UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2004

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from______ to ______.

Commission file number 1-10683

MBNA Corporation

(Exact name of registrant as specified in its charter)

Maryland	52-1713008
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Wilmington, Delaware	19884-0131
(Address of principal executive offices)	(Zip Code)

(800) 362-6255

(Registrant's telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes	X		No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes	X		No

Common Stock, $.01 Par Value – 1,277,667,791 Shares Outstanding as of March 31, 2004

 

MBNA CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

				Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Consolidated Statements of Financial Condition - March 31, 2004   and December 31, 2003		1
		Consolidated Statements of Income - For the Three Months Ended  March 31, 2004, and 2003		2
		Consolidated Statements of Changes in Stockholders' Equity - For the Three  Months ended March 31, 2004, and 2003		3
		Consolidated Statements of Cash Flows - For the Three Months Ended  March 31, 2004, and 2003		4
		Notes to the Consolidated Financial Statements		5
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of   Operations (unaudited)		15
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk		69
	Item 4.	Controls and Procedures		69
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		70
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		71
	Item 4.	Submission of Matters to a Vote of Security Holders		72
	Item 6.	Exhibits and Reports on Form 8-K		72
	Signature			74
	Certifications			76

 

Item 1.

(dollars in thousands, except per share amounts)

 

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		March 31,			December 31,
		2004      (unaudited)			2003
ASSETS
Cash and due from banks		$	783,911		$	660,022
Interest-earning time deposits in other banks			4,885,008			3,590,329
Federal funds sold			2,626,000			1,275,000
Investment securities:
Available-for-sale (amortized cost of $4,726,413 and $4,352,069 at March 31, 2004,           and December 31, 2003, respectively)			4,739,593			4,363,087
Held-to-maturity (market value of $346,624 and $354,434 at March 31, 2004, and   December 31, 2003, respectively)			341,079			353,299
Loans held for securitization			8,943,482			13,084,105
Loan portfolio:
Credit card			10,132,525			11,910,507
Other consumer			11,019,819			8,629,465
Total loan portfolio			21,152,344			20,539,972
Reserve for possible credit losses			(1,272,734	)		(1,216,316	)
Net loan portfolio			19,879,610			19,323,656
Premises and equipment, net			2,668,347			2,676,597
Accrued income receivable			321,797			443,755
Accounts receivable from securitization			9,836,350			7,766,477
Intangible assets and goodwill, net			3,534,211			3,188,368
Prepaid expenses and deferred charges			536,607			499,775
Other assets			2,027,837			1,888,885
Total assets		$	61,123,832		$	59,113,355
LIABILITIES
Deposits:
Time deposits		$	21,300,773		$	21,528,882
Money market deposit accounts			7,713,090			7,790,726
Noninterest-bearing deposits			2,654,115			2,419,209
Interest-bearing transaction accounts			53,684			47,334
Savings accounts			114,103			49,930
Total deposits			31,835,765			31,836,081
Short-term borrowings			2,231,876			1,025,463
Long-term debt and bank notes			12,190,451			12,145,628
Accrued interest payable			271,706			319,227
Accrued expenses and other liabilities			3,149,326			2,673,916
Total liabilities			49,679,124			48,000,315
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, 20,000,000 shares authorized, 8,573,882 shares issued   and outstanding at March 31, 2004, and December 31, 2003)			86			86
Common stock ($.01 par value, 1,500,000,000 shares authorized, 1,277,667,791 shares   issued and outstanding at March 31, 2004, and 1,277,597,840 shares issued and   outstanding at December 31, 2003)			12,777			12,776
Additional paid-in capital			2,026,569			2,119,700
Retained earnings			8,934,062			8,571,174
Accumulated other comprehensive income			471,214			409,304
Total stockholders' equity			11,444,708			11,113,040
Total liabilities and stockholders' equity		$	61,123,832		$	59,113,355

The accompanying notes are an integral part of the consolidated financial statements.

	-1-

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

(unaudited)

 

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		For the Three Months
		Ended March 31,
		2004			2003
Interest Income
Loan portfolio		$	578,780		$	517,163
Loans held for securitization			324,602			294,892
Investment securities:
Taxable			27,163			30,382
Tax-exempt			319			361
Time deposits in other banks			18,738			18,137
Federal funds sold			5,027			7,954
Other interest income			78,476			75,138
Total interest income			1,033,105			944,027
Interest Expense
Deposits			245,999			292,862
Short-term borrowings			12,391			10,318
Long-term debt and bank notes			106,910			85,251
Total interest expense			365,300			388,431
Net Interest Income			667,805			555,596
Provision for possible credit losses			365,161			378,877
Net interest income after provision for possible credit losses			302,644			176,719
Other Operating Income
Securitization income			1,568,542			1,475,500
Interchange			101,573			89,666
Credit card fees			163,073			126,784
Other consumer loan fees			33,380			26,075
Insurance			52,897			53,487
Other			23,067			16,497
Total other operating income			1,942,532			1,788,009
Other Operating Expense
Salaries and employee benefits			567,884			526,454
Occupancy expense of premises			44,791			43,248
Furniture and equipment expense			90,781			87,464
Other			738,462			630,709
Total other operating expense			1,441,918			1,287,875
Income Before Income Taxes			803,258			676,853
Applicable income taxes			283,550			244,344
Net Income		$	519,708		$	432,509
Earnings Per Common Share		$	.40		$	.34
Earnings Per Common Share—Assuming Dilution			.40			.33
Dividends Per Common Share			.12			.08

The accompanying notes are an integral part of the consolidated financial statements.

	-2-

 

 

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		Outstanding Shares
		Preferred (000)			Common (000)			Preferred Stock			Common Stock
Balance, December 31, 2003			8,574			1,277,598		$	86		$	12,776
Comprehensive income:
Net income			-			-			-			-
Other comprehensive income, net of tax			-			-			-			-
Comprehensive income
Cash dividends:
Common - $.12 per share			-			-			-			-
Preferred			-			-			-			-
Exercise of stock options and other awards			-			7,303			-			73
Stock-based compensation tax benefit			-			-			-			-
Amortization of deferred compensation expense			-			-			-			-
Acquisition and retirement of common stock			-			(7,233	)		-			(72	)
Balance, March 31, 2004			8,574			1,277,668		$	86		$	12,777
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
			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance, December 31, 2003		$	2,119,700		$	8,571,174		$	409,304		$	11,113,040
Comprehensive income:
Net income			-			519,708			-			519,708
Other comprehensive income, net of tax			-			-			61,910			61,910
Comprehensive income											581,618
Cash dividends:
Common - $.12 per share			-			(153,304	)		-			(153,304	)
Preferred			-			(3,516	)		-			(3,516	)
Exercise of stock options and other awards			65,524			-			-			65,597
Stock-based compensation tax benefit			16,741			-			-			16,741
Amortization of deferred compensation expense			18,336			-			-			18,336
Acquisition and retirement of common stock			(193,732	)		-			-			(193,804	)
Balance, March 31, 2004		$	2,026,569		$	8,934,062		$	471,214		$	11,444,708
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

The accompanying notes are an integral part of the consolidated financial statements.

 

	-3-

 

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	-4-

 

Pro Forma Net Income and Earnings Per Common Share
(dollars in thousands, except for per share amounts) (unaudited)
		For the Three Months
		Ended March 31,
		2004			2003
Net Income
As reported		$	519,708		$	432,509
Add:      Stock-based employee compensation                  expense included in reported net income,                  net of related tax effects			11,863			18,502
Deduct: Total stock-based employee                  compensation expense determined                  under fair value method for all                  awards, net of related tax effects			(27,995	)		(42,178	)
Pro forma		$	503,576		$	408,833
Earnings Per Common Share
As reported		$	.40		$	.34
Pro forma			.39			.32
Earnings Per Common Share-Assuming Dilution
As reported			.40			.33
Pro forma			.39			.31

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			Series A			Series B
Declaration Date	To Stockholders of Record as of	Payment Date	Dividend Rate		Dividend Per Preferred Share	Dividend Rate		Dividend Per Preferred Share
January 22, 2004	March 31, 2004	April 15, 2004	7.50	%	$.46875	5.50	%	$.34380
April 22, 2004	June 30, 2004	July 15, 2004	7.50		.46875	5.50		.34380

 

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Computation of Earnings Per Common Share
(amounts in thousands, except per share amounts) (unaudited)
		For the Three Months
		Ended March 31,
		2004			2003
Earnings Per Common Share
Net income		$	519,708		$	432,509
Less: preferred stock dividend requirements			3,516			3,516
Net income applicable to common stock		$	516,192		$	428,993
Weighted average common shares outstanding			1,277,953			1,278,980
Earnings per common share		$	.40		$	.34
Earnings Per Common Share – Assuming Dilution
Net income		$	519,708		$	432,509
Less: preferred stock dividend requirements			3,516			3,516
Net income applicable to common stock		$	516,192		$	428,993
Weighted average common shares outstanding			1,277,953			1,278,980
Net effect of dilutive stock options			23,118			13,667
Weighted average common shares outstanding   and common stock equivalents			1,301,071			1,292,647
Earnings per common share – assuming dilution		$	.40		$	.33

	-7-

 

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	-23-

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Table 3: Statements of Average Balances, Yields and Rates, Income or Expense
(dollars in thousands, yields and rates on a fully taxable equivalent basis) (unaudited)
For the Three Months Ended March 31,		2004									2003
		Average Balance			Yield/ Rate			Income or Expense			Average Balance			Yield/ Rate			Income or Expense
Assets
Interest-earning assets:
Money market instruments:
Interest-earning time deposits in   other banks:
Domestic		$	91,871			.64	%	$	146		$	1,135			.71	%	$	2
Foreign			3,695,776			2.02			18,592			3,717,536			1.98			18,135
Total interest-earning time   deposits in other banks			3,787,647			1.99			18,738			3,718,671			1.98			18,137
Federal funds sold			2,010,264			1.01			5,027			2,568,556			1.26			7,954
Total money market    instruments			5,797,911			1.65			23,765			6,287,227			1.68			26,091
Investment securities (a):
Domestic:
Taxable			4,336,216			2.11			22,764			3,649,308			3.11			27,994
Tax-exempt (b)			109,572			1.94			528			107,805			2.17			578
Total domestic investment   securities			4,445,788			2.11			23,292			3,757,113			3.08			28,572
Foreign			436,731			4.05			4,399			217,955			4.44			2,388
Total investment securities			4,882,519			2.28			27,691			3,975,068			3.16			30,960
Other interest-earning assets (a)			4,070,778			7.75			78,476			3,800,002			8.02			75,138
Loan receivables:
Loans held for securitization:
Domestic:
Credit card			8,601,584			11.59			247,864			7,807,967			12.40			238,742
Other consumer			37,660			5.60			524			38,723			5.39			515
Total domestic loans held           for securitization			8,639,244			11.56			248,388			7,846,690			12.37			239,257
Foreign:
Credit card			2,679,334			11.44			76,214			1,960,737			11.51			55,635
Other consumer			-			-			-			-			-			-
Total foreign loans held           for securitization			2,679,334			11.44			76,214			1,960,737			11.51			55,635
Total loans held for   securitization			11,318,578			11.53			324,602			9,807,427			12.19			294,892
Loan portfolio:
Domestic:
Credit card			7,412,566			10.97			202,128			6,496,637			10.73			171,817
Other consumer			6,138,971			13.09			199,746			6,296,235			14.02			217,615
Total domestic loan   portfolio			13,551,537			11.93			401,874			12,792,872			12.35			389,432
Foreign:
Credit card			3,831,407			11.22			106,856			2,809,962			11.63			80,605
Other consumer			3,618,506			7.79			70,050			1,952,785			9.79			47,126
Total foreign loan   portfolio			7,449,913			9.55			176,906			4,762,747			10.88			127,731
Total loan portfolio			21,001,450			11.08			578,780			17,555,619			11.95			517,163
Total loan receivables			32,320,028			11.24			903,382			27,363,046			12.04			812,055
Total interest-earning   assets			47,071,236			8.83			1,033,314			41,425,343			9.24			944,244
Cash and due from banks			924,850									805,316
Premises and equipment, net			2,703,419									2,524,429
Other assets			10,967,878									9,787,992
Reserve for possible credit losses			(1,226,009	)								(1,111,019	)
Total assets		$	60,441,374								$	53,432,061

 

	-24-

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Table 3: Statements of Average Balances, Yields and Rates, Income or Expense – Continued
(dollars in thousands, yields and rates on a fully taxable equivalent basis) (unaudited)
For the Three Months Ended March 31,		2004									2003
		Average Balance			Yield/ Rate			Income or Expense			Average Balance			Yield/ Rate			Income or Expense
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Domestic:
Time deposits		$	20,729,102			4.08	%	$	210,090		$	21,795,904			4.60	%	$	247,088
Money market deposit   accounts			7,707,958			1.59			30,435			7,604,653			2.13			39,873
Interest-bearing transaction   accounts			54,305			.87			117			52,695			1.32			171
Savings accounts			75,713			1.01			191			68,030			1.38			232
Total domestic interest-   bearing deposits			28,567,078			3.39			240,833			29,521,282			3.95			287,364
Foreign:
Time deposits			702,401			2.96			5,166			645,618			3.45			5,498
Total interest-bearing   deposits			29,269,479			3.38			245,999			30,166,900			3.94			292,862
Borrowed funds:
Short-term borrowings:
Domestic			899,840			3.50			7,840			1,000,000			3.60			8,865
Foreign			961,532			1.90			4,551			187,665			3.14			1,453
Total short-term   borrowings			1,861,372			2.68			12,391			1,187,665			3.52			10,318
Long-term debt and bank notes (c):
Domestic			7,234,589			2.36			42,528			7,088,338			2.65			46,384
Foreign			4,606,476			5.62			64,382			2,478,556			6.36			38,867
Total long-term debt and   bank notes			11,841,065			3.63			106,910			9,566,894			3.61			85,251
Total borrowed funds			13,702,437			3.50			119,301			10,754,559			3.60			95,569
Total interest-bearing   liabilities			42,971,916			3.42			365,300			40,921,459			3.85			388,431
Noninterest-bearing deposits			2,379,866									960,409
Other liabilities			3,071,573									2,293,821
Total liabilities			48,423,355									44,175,689
Stockholders' equity			12,018,019									9,256,372
Total liabilities and   stockholders’ equity		$	60,441,374								$	53,432,061
Net interest income								$	668,014								$	555,813
Net interest margin						5.71									5.44
Interest rate spread						5.41									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, 2004 and 2003, was $209 and $217,         respectively.
(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.

	-25-

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Table 4: Rate-Volume Variance Analysis (a) (dollars in thousands, on a fully taxable equivalent basis) (unaudited)
For the Three Months Ended March 31,		2004 Compared to 2003
		Volume			Rate			Total
Interest-Earning Assets
Money market instruments:
Interest-earning time deposits in other banks:
Domestic		$	144		$	-		$	144
Foreign			(60	)		517			457
Total interest-earning time deposits in other banks			84			517			601
Federal funds sold			(1,519	)		(1,408	)		(2,927	)
Total money market instruments			(1,435	)		(891	)		(2,326	)
Investment securities:
Domestic:
Taxable			4,735			(9,965	)		(5,230	)
Tax-exempt			10			(60	)		(50	)
Total domestic investment securities			4,745			(10,025	)		(5,280	)
Foreign			2,242			(231	)		2,011
Total investment securities			6,987			(10,256	)		(3,269	)
Other interest-earning assets			5,801			(2,463	)		3,338
Loan receivables:
Loans held for securitization:
Domestic:
Credit card			24,911			(15,789	)		9,122
Other consumer			(12	)		21			9
Total domestic loans held for securitization			24,899			(15,768	)		9,131
Foreign:
Credit card			21,038			(459	)		20,579
Other consumer			-			-			-
Total foreign loans held for securitization			21,038			(459	)		20,579
Total loans held for securitization			45,937			(16,227	)		29,710
Loan portfolio:
Domestic:
Credit card			26,591			3,720			30,311
Other consumer			(4,752	)		(13,117	)		(17,869	)
Total domestic loan portfolio			21,839			(9,397	)		12,442
Foreign:
Credit card			29,344			(3,093	)		26,251
Other consumer			34,131			(11,207	)		22,924
Total foreign loan portfolio			63,475			(14,300	)		49,175
Total loan portfolio			85,314			(23,697	)		61,617
Total loan receivables			131,251			(39,924	)		91,327
Total interest income		$	142,604		$	(53,534	)	$	89,070

	-26-

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Table 4: Rate-Volume Variance Analysis - Continued (a) (dollars in thousands, on a fully taxable equivalent basis) (unaudited)
For the Three Months Ended March 31,		2004 Compared to 2003
		Volume			Rate			Total
Interest-Bearing Liabilities
Interest-bearing deposits:
Domestic:
Time deposits		$	(10,992	)	$	(26,006	)	$	(36,998	)
Money market deposit accounts			552			(9,990	)		(9,438	)
Interest-bearing transaction accounts			5			(59	)		(54	)
Savings accounts			25			(66	)		(41	)
Total domestic interest-bearing deposits			(10,410	)		(36,121	)		(46,531	)
Foreign:
Time deposits			478			(810	)		(332	)
Total interest-bearing deposits			(9,932	)		(36,931	)		(46,863	)
Borrowed funds:
Short-term borrowings:
Domestic			(801	)		(224	)		(1,025	)
Foreign			3,875			(777	)		3,098
Total short-term borrowings			3,074			(1,001	)		2,073
Long-term debt and bank notes:
Domestic			1,013			(4,869	)		(3,856	)
Foreign			30,515			(5,000	)		25,515
Total long-term debt and bank notes			31,528			(9,869	)		21,659
Total borrowed funds			34,602			(10,870	)		23,732
Total interest expense			24,670			(47,801	)		(23,131	)
Net interest income		$	117,934		$	(5,733	)	$	112,201
(a) The rate-volume variance for each category has been allocated on a consistent basis between rate and volume variances         based on the percentage of the rate or volume variance to the sum of the two absolute variances.

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 22.7% for the three months ended March 31, 2004, as compared to 24.8% for the same period in 2003. Investment securities and money market instruments remained relatively stable during the three months ended March 31, 2004, to provide liquidity to support portfolio acquisition activity and anticipated loan growth.

Interest income on investment securities, on a fully taxable equivalent basis, decreased $3.3 million or 10.6% to $27.7 million for the three months ended March 31, 2004, as compared to $31.0 million for the same period in 2003. The decrease in interest income on investment securities for the three months ended March 31, 2004, was primarily the result of an 88 basis point decrease in the yield earned on average investment securities, partially offset by an increase in average investment securities of $907.5 million for the three months ended March 31, 2004, from the same period in 2003.

Money market instruments include interest-earning time deposits in other banks and federal funds sold. Interest income on money market instruments decreased $2.3 million or 8.9% to $23.8 million for the three months ended March 31, 2004, as compared to $26.1 million for the same period in 2003. The decrease in interest income on money market instruments was the result of a decrease in average money market instruments of $489.3 million for the three months ended March 31, 2004, as compared to the same period in 2003.

	-27-

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 the Corporation’s investment in Federal Reserve Bank stock. The Corporation accrues interest income related to its retained beneficial interests in its securitization transactions accounted for as sales 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 F: Asset Securitization” to the consolidated f inancial statements for further discussion.

Interest income on other interest-earning assets increased $3.3 million or 4.4% to $78.5 million for the three months ended March 31, 2004, as compared to $75.1 million for the same period in 2003. The increase in interest income on other interest-earning assets for the three months ended March 31, 2004, was primarily the result of an increase of $270.8 million in average other interest-earning assets partially offset by a decrease in the yield earned on other interest-earning assets of 27 basis points, as compared to the same period in 2003. The increase in average other interest-earning assets was primarily attributable to the increase in the Corporation’s interest-only strip receivable and cash reserve accounts. The decrease in the yield earned on average other interest-earning as sets 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.

	-28-

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 $91.3 million or 11.2% to $903.4 million for the three months ended March 31, 2004, as compared to $812.1 million for the same period in 2003. The increase in interest income on loan receivables for the three months ended March 31, 2004, was primarily the result of an increase in average loan receivables of $5.0 billion from the same period in 2003. The yield earned by the Corporation for the three months ended March 31, 2004, on average loan receivables decreased 80 basis points to 11.24%, as compared to 12.04% for the same period in 2003.

 

Table 5 presents the Corporation's loan receivables at period end distributed by loan type, excluding securitized loans. Loan receivables were $30.1 billion at March 31, 2004, as compared to $33.6 billion at December 31, 2003.

 

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Table 5: Loan Receivables Distribution

(dollars in thousands) (unaudited)

			March 31,			December 31,
			2004			2003
Loans held for securitization (a):
Domestic:
Credit card		$	6,655,977		$	10,274,262
Other consumer			53,588			11,653
Total domestic loans held for securitization			6,709,565			10,285,915
Foreign:
Credit card			2,233,917			2,798,190
Other consumer			-			-
Total foreign loans held for securitization			2,233,917			2,798,190
Total loans held for securitization			8,943,482			13,084,105
Loan portfolio:
Domestic:
Credit card			7,547,340			7,905,173
Other consumer			6,956,984			6,211,016
Total domestic loan portfolio			14,504,324			14,116,189
Foreign:
Credit card			2,585,185			4,005,334
Other consumer			4,062,835			2,418,449
Total foreign loan portfolio			6,648,020			6,423,783
Total loan portfolio			21,152,344			20,539,972
Total loan receivables (b)		$	30,095,826		$	33,624,077
(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.
(b) $3.3 billion and $1.3 billion of commercial loan receivables are included in loan receivables at March 31, 2004 and        December 31, 2003, respectively.

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	-29-

Domestic Credit Card Loan Receivables

Domestic credit card loan receivables decreased $4.0 billion or 21.9% to $14.2 billion at March 31, 2004, as compared to $18.2 billion at December 31, 2003. The decrease in domestic credit card loan receivables at March 31, 2004, was primarily the result of Customers paying down balances that existed at December 31, 2003 combined with a net increase in securitization activity. 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.

During the three months ended March 31, 2004, the Corporation securitized $2.3 billion of domestic credit card loan receivables, offset by an increase of $1.3 billion in the Corporation's loan portfolio when certain securitization transactions used principal payments on securitized loans to pay the investors rather than to purchase new loan principal receivables.

The yield on average domestic credit card loan receivables was 11.30% for the three months ended March 31, 2004, as compared to 11.64% for the same period in 2003. The decrease of 34 basis points in the yield on average domestic credit card loan receivables reflects lower average promotional interest rates offered to attract and retain Customers and to grow loan receivables and an increase in the percentage of loans in the portfolio with promotional interest rates.

Domestic credit card loans held for securitization decreased $3.6 billion or 35.2% to $6.7 billion at March 31, 2004, as compared to $10.3 billion at December 31, 2003. The decrease reflects lower levels of domestic credit card loan principal receivables eligible for securitization at March 31, 2004.

Domestic Other Consumer Loan Receivables

Domestic other consumer loan receivables increased $787.9 million or 12.7% to $7.0 billion at March 31, 2004, as compared to $6.2 billion at December 31, 2003. The increase in domestic other consumer loan receivables was primarily due to the acquisition of SFS, which increased domestic other consumer loans by $893.0 million. This increase was partially offset by a decrease in sales finance loans as the Corporation placed less emphasis on this product. Sales finance products are unsecured lending products that 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 ge nerally charges a higher interest rate for its sales finance products than its other unsecured lending products.

The yield on average domestic other consumer loan receivables was 13.04% for the three months ended March 31, 2004, as compared to 13.96% for the same period in 2003. The decrease of 92 basis points 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 as well as a continued lower interest rate environment impact on new account yields. 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.

Foreign Credit Card Loan Receivables

Foreign credit card loan receivables decreased $2.0 billion or 29.2% to $4.8 billion at March 31, 2004, as compared to $6.8 billion at December 31, 2003. The decrease in foreign credit card loan receivables for the three months ended March 31, 2004 was primarily the result of a net increase in securitization activity combined with Customers paying down balances that existed at December 31, 2003. These decreases were partially offset by loan originations through marketing programs at the Corporation’s two foreign bank subsidiaries, MBNA Europe and MBNA Canada, and strengthening of foreign currencies against the U.S. dollar. During the three months ended March 31, 2004, the Corporation securitized $1.4 billion of foreign credit card loans. The strengthening of foreign currencies increased foreign cr edit card loan receivables by $105.4 million for the three months ended March 31, 2004.

The yield on average foreign credit card loan receivables was 11.31% for the three months ended March 31, 2004, as compared to 11.58% for the same period in 2003. The decrease of 27 basis points in the yield on average foreign credit card loan receivables reflects lower average promotional and non-promotional interest rates offered to attract and retain Customers and to grow loan receivables.

	-30-

Foreign Other Consumer Loan Receivables

Foreign other consumer loan receivables increased $1.6 billion or 68.0% to $4.1 billion at March 31, 2004, as compared to $2.4 billion at December 31, 2003. The growth in foreign other consumer loan receivables for the three months ended March 31, 2004 was primarily a result of the PCL acquisition of $1.6 billion of commercial and consumer loans by MBNA Europe. The strengthening of foreign currencies also increased foreign other consumer loan receivables by $82.1 million for the three months ended March 31, 2004.

The yield on average foreign other consumer loan receivables was 7.79% for the three months ended March 31, 2004, as compared to 9.79% for the same period in 2003. The decrease of 200 basis points in the yield on average foreign other consumer loan receivables was primarily the result of the PCL acquisition. Once PCL has been fully integrated into the Corporation’s operations and results thereof, the Corporation expects the yield on average foreign other consumer loan receivables to return to historic levels. The interest income impact on foreign other consumer loan receivables related to PCL was not significant for the three months ending March 31, 2004. See “Note K: Acquisitions” to the consolidated financial statements for further detail regarding the PCL acquisition.

Table 6 reconciles the Corporation’s average loan receivables to average managed loans.

 

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Table 6: Reconciliation of Average Loan Receivables to Average Managed Loans
(dollars in thousands) (unaudited)
For the Three Months Ended March 31,		2004									2003
		Average Balance			Yield			Income			Average Balance			Yield			Income
Loan receivables:
Domestic:
Credit card		$	16,014,150			11.30	%	$	449,992		$	14,304,604			11.64	%	$	410,559
Other consumer			6,176,631			13.04			200,270			6,334,958			13.96			218,130
Foreign:
Credit card			6,510,741			11.31			183,070			4,770,699			11.58			136,240
Other consumer			3,618,506			7.79			70,050			1,952,785			9.79			47,126
Total loan receivables			32,320,028			11.24			903,382			27,363,046			12.04			812,055
Securitized loans			85,475,544			11.62			2,469,160			78,669,738			12.28			2,382,515
Total managed loans		$	117,795,572			11.52		$	3,372,542		$	106,032,784			12.22		$	3,194,570

 

Premises and Equipment

In 2001, the Corporation launched a multi-phase project to extend the use of the Corporation’s U.S. core Customer information systems to MBNA Europe’s business in the U.K. and Ireland. MBNA Canada already uses this system. The capital expenditures associated with capitalized software for this project at March 31, 2004 and December 31, 2003, were $238.3 million and $214.0 million, respectively. The Corporation anticipates total capital expenditures of approximately $300 million related to this project and estimates the project will be completed during the second quarter of 2004. This asset will be amortized over a five year period.

Accounts Receivable from Securitization

Accounts receivable from securitization increased $2.1 billion or 26.7% to $9.8 billion at March 31, 2004, as compared to $7.8 billion at December 31, 2003. The increase in accounts receivable from securitization was primarily due to an increase on the sale of new loan principal receivables to the trust. These amounts increase as the trust securitizes new loan principal receivables and these amounts also increase when the Corporation begins accumulating principal payments to pay the investors for the amount of securitized transactions that are scheduled to mature.

“Note F: Asset Securitization” to the consolidated financial statements provides further detail regarding accounts receivable from securitization.

	-31-

Interest-Bearing Deposits

Total interest expense on deposits decreased $46.9 million or 16.0% to $246.0 million for the three months ended March 31, 2004, as compared to $292.9 million for the same period in 2003. The decrease in interest expense on deposits for the three months ended March 31, 2004, was the result of a decrease of 56 basis points in the rate paid on average interest-bearing deposits combined with a decrease of $897.4 million in average interest-bearing deposits. The decrease in the rate paid on average interest-bearing deposits reflects actions by the FOMC throughout 2001, in the fourth quarter of 2002, and the second quarter of 2003, 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 second quarter of 2003 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, 2004, as compared to the same period in 2003. 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 the second quarter 2003 decrease in market interest rates on domestic time deposits more slowly than on money market dep osits, but continued to realize the benefits of the 2001 and 2002 decrease in market interest rates on domestic time deposits.

The decrease in average interest-bearing deposits for the three months ended March 31, 2004, was a result of a decrease in the average amount of brokered deposits held by the Corporation, partially offset by the Corporation’s continued emphasis on marketing domestic time deposits and money market deposit accounts to members of certain endorsing organizations to fund loan and other asset growth and to diversify funding sources.

Borrowed Funds

Borrowed funds include both short-term borrowings and long-term debt and bank notes.

Short-Term Borrowings

Short-term borrowings used by the Corporation include federal funds purchased and securities sold under repurchase agreements. Federal funds purchased and securities sold under repurchase agreements are overnight borrowings that normally mature within one business day of the transaction date. Other short-term borrowings consist primarily of federal funds purchased that mature in more than one business day, short-term bank notes issued from the global bank note program established by the Bank, short-term deposit notes issued by MBNA Canada, on-balance-sheet structured financings, and other transactions with maturities greater than one business day but less than one year.

Interest expense on short-term borrowings increased $2.1 million or 20.1% to $12.4 million for the three months ended March 31, 2004, as compared to $10.3 million for the same period in 2003. The increase in interest expense on short-term borrowings was primarily the result of an increase of $673.7 million in average short-term borrowings, partially offset by a decrease of 84 basis points in the rate paid on average short-term borrowings from the same period in 2003.

Domestic Short-Term Borrowings

Interest expense on domestic short-term borrowings decreased $1.0 million or 11.6% to $7.8 million for the three months ended March 31, 2004, as compared to $8.9 million for the same period in 2003. The decrease in interest expense on domestic short-term borrowings for the three months ended March 31, 2004 was primarily the result of a decrease of $100.2 million in average domestic short-term borrowings.

Foreign Short-Term Borrowings

Interest expense on foreign short-term borrowings increased $3.1 million to $4.6 million for the three months ended March 31, 2004, as compared to $1.5 million for the same period in 2003. The increase in interest expense on foreign short-term borrowings for the three months ended March 31, 2004 was primarily the result of an increase of $773.9 million in average foreign short-term borrowings, partially offset by a 124 basis point decrease in the interest rate paid on average short-term borrowings. The increase in average foreign short-term borrowings for the three months ended March 31, 2004 was primarily the result of the assumption of debt from the PCL acquisition. Once PCL has been fully integrated into the Corporation’s operations and results thereof, the Corporation expects the yield on aver age foreign short-term borrowings to return to historic levels. The interest expense impact on foreign short-term borrowings relating to PCL was not significant for the three months ending March 31, 2004. See “Note K: Acquisitions” and “Note G: Short-Term Borrowings” to the consolidated financial statements for further detail regarding the PCL acquisition.

	-32-

Long-Term Debt and Bank Notes

Long-term debt and bank notes consist of borrowings having an original maturity of one year or more.

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.

Interest expense on long-term debt and bank notes increased $21.7 million or 25.4% to $106.9 million for the three months ended March 31, 2004, as compared to $85.3 million for the same period in 2003. The increase in interest expense on long-term debt and bank notes during the three months ended March 31, 2004, from the same period in 2003 was primarily the result of an increase in average long-term debt and bank notes of $2.3 billion, as compared to the same period in 2003.

Domestic Long-Term Debt and Bank Notes

Interest expense on domestic long-term debt and bank notes decreased $3.9 million or 8.3% to $42.5 million for the three months ended March 31, 2004, as compared to $46.4 million the same period in 2003. The decrease in interest expense on domestic long-term debt and bank notes for the three months ended March 31, 2004, was primarily a result of a decrease of 29 basis points in the rate paid on average domestic long-term debt and bank notes, partially offset by an $146.3 million increase in average domestic long-term debt and bank notes. The decrease in the rate paid on average domestic long-term debt and bank notes reflects actions by the FOMC in the second quarter of 2003 that impacted overall market interest rates.

Foreign Long-Term Debt and Bank Notes

Interest expense on foreign long-term debt and bank notes increased $25.5 million or 65.6% to $64.4 million during the three months ended March 31, 2004, as compared to $38.9 million for the same period in 2003. 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 $2.1 billion or 85.9% to $4.6 billion for three months ended March 31, 2004, as compared to $2.5 billion for the same period in 2003, partially offset by a decrease of 74 basis points in the rate paid on average foreign long-term debt and bank notes. MBNA Europe and MBNA Canada issued additional long-term debt and bank notes over the past twelve months to fund loan and other asset growth and to diversify funding sourc es.

Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities increased $475.4 million or 17.8% to $3.1 billion at March 31, 2004, as compared to $2.7 billion at December 31, 2003. This increase was primarily the result of an increase in the amount of payables related to MBNA Europe’s loans for insurance premiums, specifically related to the PCL acquisition. See “Note K: Acquisitions” to the consolidated financial statements for further detail regarding the PCL acquisition.

 

Accumulated Other Comprehensive Income

Accumulated other comprehensive income increased $61.9 million or 15.1% to $471.2 million at March 31, 2004, as compared to $409.3 million at December 31, 2003. The increase was primarily attributable to foreign currency translation amounts related to the strengthening of foreign currencies against the U.S. dollar. See “Note I: Comprehensive Income” to the consolidated financial statements for further discussion.

	-33-

Total Other Operating Income

Total other operating income includes securitization income, interchange income, credit card fees, other consumer loan fees, insurance income, and other income. Total other operating income increased $154.5 million or 8.6% to $1.9 billion for the three months ended March 31, 2004, as compared to $1.8 billion for the same period in 2003.

Table 7 presents the components of total other operating income.

 

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Table 7: Components of Total Other Operating Income

(dollars in thousands) (unaudited)

		For the Three Months
		Ended March 31,
		2004			2003
Securitization income:
Excess servicing fees (a)		$	1,185,035		$	1,068,159
Loan servicing fees (a)			405,448			369,958
Gain from the sale of loan principal receivables for new securitizations (b)			25,134			25,264
Net revaluation of interest-only strip receivable (b)			(47,075	)		12,119
Total securitization income			1,568,542			1,475,500
Interchange			101,573			89,666
Credit card fees			163,073			126,784
Other consumer loan fees			33,380			26,075
Insurance			52,897			53,487
Other			23,067			16,497
Total other operating income		$	1,942,532		$	1,788,009
(a) Total securitization servicing fees include excess servicing fees and loan servicing fees.
(b) The net gain (or loss) from securitization activity includes the gain from the sale of loan principal receivables for new        securitizations and the net revaluation of the interest-only strip receivable.

Certain components and changes in total other operating income are discussed as follows:

Securitization Income

Securitization income includes excess servicing and loan servicing fees, the gain from the sale of loan principal receivables recognized for new securitizations, and the net revaluation of the Corporation’s interest-only strip receivable. The Corporation has the rights to all excess revenue generated from the securitized loans arising after the trusts absorb the cost of funds, loan servicing fees and credit losses (“excess servicing fees”). The Corporation continues to service the securitized loans and receives an annual contractual servicing fee of approximately 2% of the investor principal outstanding (“loan servicing fees”). The Corporation recognizes a gain from the sale of loan principal receivables for new securitizations. Securitization income is also impacted by the net revaluation of the Corporation’s interest-only strip receivable as a result of changes in the estimat ed excess spread to be earned in the future and changes in projected loan payment rates and securitization transactions that are currently in their scheduled accumulation period. The accumulation period occurs when the trusts begin accumulating principal collections to make principal payments to the investors, instead of purchasing new loan principal receivables from the Corporation.

Securitization income increased $93.0 million or 6.3% to $1.6 billion for the three months ended March 31, 2004, as compared to $1.5 billion for the same period in 2003. This increase is discussed below.

	-34-

Total Securitization Servicing Fees

Total securitization servicing fees include both excess servicing fees and loan servicing fees. These items are discussed below.

Table 8 provides further detail regarding total excess servicing fees.

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Table 8: Components of Total Excess Servicing Fees

(dollars in thousands) (unaudited)

		For the Three Months
		Ended March 31,
		2004			2003
Interest income on securitized loans		$	2,391,738		$	2,308,383
Interest expense on securitized loans			(423,714	)		(411,267	)
Net interest income on securitized loans			1,968,024			1,897,116
Other fee income on securitized loans			733,480			641,296
Net credit losses on securitized loans			(1,111,021	)		(1,100,295	)
Total securitization servicing fees			1,590,483			1,438,117
Loan servicing fees			(405,448	)		(369,958	)
Total excess servicing fees		$	1,185,035		$	1,068,159

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Excess Servicing Fees

Excess servicing fees increased $116.9 million or 10.9% to $1.2 billion for the three months ended March 31, 2004, as compared to $1.1 billion for the same period in 2003. The increase for the three months ended March 31, 2004 was primarily the result of an increase in net interest income and other fee income earned on securitized loans, partially offset by an increase in loan servicing fees.

Certain measures of securitized loan performance are discussed below. The Corporation’s net interest income as reported and net interest margin as reported are discussed under “Net Interest Income.” Refer to “Table 19” for the reconciliation of net interest income to managed net interest income. Refer to “Off-Balance Sheet Arrangements—Impact of Off-Balance Sheet Securitization Transactions on the Corporation’s Results” for the calculation of the Corporation’s net interest margin on securitized interest-earning assets and the calculation of the Corporation’s net interest margin. The Corporation’s net credit losses on loan receivables are discussed under “Loan Quality—Net Credit Losses.” Re fer to “Table 15” for the reconciliation of net credit losses on loan receivables to the net credit losses on managed loans and the calculation of the net credit loss ratio on loan receivables and securitized loans.

 

Net interest income on securitized loans increased by $70.9 million or 3.7% to $2.0 billion for the three months ended March 31, 2004, as compared to $1.9 billion for the same period in 2003. Net interest income on securitized loans was affected by the growth in average securitized loans, which increased $6.8 billion or 8.7% to $85.5 billion for the three months ended March 31, 2004, as compared to $78.7 billion for the same period in 2003. The growth in average securitized loans was consistent with the overall growth in the Corporation’s average managed loans, which increased 11.1% for the three months ended March 31, 2004, as compared to the same period in 2003.

The net interest margin on securitized interest-earning assets decreased to 9.72% for the three months ended March 31, 2004, as compared to 10.27% for the same period in 2003. The securitized net interest margin represents net interest income on securitized loans for the period expressed as a percentage of average securitized interest-earning assets.

 

Changes in the yield earned on average securitized loans and the interest rate paid to investors on the Corporation’s securitization transactions impact the securitized net interest margin. The yield earned on average securitized loans was 11.62% for the three months ended March 31, 2004, as compared to 12.28% for the same period in 2003. The decrease of 66 basis points in the yield earned on average securitized loans for the three months ended March 31, 2004 as compared to the same period in 2003, reflects lower average interest rates offered to attract and retain Customers and to grow managed loans. Refer to “Loan Receivables” for the calculation of the yield on average securitized loans and the yield on average loan receivables as well as a discussion of the yield on average loan receivables.

	-35-

The interest rate paid to investors in the Corporation’s average securitization transactions was 2.03% for the three months ended March 31, 2004, as compared to 2.17% for the same period in 2003. The decrease of 14 basis points in the average interest rate paid to investors for the three months ended March 31, 2004 and 2003 reflects the continued impact of actions by the FOMC in the second quarter of 2003 that impacted overall market interest rates. The interest rate paid to investors generally resets on a monthly basis. The interest rate paid on the Corporation’s average net interest-bearing liabilities is discussed under “Interest-Bearing Deposits” and “Borrowed Funds.” Refer to “Off-Balance Sheet Arrangements—Impact of Off-Balance Sheet Securitization Tra nsactions on the Corporation’s Results” for the calculation of the interest rate paid to investors on the Corporation’s average securitization transactions and the calculation of the interest rate on average net interest-bearing liabilities.

Other fee income generated by securitized loans increased by $92.2 million or 14.4% to $733.5 million for the three months ended March 31, 2004, as compared to $641.3 million for the same period in 2003, primarily as a result of higher average securitized loans. The increase for the three months ended March 31, 2004 is also attributable to an increase in the average fees assessed related to the implementation of modified late and cash advance fee structures.

Securitized net credit losses increased by $10.7 million or 1.0% to $1.1 billion for the three months ended March 31, 2004 as compared to the same period in 2003. The net charge-off rate on securitized loans decreased by 39 basis points to 5.20% for the three months ended March 31, 2004 as compared to 5.59% for the same period in 2003. This decrease in rate was offset by an increase in average securitized loans which resulted in an increase in net credit losses on securitized loans.

The increase in loan servicing fees, which is described below, decreased excess servicing fees.

Loan Servicing Fees

Loan servicing fees during the three months ended March 31, 2004 increased $35.5 million or 9.6% to $405.4 million, as compared to $370.0 million for the same period in 2003. The increase was a result of a $6.8 billion or 8.7% increase in average securitized loans for the three months ended March 31, 2004. The growth in average securitized loans reflects the overall growth in the Corporation’s average managed loans, which increased 11.1% for the three months ended March 31, 2004.

Net Gain (or Loss) from Securitization Activity

The net gain (or loss) from securitization activity consists of gains associated with the sale of new loan principal receivables (net of securitization transaction costs), changes in the projected excess spread used to value the interest-only strip receivable for securitized credit card and other consumer loan principal receivables, and all other changes in the fair value of the interest-only strip receivable. The net loss from securitization activity was $21.9 million for the three months ended March 31, 2004, as compared to a net gain of $37.4 million for the same period in 2003, resulting in a decrease in securitization income of $59.3 million for the three months ended March 31, 2004.

Certain components of the net gain (or loss) from securitization activity are discussed separately as follows:

 

Gain from the Sale of Loan Principal Receivables

The gain from the sale of loan principal receivables for new securitization transactions that the Corporation recognizes as sales in accordance with Statement No. 140 is included in securitization income in the Corporation’s consolidated statements of income. The gain was $25.1 million (net of securitization transaction costs of $15.6 million) for the three months ended March 31, 2004 (on the sale of $3.6 billion of credit card loan principal receivables for the three months ended March 31, 2004), as compared to a gain of $25.3 million (net of securitization transaction costs of $8.7 million) for the same period in 2003 (on the sale of $2.8 billion of credit card loan principal receivables for the same period in 2003).

 

Net Revaluation of the Interest-Only Strip Receivable

The projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables decreased to 5.01% at March 31, 2004, as compared to 5.19% at December 31, 2003. The decrease in the projected excess spread for the three months ended March 31, 2004, used to value the interest-only strip receivable was the result of a decrease in projected interest yields on securitized credit card loan principal receivables resulting from the Corporation’s pricing decisions to attract and retain Customers and to grow managed loans. This decrease in the projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables was offset by a decrease in projected charge-off rates on securitized credit card loan principal receivables. The projected excess spread used to value the interest-only strip receivable for secu ritized other consumer loan principal receivables increased to 2.58% at March 31, 2004, as compared to 1.95% at December 31, 2003. The increase in the projected excess spread used to value the interest-only strip receivable was the result of lower projected charge-off rates on securitized other consumer loan principal receivables. This increase was partially offset by a decrease in projected interest yields on securitized other consumer loan principal receivables resulting from the Corporation’s pricing decisions to attract and retain Customers and to grow managed loans. The net of these items and all other changes in the fair value of the interest-only strip receivable for both securitized credit card loan principal receivables and securitized other consumer loan principal receivables resulted in a $47.1 million loss for the three months ended March 31, 2004.

	-36-

The projected excess spread used to value the interest-only strip receivable for securitized credit card loan principal receivables increased to 4.94% at March 31, 2003, as compared to 4.84% at December 31, 2002. The increase in the projected excess spread for the three months ended March 31, 2003, used to value the interest-only strip receivable was the result of an increase in projected interest yields on securitized credit card loan principal receivables. The projected excess spread used to value the interest-only strip receivable for securitized other consumer loan principal receivables increased to 2.02% at March 31, 2003, as compared to .91% at December 31, 2002. The increase in the projected excess spread used to value the interest-only strip receivable was the result of lower projected charge-off rates on securitized other consumer loan principal receivables combined with a decrease in the projected interest rate paid to investors, partially offset by a decrease in projected interest yields. The net on these items and all other changes in the fair value of the interest-only strip receivable for both securitized credit card loan principal receivables and securitized other consumer loan principal receivables resulted in a $12.1 million gain for the three months ended March 31, 2003.

“Note F: Asset Securitization” to the consolidated financial statements provides further detail regarding the sensitivity to changes in the key assumptions and estimates used in determining the estimated value of the interest-only strip receivable.

Interchange

Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network as compensation for risk, grace period, and other operating costs. Such fees are set annually by MasterCard International Incorporated (“MasterCard”) and Visa U.S.A. Incorporated (“Visa”).

Interchange income increased $11.9 million or 13.3% to $101.6 million for the three months ended March 31, 2004, as compared to $89.7 million for the same period in 2003. The increase in interchange income for the three months ended March 31, 2004 was primarily the result of an increase in cardholder sales volume. Additionally in the second and third quarter of 2003, MasterCard and Visa increased their interchange rates. Interchange income on securitized loans is included in securitization income.

Credit Card Fees

Credit card fees include annual, late, overlimit, returned check, cash advance, express payment, and other miscellaneous fees on credit card loans.

Credit card fees increased $36.3 million or 28.6% to $163.1 million for the three months ended March 31, 2004, as compared to $126.8 million for the same period in 2003. The increase in credit card fees for the three months ended March 31, 2004 was primarily the result of the growth in the Corporation’s loan receivables, an increase in the number of accounts, an increase in the average fees assessed related to the implementation of modified late and cash advance fee structures, and a modification of payment due dates on credit card accounts. Credit card fees on securitized loans are included in securitization income.

Other Consumer Loan Fees

Other consumer loan fees increased $7.3 million or 28.0% to $33.4 million for the three months ended March 31, 2004, as compared to $26.1 million for the same period in 2003. The increase in other consumer loan fees for the three months ended March 31, 2004 was primarily the result of an increase in the average cash advance fees assessed. Other consumer loan fees on securitized loans are included in securitization income.

	-37-

Total Other Operating Expense

 

Total other operating expense includes salaries and employee benefits, occupancy expense of premises, furniture and equipment expense, and other operating expenses.

Total other operating expense increased $154.0 million or 12.0% to $1.4 billion for the three months ended March 31, 2004, as compared to $1.3 billion for the same period in 2003. The growth in total other operating expense for the three months ended March 31, 2004 primarily reflects the Corporation’s continued investment in attracting, servicing, and retaining Customers.

The Corporation added 2.5 million new accounts during the three months ended March 31, 2004, as compared to 2.3 million new accounts for the same period in 2003. The Corporation added 50 new endorsements from organizations during the three months ended March 31, 2004, as compared to 80 new endorsements for the same period in 2003. Certain components of other operating expenses are discussed below.

Salaries and Employee Benefits

Salaries and employee benefits increased $41.4 million or 7.9% to $567.9 million for the three months ended March 31, 2004, as compared to $526.5 million for the same period in 2003. The increase in salaries and employee benefits for the three months ended March 31, 2004 was primarily related to increases in employee salary levels and an increased number of people to service the Corporation’s higher number of Customers.

The Corporation had approximately 27,700 and 25,800 full-time equivalent employees, at March 31, 2004, and 2003, respectively.

Included in salaries and employee benefits is the net periodic benefit cost for the Corporation’s noncontributory defined benefit pension plan (“Pension Plan”) and the supplemental executive retirement plan (“SERP”) of $29.3 million for the three months ended March 31, 2004, as compared to $24.8 million for the same period in 2003. The Corporation anticipates, based on current conditions, that net periodic benefit cost for the Pension Plan and the SERP will increase by $14.5 million in 2004 because of a lower assumed discount rate and normal operations of the plans, partially offset by a lower assumed rate of compensation increase. The Corporation expects to contribute the maximum tax deductible contribution to the Pension Plan in 2004, which is estimated to be approximately $75 million. For the three months ended March 31, 2004, the Corporation contributed $60.0 million to the Pension Plan. In 2003, the Corporation contributed $69.0 million to the Pension Plan.

“Note J: Employee Benefits” to the consolidated financial statements provides further detail regarding the Corporation’s employee benefits for the three months ended March 31, 2004 and 2003. “Note 22: Employee Benefits” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, provides further detail regarding the Corporation’s employee benefits.

	-38-

Other Expense Component of Other Operating Expense

The other expense component of other operating expense increased $107.8 million or 17.1% to $738.5 million for the three months ended March 31, 2004, as compared to $630.7 million for the same period in 2003. Certain components of the other expense component of other operating expense are discussed separately.

Table 9 provides further detail regarding the other expense components of the Corporation’s other operating expenses.

 

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Table 9: Other Expense Components of Other Operating Expense

(dollars in thousands) (unaudited)

		For the Three Months
		Ended March 31,
		2004			2003
Purchased services		$	175,407		$	145,516
Advertising			117,549			104,032
Collection			23,416			16,600
Stationery and supplies			10,093			9,871
Service bureau			22,618			18,638
Postage and delivery			132,814			102,584
Telephone usage			22,152			21,917
Loan receivable fraud losses			37,133			34,139
Amortization of intangible assets			107,366			96,635
Other			89,914			80,777
Total other expense		$	738,462		$	630,709

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Purchased Services

Purchased Services expense increased $29.9 million or 20.5% to $175.4 million for the three months ended March 31, 2004, as compared to $145.5 million for the same period in 2003. The increase in purchased services expense for the three months ended March 31, 2004 reflects additional services provided by third-party vendors.

Advertising

Advertising expense increased $13.5 million or 13.0% to $117.5 million for the three months ended March 31, 2004, as compared to $104.0 million for the same period in 2003. The increase in advertising expense for the three months ended March 31, 2004 reflects the Corporation’s continued investment in attracting and retaining Customers, primarily in the Corporation’s international markets.

 

Postage and Delivery

Postage and delivery expense increased $30.2 million or 29.5% to $132.8 million for the three months ended March 31, 2004, as compared to $102.6 million for the same period in 2003. The increase in postage and delivery expense for the three months ended March 31, 2004 reflects the Corporation’s continued investment in attracting, servicing, and retaining Customers. Also during the three months ended March 31, 2004, the Corporation increased the marketing of its products through increased levels of mailings to existing and potential Customers.

 

Amortization of Intangible Assets

Amortization of intangible assets increased $10.7 million or 11.1% to $107.4 million for the three months ended March 31, 2004, as compared to $96.6 million for the same period in 2003. The increase in amortization of intangible assets for the three months ended March 31, 2004 reflects an increase in loan portfolio acquisition activity in recent years.

“Note 3: Significant Accounting Policies – Intangible Assets” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 and “Critical Accounting Policies – Intangible Assets and Goodwill” provides further detail regarding the Corporation’s intangible assets.

	-39-

Other

Other expense increased $9.1 million or 11.3% to $89.9 million for the three months ended March 31, 2004, as compared to $80.8 million for the same period in 2003. The increase in other expense for the three months ended March 31, 2004 was primarily related to losses recorded on sales of fixed assets and the write down to fair market value of certain fixed assets that the Corporation intends to sell.

Income Taxes

Income tax expense increased $39.2 million or 16.0% to $283.6 million for the three months ended March 31, 2004, as compared to $244.3 million for the same period in 2003. These amounts represent an effective tax rate of 35.3% for the three months ended March 31, 2004, and 36.1% for the same period in 2003. The reduction in the effective tax rate was primarily driven by favorable resolutions of examination issues at the federal and state levels, combined with a continuing benefit from earnings of the Corporation’s foreign subsidiaries, which are taxed at lower rates.

Loan Quality

The Corporation’s loan quality at any time reflects, among other factors, the credit quality of the Corporation’s credit card and other consumer loans, the success of the Corporation’s collection efforts, the composition of credit card and other consumer loans included in the Corporation’s loan receivables, the seasoning of the Corporation’s loans, and general economic conditions. As new loans season, the delinquency and charge-off rates on these loans normally rise and then stabilize. The Corporation’s financial results are sensitive to changes in delinquencies and net credit losses related to the Corporation’s loans. During an economic downturn, delinquencies and net credit losses are more likely to increase. The Corporation considers the levels of delinquent loans, renegotiated loans, re-aged loans, and other factors in determining the appropriate reserve for possible c redit losses and the estimate of uncollectible accrued interest and fees. The following loan quality discussion includes credit risk, delinquencies, renegotiated loan programs, which include nonaccrual loans and reduced-rate loans, re-aged loans, net credit losses, the reserve and provision for possible credit losses, and the estimate of uncollectible accrued interest and fees. See “Critical Accounting Policies—Reserve For Possible Credit Losses” and “Revenue Recognition” for further discussion.

Credit Risk

Credit risk is one of the Corporation’s most significant risks. It primarily represents the risk to earnings and capital arising from the failure of Customers to repay loans according to their terms. Credit risk is particularly important for the Corporation because its primary products are unsecured consumer credit cards and other unsecured consumer loans that generally have higher credit risks than secured consumer lending products, such as mortgage loans and automobile loans, and commercial lending products. In addition, the Corporation generates significant revenues from fees, such as late and overlimit fees, on accounts that exhibit higher credit risk.

Management attempts to manage credit risk through a variety of techniques, including prudent underwriting of applications for credit and review of credit risk for portfolios of loans that are acquired, setting and managing appropriate credit line amounts, monitoring account usage and, where appropriate, blocking use of accounts and working with Customers with past-due balances to help them manage their accounts and to collect past-due amounts. These efforts are described under “Business” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

	-40-

The level of the Corporation’s credit risk is affected by the Corporation’s marketing and credit underwriting strategies. The Corporation markets its products through endorsements from associations, financial institutions, and other organizations. Through this endorsed marketing strategy and the Corporation’s underwriting of loan applications, the Corporation attempts to attract quality loan applicants and offer optimal, initial credit lines on accounts and periodic credit-line increases, resulting in higher usage and average account balances. When Customers experience financial difficulties, however, the higher usage and average account balances will result in higher average balances for accounts that charge off. The Corporation attempts to control this risk through blocking the use of accounts or reducing credit lines. The Corporation may also set or increase the interest rate charged on ac counts to compensate for increased credit risk. For example, as discussed under “Loan Quality—Delinquencies” below, the Corporation generally charges higher interest rates on domestic other consumer loan receivables because these receivables typically have a higher delinquency and charge-off rate than the Corporation’s domestic credit card loan receivables. The Corporation also assesses certain fees, such as late and overlimit fees, to encourage Customers to pay and manage their accounts responsibly and to compensate the Corporation for the additional risk associated with delinquency and overlimit activity on the Customers’ accounts.

Credit quality and the impact of credit losses on the Corporation’s financial condition and results of operations are discussed below.

Delinquencies

The entire balance of an account is contractually delinquent if the minimum payment is not received by the specified date on the Customer's billing statement. Interest and fees continue to accrue on the Corporation’s delinquent loans. Delinquency as a percentage of the Corporation's loan receivables was 3.39% at March 31, 2004, as compared to 3.84% at December 31, 2003. The Corporation's delinquency as a percentage of managed loans was 4.27% at March 31, 2004, as compared to 4.39% at December 31, 2003.

Table 10 presents a reconciliation of the Corporation’s loan receivables delinquency ratio to the managed loans delinquency ratio.

Loan delinquency on domestic credit card loan receivables was 3.52% at March 31, 2004, as compared to 4.27% at December 31, 2003. Loan delinquency on domestic other consumer loan receivables was 4.68% at March 31, 2004, as compared to 5.45% at December 31, 2003. Loan delinquency on foreign credit card loan receivables was 2.18% at March 31, 2004, as compared to 1.84% at December 31, 2003. Loan delinquency on foreign other consumer loan receivables was 2.18% for March 31, 2004, as compared to 2.06% at December 31, 2003. The delinquency rate on the Corporation’s foreign loan receivables is typically lower than the delinquency rate on the Corporation’s domestic loan receivables. The Corporation’s domestic other consumer loan receivables typically have a higher delinquency and charge-off rate than the Corporation’s domestic credit card loan receivables. As a result, the Corporation generally charges higher interest rates on domestic other consumer loan receivables.

	-41-

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Table 10: Delinquent Loans (a) (b)
(dollars in thousands) (unaudited)
		March 31, 2004						December 31, 2003
Loan receivables:
Loan receivables outstanding		$	30,095,826					$	33,624,077
Loan receivables delinquent:
30 to 59 days		$	332,313			1.10	%	$	429,266			1.28	%
60 to 89 days			226,637			.75			277,928			.83
90 or more days (c)			462,772			1.54			582,605			1.73
Total		$	1,021,722			3.39	%	$	1,289,799			3.84	%
Loan receivables delinquent by geographic area:
Domestic:
Credit card		$	499,945			3.52	%	$	775,420			4.27	%
Other consumer			328,140			4.68			339,199			5.45
Total domestic			828,085			3.90			1,114,619			4.57
Foreign:
Credit card			105,122			2.18			125,285			1.84
Other consumer			88,515			2.18			49,895			2.06
Total foreign			193,637			2.18			175,180			1.90
Total		$	1,021,722			3.39		$	1,289,799			3.84
Securitized loans:
Securitized loans outstanding		$	87,490,976					$	84,869,483
Securitized loans delinquent:
30 to 59 days		$	1,225,160			1.40	%	$	1,235,230			1.46	%
60 to 89 days			850,149			.97			818,356			.96
90 or more days (c)			1,924,694			2.20			1,860,265			2.19
Total		$	4,000,003			4.57	%	$	3,913,851			4.61	%
Securitized loans delinquent by geographic area:
Domestic:
Credit card		$	3,314,741			4.83	%	$	3,244,512			4.80	%
Other consumer			318,394			5.62			351,655			6.20
Total domestic			3,633,135			4.89			3,596,167			4.91
Foreign:
Credit card			366,868			2.79			317,684			2.74
Other consumer			-			-			-			-
Total foreign			366,868			2.79			317,684			2.74
Total		$	4,000,003			4.57		$	3,913,851			4.61
Managed loans:
Managed loans outstanding		$	117,586,802					$	118,493,560
Managed loans delinquent:
30 to 59 days		$	1,557,473			1.32	%	$	1,664,496			1.40	%
60 to 89 days			1,076,786			.92			1,096,284			.93
90 or more days (c)			2,387,466			2.03			2,442,870			2.06
Total		$	5,021,725			4.27	%	$	5,203,650			4.39	%
Managed loans delinquent by geographic area:
Domestic:
Credit card		$	3,814,686			4.60	%	$	4,019,932			4.69	%
Other consumer			646,534			5.10			690,854			5.81
Total domestic			4,461,220			4.67			4,710,786			4.82
Foreign:
Credit card			471,990			2.62			442,969			2.41
Other consumer			88,515			2.18			49,895			2.06
Total foreign			560,505			2.54			492,864			2.37
Total		$	5,021,725			4.27		$	5,203,650			4.39
(a) Amounts exclude nonaccrual loans, which are presented in Table 12.
(b) The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible accrued interest and fees.
(c) See Table 11 for further detail on accruing loans past due 90 days or more.

	-42-

Accruing Loans Past Due 90 days Or More

Table 11 presents the Corporation's accruing loan receivables past due 90 days or more and includes a reconciliation to the accruing managed loans past due 90 days or more.

 

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Table 11: Accruing Loans Past Due 90 Days or More (a) (b) (c)
(dollars in thousands) (unaudited)
			March 31,			December 31,
			2004			2003
Loan receivables:
Domestic:
Credit card		$	231,954		$	365,668
Other consumer			164,121			164,315
Total domestic			396,075			529,983
Foreign:
Credit card			38,659			41,784
Other consumer			28,038			10,838
Total foreign			66,697			52,622
Total		$	462,772		$	582,605
Securitized loans:
Domestic:
Credit card		$	1,612,567		$	1,563,719
Other consumer			161,868			174,314
Total domestic			1,774,435			1,738,033
Foreign:
Credit card			150,259			122,232
Other consumer			-			-
Total foreign			150,259			122,232
Total		$	1,924,694		$	1,860,265
Managed loans:
Domestic:
Credit card		$	1,844,521		$	1,929,387
Other consumer			325,989			338,629
Total domestic			2,170,510			2,268,016
Foreign:
Credit card			188,918			164,016
Other consumer			28,038			10,838
Total foreign			216,956			174,854
Total		$	2,387,466		$	2,442,870
(a) Amounts exclude nonaccrual loans, which are presented in Table 12.
(b) This Table provides further detail on 90 days or more delinquent loans presented in Table 10.
(c) The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible accrued interest and fees.

	-43-

Renegotiated Loan Programs

The Corporation may modify the terms of its credit card and other consumer loan agreements with Customers who have experienced financial difficulties by offering them renegotiated loan programs, which include either placing them on nonaccrual status or reducing their interest rate. The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible accrued interest and fees.

 

Nonaccrual Loans

On a case-by-case basis, management determines whether an account should be placed on nonaccrual status. When loans are classified as nonaccrual, the accrual of interest ceases. In future periods, when a payment is received, it is recorded as a reduction of principal.

 

Nonaccrual loan receivables as a percentage of the Corporation’s ending loan receivables were .24% at March 31, 2004, as compared to .30% at December 31, 2003. Nonaccrual managed loans as a percentage of ending managed loans were .23% at March 31, 2004 and December 31, 2003. Beginning in 2003, the Corporation began reducing the number of nonaccrual loan programs offered to its domestic Customers. In addition, MBNA Europe classified certain collection accounts as nonaccrual loans, as well as conformed its practices to the Corporation’s domestic practices as to when loans are placed on nonaccrual status. These factors were the primary reason that the balances for foreign nonaccrual loans were more than domestic nonaccrual loans at March 31, 2004.

 

	-44-

Table 12 presents the Corporation's nonaccrual loan receivables and includes a reconciliation to the nonaccrual managed loans.

 

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Table 12: Nonaccrual Loans (a) (b)
(dollars in thousands) (unaudited)
			March 31,			December 31,
			2004			2003
Loan receivables:
Domestic:
Credit card		$	8,460		$	13,114
Other consumer			2,579			1,053
Total domestic			11,039			14,167
Foreign:
Credit card			56,700			80,381
Other consumer			5,314			4,903
Total foreign			62,014			85,284
Total		$	73,053		$	99,451
Nonaccrual loan receivables as a percentage   of ending loan receivables			.24	%		.30	%
Securitized loans:
Domestic:
Credit card		$	34,849		$	47,772
Other consumer			860			1,050
Total domestic			35,709			48,822
Foreign:
Credit card			164,404			129,140
Other consumer			-			-
Total foreign			164,404			129,140
Total		$	200,113		$	177,962
Nonaccrual securitized loans as a percentage   of ending securitized loans			.23	%		.21	%
Managed loans:
Domestic:
Credit card		$	43,309		$	60,886
Other consumer			3,439			2,103
Total domestic			46,748			62,989
Foreign:
Credit card			221,104			209,521
Other consumer			5,314			4,903
Total foreign			226,418			214,424
Total		$	273,166		$	277,413
Nonaccrual managed loans as a percentage   of ending managed loans			.23	%		.23	%
(a) Although nonaccrual loans are charged off consistent with the Corporation’s charge-off policy as described in        “Loan Quality – Net Credit Losses,” nonaccrual loans are not included in the delinquent loans presented in          Tables 10 and 11 and reduced-rate loans which are presented in Table 13.
(b) The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit          losses and the estimate of uncollectible accrued interest and fees.

	-45-

Reduced-Rate Loans

On a case-by-case basis, management determines whether an account should be placed on reduced-rate status. Reduced-rate loans are loans for which the interest rate is reduced because of the inability of the Customer to comply with the terms and conditions of the loan agreement. Income is accrued at the reduced rate as long as the Customer complies with the revised terms and conditions.

Reduced-rate loan receivables as a percentage of the Corporation’s ending loan receivables were 1.62% at March 31, 2004, as compared to 1.70% at December 31, 2003. Reduced-rate managed loans as a percentage of ending managed loans were 2.08% at March 31, 2004, as compared to 2.03% at December 31, 2003.

	-46-

Table 13 presents the Corporation’s reduced-rate loan receivables and includes a reconciliation to the reduced-rate managed loans.

 

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Table 13: Reduced-Rate Loans (a) (b)
(dollars in thousands) (unaudited)
			March 31,			December 31,
			2004			2003
Loan receivables:
Domestic:
Credit card		$	340,070		$	410,156
Other consumer			127,729			131,048
Total domestic			467,799			541,204
Foreign:
Credit card			20,841			31,402
Other consumer			42			44
Total foreign			20,883			31,446
Total		$	488,682		$	572,650
Reduced-rate loan receivables as a percentage   of ending loan receivables			1.62	%		1.70	%
Securitized loans:
Domestic:
Credit card		$	1,751,195		$	1,626,721
Other consumer			141,122			139,476
Total domestic			1,892,317			1,766,197
Foreign:
Credit card			67,089			66,009
Other consumer			-			-
Total foreign			67,089			66,009
Total		$	1,959,406		$	1,832,206
Reduced-rate securitized loans as a percentage   of ending securitized loans			2.24	%		2.16	%
Managed loans:
Domestic:
Credit card		$	2,091,265		$	2,036,877
Other consumer			268,851			270,524
Total domestic			2,360,116			2,307,401
Foreign:
Credit card			87,930			97,411
Other consumer			42			44
Total foreign			87,972			97,455
Total		$	2,448,088		$	2,404,856
Reduced-rate managed loans as a percentage   of ending managed loans			2.08	%		2.03	%
(a) Reduced-rate loans presented in this Table exclude accruing loans past due 90 days or more and nonaccrual loans, which are         presented in Tables 11 and 12, respectively.
(b) The Corporation considers these loans and other factors in determining an appropriate reserve for possible credit losses and the estimate of uncollectible accrued interest and fees.

	-47-

Re-aged Loans

A Customer’s account may be re-aged to remove existing delinquency. Generally, the intent of a re-age is to assist Customers who have recently overcome temporary financial difficulties, and have demonstrated both the ability and willingness to resume regular payments, but may be unable to pay the entire past due amount. To qualify for re-aging, the account must have been open for at least one year and cannot have been re-aged during the preceding 365 days. An account may not be re-aged more than two times in a five-year period. To qualify for re-aging, the Customer must also have made three regular minimum monthly payments within the last 90 days. In addition, the Corporation may re-age the account of a Customer who is experiencing long-term financial difficulties and apply modified, concessionary terms and conditions to the account. Such additional re-ages are limited to one in a five year period and must meet the qualifications for re-ages described above, except that the Customer’s three consecutive minimum monthly payments may be based on the modified terms and conditions applied to the account. All re-age strategies are approved by the Corporation’s senior management and the Corporation’s Loan Review Department.

Re-ages can have the effect of delaying charge-offs. There were $170.3 million of loan receivables re-aged during the three months ended March 31, 2004, as compared to $207.9 million for the same period in 2003. Managed loans re-aged during the three months ended March 31, 2004 were $674.6 million, as compared to $833.4 million for the same period in 2003. Of those accounts that were re-aged during the three months ended March 31, 2003, approximately 21.4% returned to delinquency status and approximately 20.0% charged off by March 31, 2004.

The decrease in the domestic loan re-aged amounts was the result of changes in re-age practices implemented by the Corporation during 2002 and the first quarter of 2003, which reduced the number of accounts that qualified for re-age. The increase in the foreign loan re-aged amounts was the result of the increase in foreign loan receivables.

	-48-

Table 14 presents the Corporation’s loan receivables re-aged amounts and includes a reconciliation to the managed re-aged amounts.

 

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Table 14: Re-aged Amounts (a)

(dollars in thousands) (unaudited)

		For the Three Months
		Ended March 31,
		2004			2003
Loan Receivables Re-aged Amounts
Domestic:
Credit card		$	97,923		$	112,662
Other consumer			49,460			78,151
Total domestic			147,383			190,813
Foreign:
Credit card			18,734			11,590
Other consumer			4,205			5,452
Total foreign			22,939			17,042
Total loan receivables re-aged amounts		$	170,322		$	207,855
Securitized Loan Re-aged Amounts
Domestic:
Credit card		$	425,506		$	526,455
Other consumer			41,060			75,414
Total domestic			466,566			601,869
Foreign:
Credit card			37,668			23,655
Other consumer			-			-
Total foreign			37,668			23,655
Total securitized loan re-aged amounts		$	504,234		$	625,524
Managed Loan Re-aged Amounts
Domestic:
Credit card		$	523,429		$	639,117
Other consumer			90,520			153,565
Total domestic			613,949			792,682
Foreign:
Credit card			56,402			35,245
Other consumer			4,205			5,452
Total foreign			60,607			40,697
Total managed loan re-aged amounts		$	674,556		$	833,379
(a) Re-aged loans that returned to delinquency status are included in the delinquency amounts presented in Tables 10 and 11.

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	-49-

Net Credit Losses

The Corporation’s net credit losses include the principal amount of loans charged off less current period recoveries and exclude uncollectible accrued interest and fees and fraud losses. Uncollectible accrued interest and fees are recognized by the Corporation through a reduction of the amount of interest income and fee income recognized in the current period that the Corporation does not expect to collect in subsequent periods. The respective income amounts, loan receivables, and accrued income receivable are reduced for uncollectible interest and fees. The Corporation records current period recoveries on loans previously charged off in the reserve for possible credit losses. If the Corporation sells charged-off loans, it records the proceeds received from these sales as recoveries. Fraud losses are recognized through a charge to other expense.

The Corporation works with Customers continually at each stage of delinquency. The Corporation’s policy is to charge off open-end delinquent loans by the end of the month in which the account becomes 180 days contractually past due and closed-end delinquent loans by the end of the month in which they become 120 days contractually past due. Delinquent bankrupt accounts are charged off by the end of the second calendar month following receipt of notification of filing from the applicable court, but not later than the applicable 180-day or 120-day timeframes described above. Accounts of deceased Customers are charged off when the loss is determined, but not later than the applicable 180-day or 120-day timeframes. Accounts failing to make a payment within charge-off policy timeframes are written off. Managers may on an exception basis defer charge off of an account for another month, pending continued payment activity or other special circumstances. Senior manager approval is required on all such exceptions to the above charge-off policies.

Loan receivables net credit losses increased $9.3 million or 2.7% to $359.5 million for the three months ended March 31, 2004, as compared to $350.2 million for the same period in 2003. Net credit losses as a percentage of average loan receivables were 4.45% for the three months ended March 31, 2004, as compared to 5.12% for the same period in 2003. The Corporation’s managed net credit losses as a percentage of average managed loans for the three months ended March 31, 2004, were 4.99%, as compared to 5.47% for the same period in 2003.

Domestic credit card net credit losses as a percentage of average domestic credit card loan receivables were 4.43% for the three months ended March 31, 2004, as compared to 4.81% for the same period in 2003. Domestic other consumer net credit losses as a percentage of average domestic other consumer loan receivables were 7.48% for the three months ended March 31, 2004, as compared to 8.11% for the same period in 2003. Domestic other consumer net credit losses reflect the higher credit risk associated with these products. Foreign credit card net credit losses as a percentage of average foreign credit card loan receivables were 2.67% for the three months ended March 31, 2004, as compared to 2.82% for the same period in 2003. Foreign other consumer net credit losses as a percentage of average foreign other consumer loan receivables were 2.54% for the three months ended March 31, 2004, as compared to 3.30% for the same period in 2003. The lower level of net credit losses on the Corporation’s foreign loan receivables, as compared to domestic loan receivables, primarily reflects the growth in the Corporation’s foreign loan receivables and the seasoning of those accounts. A higher percentage of newer, less seasoned accounts results in a lower charge-off ratio compared to a more seasoned portfolio.

Managed domestic credit card net credit losses as a percentage of average managed domestic credit card loans were 5.12% for the three months ended March 31, 2004, as compared to 5.43% for the same period in 2003. Managed domestic other consumer net credit losses as a percentage of average managed domestic other consumer loans were 7.87% for the three months ended March 31, 2004, as compared to 8.67% for the same period in 2003. Managed foreign credit card net credit losses as a percentage of average managed foreign credit card loans were 3.05% for the three months ended March 31, 2004, as compared to 3.25% for the same period in 2003. Managed foreign other consumer net credit losses as a percentage of average managed foreign other consumer loans were 2.54% for the three months ended March 31, 2004, as compared to 3.30% for the same period in 2003.

The net credit loss ratio is calculated by dividing annualized net credit losses, which exclude uncollectible accrued interest and fees and fraud losses, for the period by average loan receivables, which include the estimated collectible billed interest and fees, for the corresponding period.

Table 15 presents the Corporation’s loan receivables net credit loss ratio and includes a reconciliation to the managed net credit loss ratio.

	-50-

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Table 15: Net Credit Loss Ratio (dollars in thousands) (unaudited)
		For the Three Months Ended March 31, 2004									For the Three Months Ended March 31, 2003
		Net Credit Losses			Average Loans Outstanding			Net Credit Loss Ratio			Net Credit Losses			Average Loans Outstanding			Net Credit Loss Ratio
Loan receivables:
Domestic:
Credit card		$	177,483		$	16,014,150			4.43	%	$	172,081		$	14,304,604			4.81	%
Other consumer			115,532			6,176,631			7.48			128,376			6,334,958			8.11
Total domestic loan receivables			293,015			22,190,781			5.28			300,457			20,639,562			5.82
Foreign:
Credit card			43,516			6,510,741			2.67			33,613			4,770,699			2.82
Other consumer			23,002			3,618,506			2.54			16,133			1,952,785			3.30
Total foreign loan receivables			66,518			10,129,247			2.63			49,746			6,723,484			2.96
Total loan receivables		$	359,533		$	32,320,028			4.45		$	350,203		$	27,363,046			5.12
Securitized loans:
Domestic:
Credit card		$	897,415		$	68,015,847			5.28		$	889,495		$	63,921,788			5.57
Other consumer			117,683			5,673,664			8.30			132,070			5,686,618			9.29
Total domestic securitized          loans			1,015,098			73,689,511			5.51			1,021,565			69,608,406			5.87
Foreign:
Credit card			95,923			11,786,033			3.26			78,730			9,061,332			3.48
Other consumer			-			-			-			-			-			-
Total foreign securitized loans			95,923			11,786,033			3.26			78,730			9,061,332			3.48
Total securitized loans		$	1,111,021		$	85,475,544			5.20		$	1,100,295		$	78,669,738			5.59
Managed loans:
Domestic:
Credit card		$	1,074,898		$	84,029,997			5.12		$	1,061,576		$	78,226,392			5.43
Other consumer			233,215			11,850,295			7.87			260,446			12,021,576			8.67
Total domestic managed loans			1,308,113			95,880,292			5.46			1,322,022			90,247,968			5.86
Foreign:
Credit card			139,439			18,296,774			3.05			112,343			13,832,031			3.25
Other consumer			23,002			3,618,506			2.54			16,133			1,952,785			3.30
Total foreign managed loans			162,441			21,915,280			2.96			128,476			15,784,816			3.26
Total managed loans		$	1,470,554		$	117,795,572			4.99		$	1,450,498		$	106,032,784			5.47

	-51-

Reserve and Provision for Possible Credit Losses

The Corporation’s reserve for possible credit losses increased $56.4 million or 4.6% to $1.3 billion at March 31, 2004, as compared to $1.2 billion at December 31, 2003 primarily as a result of the reserves acquired in connection with the PCL and SFS acquisitions of $22.0 million and $21.4 million, respectively. See “Note K: Acquisitions” to the consolidated financial statements for further detail regarding acquisitions. The provision for possible credit losses decreased $13.7 million or 3.6% to $365.2 million for the three months ended March 31, 2004, compared to $378.9 million for the same period in 2003.

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 Corporation’s loan receivables, 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.

Table 16 presents an analysis of the Corporation's reserve for possible credit losses. The reserve for possible credit losses is a general allowance applicable to the Corporation's loan receivables and does not include an allocation for credit risk related to securitized loans. Net credit losses on securitized loans are absorbed directly by the related trusts under their respective contractual agreements and do not affect the Corporation’s reserve for possible credit losses.

 

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Table 16: Reserve for Possible Credit Losses
(dollars in thousands) (unaudited)
		For the Three Months
		Ended March 31,
		2004			2003
Reserve for possible credit losses, beginning of period		$	1,216,316		$	1,111,299
Reserves acquired:
Domestic			25,251			12,849
Foreign			23,052			102
Total reserves acquired			48,303			12,951
Provision for possible credit losses:
Domestic			297,788			323,683
Foreign			67,373			55,194
Total provision for possible credit losses			365,161			378,877
Foreign currency translation			2,487			(1,530	)
Credit losses:
Domestic:
Credit card			(190,669	)		(183,357	)
Other consumer			(123,010	)		(135,921	)
Total domestic credit losses			(313,679	)		(319,278	)
Foreign:
Credit card			(49,694	)		(38,445	)
Other consumer			(25,833	)		(18,230	)
Total foreign credit losses			(75,527	)		(56,675	)
Total credit losses			(389,206	)		(375,953	)
Recoveries:
Domestic:
Credit card			13,187			11,276
Other consumer			7,478			7,545
Total domestic recoveries			20,665			18,821
Foreign:
Credit card			6,177			4,832
Other consumer			2,831			2,097
Total foreign recoveries			9,008			6,929
Total recoveries			29,673			25,750
Net credit losses			(359,533	)		(350,203	)
Reserve for possible credit losses, end of period		$	1,272,734		$	1,151,394

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	-52-

Estimate of Uncollectible Accrued Interest And Fees

The Corporation adjusts the amount of interest and fee income on loan receivables 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 amounts, loan receivables, and accrued income receivable. The estimate of uncollectible accrued 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.

The difference between the amounts of interest and fees the Corporation was contractually entitled to and the amounts recognized as revenue was $253.0 million for the three months ended March 31, 2004, as compared to $312.2 million for the same period in 2003. The difference between the amounts of interest and fees the Corporation was contractually entitled to and the amounts recognized as revenue decreased $59.2 million or 19%, primarily due to improved delinquencies.

Table 17 presents the domestic and foreign amounts for the difference between the amounts of interest and fees the Corporation was contractually entitled to and the amounts recognized as revenue.

 

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Table 17: Difference Between The Amounts Of Interest And Fees The Corporation Was Contractually Entitled To And                      The Amounts Recognized As Revenue (a)
(dollars in thousands) (unaudited)
		For the Three Months
		Ended March 31,
		2004			2003
Domestic		$	231,006		$	291,055
Foreign			22,006			21,113
Total		$	253,012		$	312,168
(a) Includes the valuation of securitized loans.

 

Capital Adequacy

 

The Corporation is subject to risk-based capital guidelines adopted by the Federal Reserve Board for bank holding companies. The Bank and MBNA Delaware are also subject to similar capital requirements adopted by the Office of the Comptroller of the Currency. Under these requirements, the federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Tier 1 Capital, Total Capital, and Leverage ratios are maintained. Failure to meet these minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal bank regulators that, if undertaken, could have a direct material effect on the Corporation's, the Bank's, and MBNA Delaware's consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation, the Bank, and MBNA Delaware must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Corporation's, the Bank's, and MBNA Delaware's capital amounts and classification are also subject to qualitative judgments by the federal bank regulators about components, risk weightings, and other factors. At March 31, 2004, and December 31, 2003, the Corporation's, the Bank's, and MBNA Delaware's capital exceeded all minimum regulatory requirements to which they are subject, and the Bank and MBNA Delaware were “well-capitalized” as defined under the federal bank regulatory guidelines. The risk-based capital ratios, shown in Table 18, have been computed in accordance with regulatory accounting practices. As of March 31, 2004, no conditions or events have occurred that changed the Corporation’s classification as “adequately capitalized 8; and the Bank’s or MBNA Delaware’s classification as “well-capitalized.”

 

MBNA Delaware’s Tier I, Total, and Leverage Capital ratios decreased from December 31, 2003 primarily as a result of the SFS acquisition on March 31, 2004. “Note K: Acquisitions” to the consolidated financial statements provides further detail regarding the acquisition.

 

	-53-

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Table 18: Regulatory Capital Ratios
	March 31, 2004		December 31, 2003		Minimum Requirements		Well-Capitalized Requirements
	(unaudited)
MBNA Corporation
Tier 1	18.65	%	18.47	%	4.00	%	(a)
Total	22.33		22.18		8.00		(a)
Leverage	19.98		20.52		4.00		(a)
MBNA America Bank, N.A.
Tier 1	17.27		16.38		4.00		6.00	%
Total	21.07		20.13		8.00		10.00
Leverage	18.29		18.52		4.00		5.00
MBNA America (Delaware), N.A.
Tier 1	17.17		28.38		4.00		6.00
Total	18.48		29.75		8.00		10.00
Leverage	25.22		32.47		4.00		5.00
(a) Not applicable for bank holding companies.

 

Dividend Limitations

The payment of dividends in the future and the amount of such dividends, if any, will be at the discretion of the Corporation’s Board of Directors. The payment of preferred and common stock dividends by the Corporation may be limited by certain factors, including regulatory capital requirements, broad enforcement powers of the federal bank regulatory agencies, and tangible net worth maintenance requirements under the Corporation’s revolving credit facilities. The payment of common stock dividends may also be limited by the terms of the Corporation’s preferred stock. If the Corporation has not paid scheduled dividends on the preferred stock, or declared the dividends and set aside funds for payment, the Corporation may not declare or pay any cash dividends on its common stoc k. In addition, if the Corporation defers interest payments for consecutive periods covering 10 semiannual periods or 20 consecutive quarterly periods, depending on the series, on the Corporation’s junior subordinated deferrable interest debentures, the Corporation may not be permitted to declare or pay any cash dividends on the Corporation’s Common Stock, or pay any interest on debt securities that have equal or lower priority than the junior subordinated deferrable interest debentures. During the three months ended March 31, 2004, the Corporation declared dividends on its preferred stock of $3.5 million and on its common stock of $153.3 million.

The Corporation is a legal entity separate and distinct from its banking and other subsidiaries. The primary source of funds for payment of preferred and common stock dividends by the Corporation is dividends received from the Bank. The amount of dividends that a national bank may declare in any year is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits. Also, a national bank may not declare dividends if such declaration would leave the bank inadequately capitalized. Therefore, the ability of the Bank to declar e dividends will depend on its future net income and capital requirements. At March 31, 2004, the amount of undivided profits available for declaration and payment of dividends from the Bank to the Corporation was $3.4 billion. The Bank’s payment of dividends to the Corporation may also be limited by a tangible net worth requirement under the Corporation’s senior syndicated revolving credit facility. This facility was not drawn upon at March 31, 2004. If this facility had been drawn upon at March 31, 2004, the amount of retained earnings available for declaration of dividends would have been limited to $3.1 billion. Also, banking regulators have indicated that national banks should generally pay dividends only out of current operating earnings. Payment of dividends by the Bank to the Corporation, however, can be further limited by federal bank regulatory agencies.

	-54-

Off-Balance Sheet Arrangements

In the normal course of business, the Corporation is a party to a number of activities that contain credit, market and operational risk that are not reflected in whole or in part in the Corporation’s consolidated financial statements. Such activities include asset securitization, off-balance sheet derivative financial instruments, and other items.

Asset Securitization

Asset securitization is the process whereby loan principal receivables are converted into securities normally referred to as asset-backed securities. The securitization of the Corporation’s loan principal receivables is accomplished through the public and private issuance of asset-backed securities and is accounted for in accordance with Statement No. 140. Asset securitization removes loan principal receivables from the consolidated statements of financial condition through the transfer of loan principal receivables to a trust. The trust then sells undivided interests to investors that entitle the investors to specified cash flows generated from the securitized loan principal receivables, while the Corporation retains the remaining undivided interest and is entitled to specific cash flows allocable to that retained interest. As loan principal receivables are securitized, the Corporation’s on-balance-sheet funding needs are reduced by the amount of loans securitized.

A credit card account represents a contractual relationship between the Corporation and the Customer. A loan receivable represents a financial asset. Unlike a mortgage loan or other closed-end loan account, the terms of a credit card account permit a Customer to borrow additional amounts and to repay each month an amount the Customer chooses, subject to a minimum payment requirement. The account remains open after repayment of the balance and the Customer may continue to use it to borrow additional amounts. The Corporation reserves the right to change the account terms, including interest rates and fees, in accordance with the terms of the agreement and applicable law. The credit card account is, therefore, separate and distinct from the loan receivable.

In a credit card securitization, the account relationships are not sold to the securitization trust. The Corporation retains ownership of the account relationship, including the right to change the terms of the account and the right to additional loan principal receivables generated by the account. During a securitization’s revolving period, the Corporation agrees to sell the additional principal receivables to the trusts until the trusts begin using principal collections to make payments to investors. When the revolving period of the securitization ends, the account relationship between the Corporation and the Customer continues.

The undivided interests in the trusts sold to investors are issued through different classes of securities with different risk levels and credit ratings. The Corporation’s securitization transactions are generally structured to include up to three classes of securities sold to investors. With the exception of the most senior class, each class of securities issued by the trusts provides credit enhancement, in the form of subordination, to the more senior, higher-rated classes. The most senior class of asset-backed securities is the largest and generally receives a AAA credit rating at the time of issuance. In order to issue senior classes of securities, it is necessary to obtain the appropriate amount of credit enhancement, generally through the issuance of the above described subordi nated classes. The Corporation receives a servicing fee for servicing the loans. This servicing fee is a component of securitization income.

The trusts are qualified special purpose entities as defined under Statement No. 140. To meet the criteria to be considered a qualifying special purpose entity, a trust must be demonstrably distinct from the Corporation and have activities that are significantly limited and entirely specified in the legal documents that established the trust. The Corporation cannot change the activities that the trust can perform. These activities may only be changed by a majority of the beneficial interest holders not including the Corporation. As qualifying special purpose entities under Statement No. 140, the trusts’ assets and liabilities are not consolidated in the Corporation’s statements of financial condition. The trusts are administered by an independent trustee.

During the revolving period, which normally ranges from 24 months to 120 months, the trust makes no principal payments to the investors in the securitization. Instead, during the revolving period, the trust uses principal payments received from Customers, which pay off the loan principal receivables that were sold to the trust, to purchase for the trust from the Corporation new loan principal receivables generated by these accounts, in accordance with the terms of the transaction, so that the principal dollar amount of the investors’ undivided interest remains unchanged. Once the revolving period ends, the amortization period begins and the trust distributes principal payments to the investors according to the terms of the transaction. When the trust uses principal payments to pay th e investors, the Corporation’s on-balance-sheet loan receivables increase by the amount of any new loans on the Customer accounts because the trust is no longer purchasing new loan receivables from the Corporation.

	-55-

The Corporation maintains retained interests in its securitization transactions, which are included in accounts receivable from securitization in the Corporation’s consolidated statements of financial condition. The investors and providers of credit enhancement had a lien on a portion of these retained interests of $1.2 billion at March 31, 2004 and December 31, 2003. The Corporation has no further obligation to provide funding support to either the investors or the trusts if the securitized loans are not paid when due.

Impact Of Off-Balance Sheet Securitization Transactions On The Corporation’s Results

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 lo ans. 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.

When adjusted for the effects of securitization, certain components of the Corporation’s consolidated financial information may be reconciled to its managed data. This securitization adjustment reclassifies interest income, interchange income, credit card and other consumer loan fees, insurance income, recoveries on charged-off securitized loan principal receivables in excess of interest paid to investors, gross credit losses, and other trust expenses into securitization income.

 

Table 19 reconciles income statement data for the period to managed net interest income, managed provision for possible credit losses, and managed other operating income.

 

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Table 19: Reconciliation of Income Statement Data for the Period to Managed Net Interest Income, Managed

                      Provision for Possible Credit Losses, and Managed Other Operating Income

                  (dollars in thousands) (unaudited)

		For the Three Months
		Ended March 31,
		2004			2003
Net Interest Income:
Net interest income		$	667,805		$	555,596
Securitization adjustments			1,968,024			1,897,116
Managed net interest income		$	2,635,829		$	2,452,712
Provision for Possible Credit Losses:
Provision for possible credit losses		$	365,161		$	378,877
Securitization adjustments			1,111,021			1,100,295
Managed provision for possible credit losses		$	1,476,182		$	1,479,172
Other Operating Income:
Other operating income		$	1,942,532		$	1,788,009
Securitization adjustments			(857,003	)		(796,821	)
Managed other operating income		$	1,085,529		$	991,188

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	-56-

Managed net interest income increased $183.1 million or 7.5% to $2.6 billion for the three months ended March 31, 2004, as compared to $2.5 billion for the same period in 2003.

Average managed interest-earning assets increased $12.2 billion or 10.5% to $128.5 billion for the three months ended March 31, 2004, as compared to $116.4 billion for the same period in 2003. The increase in average managed interest-earning assets was primarily the result of the increase in average managed loans. The yield earned on average managed interest-earning assets for the three months ended March 31, 2004 was 10.72% as compared to 11.34% for the same period in 2003. The decrease of 62 basis points in the yield earned on average managed interest-earning assets was primarily the result of lower rates offered to attract and retain Customers and to grow managed loans.

Average managed interest-bearing liabilities increased $8.9 billion or 7.6% to $126.8 billion for the three months ended March 31, 2004, as compared to $117.9 billion for the same period in 2003. The increase in average managed interest-bearing liabilities was a result of the increase in average securitized loans and average borrowed funds. The decrease in the rate paid on average managed interest-bearing liabilities of 25 basis points to 2.50% for the three months ended March 31, 2004, from 2.75% for the same period in 2003, reflects actions by the FOMC in the second quarter of 2003, that impacted overall market interest rates and decreased the Corporation’s funding costs.

Table 20 reconciles average interest-earning assets and average interest-bearing liabilities to average managed interest-earning assets and average managed interest-bearing liabilities.

 

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Table 20: Reconciliation of Average Interest-Earning Assets and Average Interest-Bearing Liabilities to Average                     Managed Interest-Earning Assets and Average Managed Interest-Bearing Liabilities
(dollars in thousands, yields and rates on a fully taxable equivalent basis) (unaudited)
For the Three Months Ended March 31,		2004									2003
		Average Balance			Yield/ Rate			Income or Expense			Average Balance			Yield/ Rate			Income or Expense
Assets:
Net interest-earning assets		$	47,071,236			8.83	%	$	1,033,314		$	41,425,343			9.24	%	$	944,244
Securitization adjustments			81,475,064			11.81			2,391,738			74,936,751			12.49			2,308,383
Managed interest-earning assets		$	128,546,300			10.72		$	3,425,052		$	116,362,094			11.34		$	3,252,627
Liabilities:
Net interest-bearing liabilities		$	42,971,916			3.42		$	365,300		$	40,921,459			3.85		$	388,431
Securitization adjustments			83,849,137			2.03			423,714			76,977,218			2.17			411,267
Managed interest-bearing liabilities		$	126,821,053			2.50		$	789,014		$	117,898,677			2.75		$	799,698

The Corporation’s managed net interest margin, on a fully taxable equivalent basis, was 8.25% for the three months ended March 31, 2004, as compared to 8.55% for the same period in 2003. The managed net interest margin represents managed net interest income on a fully taxable equivalent basis expressed as a percentage of managed average total interest-earning assets. The decrease in the managed net interest margin for the three months ended March 31, 2004, was primarily the result of the decrease in the yield earned on managed average interest-earning assets partially offset by the decrease in the rate paid on managed average interest-bearing liabilities.

Managed other operating income increased $94.3 million or 9.5% to $1.1 billion for the three months ended March 31, 2004, as compared to $991.2 million for the same period in 2003. The increase in managed other operating income for the three months ended March 31, 2004, was primarily the result of an increase in credit card fees and interchange income, partially offset by the net loss from securitization activity, which includes changes in the fair value of the interest-only strip receivable and the gains from the sale of loan principal receivables.

	-57-

Table 21 reconciles the net interest margin ratio to the managed net interest margin ratio.

 

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Table 21: Reconciliation of the Net Interest Margin Ratio to the Managed Net Interest Margin Ratio
(dollars in thousands) (unaudited)
		For the Three Months Ended									For the Three Months Ended
		March 31, 2004									March 31, 2003
		Average Earning Assets			Net Interest Income			Net Interest Margin Ratio			Average Earning Assets			Net Interest Income			Net Interest Margin Ratio
Net Interest Margin (a):
Investment securities and   money market instruments		$	10,680,430								$	10,262,295
Other interest-earning assets			4,070,778									3,800,002
Loan receivables (b)			32,320,028									27,363,046
Total		$	47,071,236		$	668,014			5.71	%	$	41,425,343		$	555,813			5.44	%
Securitization Adjustments:
Investment securities and   money market instruments		$	-								$	-
Other interest-earning assets			(4,000,480	)								(3,732,987	)
Securitized loans			85,475,544									78,669,738
Total		$	81,475,064			1,968,024			9.72		$	74,936,751			1,897,116			10.27
Managed Net Interest Margin (a):
Investment securities and   money market instruments		$	10,680,430								$	10,262,295
Other interest-earning assets			70,298									67,015
Managed loans			117,795,572									106,032,784
Total		$	128,546,300			2,636,038			8.25		$	116,362,094			2,452,929			8.55
(a) Net interest margin ratios are presented on a fully taxable equivalent basis. The fully taxable equivalent adjustment for the        three months ended March 31, 2004 and 2003 was $209 and $217, respectively.
(b) Loan receivables include loans held for securitization and the loan portfolio.

Off-Balance Sheet Securitization Transaction Activity

During the three months ended March 31, 2004, the Corporation securitized credit card loan principal receivables totaling $3.6 billion, including the securitization of £750.0 million (approximately $1.4 billion) by MBNA Europe. The total amount of securitized loans was $87.5 billion or 74.4% of managed loans at March 31, 2004, as compared to $84.9 billion or 71.6% at December 31, 2003. The total amount of securitized domestic credit card loans was 82.9% of managed domestic credit card loans at March 31, 2004, as compared to 78.8% at December 31, 2003. Securitized domestic other consumer loans were 44.7% of managed domestic other consumer loans at March 31, 2004, as compared to 47.7% at December 31, 2003. Securitized foreign credit card loans were 73.2% of managed foreign credit card loans at March 31, 2004, as compared to 63.0% at December 31, 2003. The Corporation did not have any off-balance sheet se curitized foreign other consumer loans at March 31, 2004 and December 31, 2003. Refer to Table 5 and Table 22 to reconcile the Corporation’s loan receivables and securitized loans to it managed loans.

During the three months ended March 31, 2004, there was an increase of $1.3 billion in the Corporation’s loan receivables that occurred when certain securitizations matured as scheduled and the trusts used principal payments to pay the investors rather than purchasing new loan principal receivables from the Corporation. The Corporation’s loan portfolio is expected to increase an additional $8.9 billion during the remainder of 2004 as a result of estimated maturities of existing securitization transactions when trusts use principal payments to pay investors rather than purchasing new loan principal receivables from the Corporation. This amount is based upon the estimated maturity of outstanding securitization transactions and does not include any future securitization activity. Should the Corporation choose or be unable to securitize these assets in the future, additional on-balance sheet funding a nd capital would be required.

	-58-

Table 22 presents the Corporation’s securitized loans distribution.

 

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Table 22: Securitized Loans Distribution

(dollars in thousands) (unaudited)

			March 31,			December 31,
			2004			2003
Securitized Loans
Domestic:
Credit card		$	68,659,208		$	67,620,822
Other consumer			5,662,669			5,671,832
Total domestic securitized loans			74,321,877			73,292,654
Foreign:
Credit card			13,169,099			11,576,829
Other consumer			-			-
Total foreign securitized loans			13,169,099			11,576,829
Total securitized loans		$	87,490,976		$	84,869,483

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The Corporation’s securitization transactions contain provisions which could require that the excess spread generated by the securitized loans be accumulated in the trusts to provide additional credit enhancement to the investors. These provisions require that excess spread be retained once the yields in excess of minimum yield for three consecutive months falls below a range of 6.50% to 4.00% depending on the terms of the particular securitization transaction. At March 31, 2004 and December 31, 2003, no excess spread was held by the trusts under these provisions.

Distribution of principal to investors may begin sooner if the average annualized yield (generally including interest income, interchange income, charged-off loan recoveries, and other fees) for three consecutive months drops below a minimum yield (generally equal to the sum of the interest rate payable to investors, contractual servicing fees, and principal credit losses during the period) or certain other events occur. If distribution of principal to investors began sooner than expected, the Corporation would likely need to raise additional capital to support loan and asset growth and meet regulatory capital requirements.

Table 23 presents the Corporation’s estimated maturities of investor principal.

 

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Table 23: Estimated Maturities of Investor Principal

(dollars in thousands) (unaudited)

One year or less (a)		$	16,700,430
Over one year through two years			12,632,249
Over two years through three years			12,187,946
Over three years through four years			14,792,430
Over four years through five years			9,298,197
Thereafter			20,324,268
Total amortization of investor principal			85,935,520
Estimated collectible billed interest and   fees included in securitized loans			1,555,456
Total securitized loans		$	87,490,976
(a) The $4.5 billion MBNA Master Note Trust Emerald Program (“Emerald Notes”) and the $458.9 million U.K. Receivables         Trust II Series 2004—VFN Program (“Variable Funding Notes”) are comprised of short-term commercial paper, and are         included in the one year or less category based on the possibility that maturing Emerald Notes and Variable Funding         Notes cannot be re-issued.  These events would cause the transactions to begin amortizing, thus creating a liquidity         requirement. However, the Corporation expects the Emerald Notes and Variable Funding Notes to continue to be re-         issued during the course of the program through their scheduled final maturity dates, which are scheduled to occur in         June 2006 and March 2009, respectively.

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	-59-

Table 24 presents summarized yields for each trust for the three months ended March 31, 2004. The yield in excess of minimum yield for each of the trusts is presented on a cash basis and includes various credit card or other fees as specified in the securitization agreements. If the yield in excess of minimum falls below 0%, for a contractually specified period, generally a three-month average, then the securitizations will begin to amortize earlier than their scheduled contractual amortization date.

 

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Table 24: Securitization Trust Yields in Excess of Minimum Yield Data
(dollars in thousands) (unaudited)
			For the Three Months Ended March 31, 2004
							Yield in Excess of Minimum Yield (a)
									Series Range
	Investor Principal	Number of Series in Trust	Average Annualized Yield		Average Minimum Yield		Weighted Average		High		Low
MBNA Master Credit Card Trust II	$    29,750,757	41	17.31	%	9.28	%	8.03	%	8.36	%	7.22	%
MBNA Credit Card Master Note Trust (b)	34,679,195	66	17.37		9.28		8.09		8.09		8.09
MBNA Master Consumer Loan Trust	5,560,278	3	(c)		(c)		(c)		(c)		(c)
MBNA Triple A Master Trust	2,000,000	2	16.68		9.00		7.68		7.72		7.67
Multiple Asset Note Trust	1,000,000	2	19.28		9.20		10.08		10.09		10.08
UK Receivables Trust	3,301,143	6	20.40		11.12		9.28		9.79		7.27
UK Receivables Trust II	6,881,291	9	18.28		10.60		7.68		7.72		7.63
Gloucester Credit Card Trust	2,762,856	10	19.32		9.65		9.67		10.22		9.10
(a) The Yield in Excess of Minimum Yield represents the trust’s average annualized yield less its average minimum yield.
(b) MBNA Credit Card Master Note Trust issues a series of notes called the MBNAseries. Through the MBNAseries, MBNA        Credit Card Master Note Trust issues specific classes of notes which contribute on a prorated basis to the calculation of the        average yield in excess of minimum yield. This average yield in excess of minimum yield impacts the distribution of        principal to investors of all classes within the MBNAseries.
(c) The MBNA Master Consumer Loan Trust yield in excess of minimum yield does not impact the distribution of principal to        investors. Distribution to investors for transactions in this trust may begin earlier than the scheduled time if the credit        enhancement amount falls below a predetermined contractual level. As a result, its yields are excluded from this Table.

Other Off-Balance Sheet Arrangements

MBNA Capital A, MBNA Capital B, MBNA Capital C, MBNA Capital D, and MBNA Capital E (collectively the “statutory trusts”), are variable interest entities and the Corporation is not the primary beneficiary. See “Note 17: Long-Term Debt and Bank Notes” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, for further discussion of the statutory trusts.

The Corporation utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk and foreign currency exchange rate risk that exist as part of its ongoing business operations. See “Note 30: Fair Value of Financial Instruments” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

	-60-

Liquidity And Rate Sensitivity

 

The Corporation seeks to maintain prudent levels of liquidity, interest rate risk, and foreign currency exchange rate risk.

Liquidity Management

Liquidity management is the process by which the Corporation manages the use and availability of various funding sources to meet its current and future operating needs. These needs change as loans grow, securitizations mature, debt and deposits mature, and payments on other obligations are made. Because the characteristics of the Corporation’s assets and liabilities change, liquidity management is a dynamic process, affected by the pricing and maturity of investment securities, loans, deposits, securitizations, and other assets and liabilities.

The Corporation manages liquidity at two primary levels. The first level is the liquidity of the parent company, which is the holding company that owns the banking subsidiaries. The second level is the liquidity of the banking subsidiaries. The management of liquidity at both levels is essential because the parent company and banking subsidiaries each have different funding needs and funding sources and each are subject to certain regulatory guidelines and requirements.

The liquidity requirements of the Corporation are met by regular dividend payments from the Bank, the growth in retained earnings from regular operations, and the issuance of unsecured senior medium-term notes and senior notes. The available cash position of the Corporation is maintained at a level sufficient to meet anticipated cash needs for at least one year. The liquidity of the banking subsidiaries is managed to reflect the anticipated cash required to finance loan demand and to maintain sufficient liquid assets to cover the maturities for the next six months for all off-balance sheet securitizations, unsecured debt, and wholesale money market funding sources. The level of liquid assets, which is comprised of the investments and money market assets described further in “Investment Securities and Money Market Instruments,” is managed to a size prude nt for both anticipated loan receivable growth and overall conditions in the markets for asset-backed securitization, unsecured corporate debt, and short-term borrowed funds. The Corporation, the Bank, MBNA Europe, and MBNA Canada also have access to the credit facilities described further in “Note 27: Commitments and Contingencies” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003. Finally, the deposit funding sources are also used to finance loan receivable growth and to maintain a sufficient level of liquid assets.

Table 25 provides a summary of the estimated amounts and maturities of the contractual obligations of the Corporation at March 31, 2004.

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Table 25: Estimated Contractual Obligations (a) (b)
(dollars in thousands) (unaudited)
		Estimated Contractual Obligations at March 31, 2004
		Within 1 Year			1-3 Years			3-5 Years			Over 5 Years			Total
Long-term debt and bank notes (par) (c)		$	1,326,253		$	3,143,382		$	2,741,089		$	4,547,757		$	11,758,481
Minimum rental payments under noncancelable    operating leases			29,274			29,350			7,580			1,104			67,308
Purchase obligations (d)			311,166			355,079			197,822			85,558			949,625
Other long-term liabilities reflected in the    Corporation’s consolidated statements of financial    condition (e)			93,294			145,556			49,055			753			288,658
Total estimated contractual obligations		$	1,759,987		$	3,673,367		$	2,995,546		$	4,635,172		$	13,064,072
(a) “Note 30: Fair Value of Financial Instruments – Derivative Financial instruments” of the Corporation’s Annual Report on          Form 10-K for the year ended December 31, 2003 provides further detail on the Corporation’s derivative financial          instruments. These amounts are not included in this Table.
(b) Table 26 provides detail on the maturities of deposits. These amounts are not included in this Table.
(c) Excludes interest.
(d) Includes the royalties to endorsing organizations payable in the future subject to certain conditions, Community          Reinvestment Act obligations that cannot be canceled, and other purchase obligations.
(e) Includes amounts accrued for Customers reward programs, and other long-term contractual obligations.

 

If certain terms on the above estimated contractual requirements are not met, there may be an acceleration of the payment due dates noted above. As of March 31, 2004, the Corporation was not in default of any such covenants. The Corporation estimates that it will have $1.8 billion in contractual obligation requirements due within the next year.

	-61-

Funding

To facilitate liquidity management, the Corporation uses a variety of funding sources to establish a maturity pattern that it believes provides a prudent mixture of short-term and long-term funds. The Corporation obtains funds through deposits and debt issuances, and uses securitization of the Corporation’s loan principal receivables as a major funding alternative. In addition, further liquidity is provided to the Corporation through committed credit facilities.

Asset Securitization

At March 31, 2004, the Corporation funded 74.4% of its managed loans through securitization transactions. To maintain an appropriate funding level, the Corporation expects to securitize additional loan principal receivables during future periods. The consumer asset-backed securitization market in the United States exceeded $1.6 trillion at March 31, 2004, with approximately $142 billion of asset-backed securities issued during the first three months of 2004. An additional $73 billion of consumer asset-backed securities were issued in European markets during the first three months of 2004. The Corporation is a leading issuer in these markets, which have remained stable through adverse conditions. Despite the size and relative stability of these markets and the Corporation’s position as a leading issuer, if these markets experience difficulties, the Corporation may be unable to securitize its loan princi pal receivables or to do so at favorable pricing levels. Factors affecting the Corporation’s ability to securitize its loan principal receivables or to do so at favorable pricing levels include the overall credit quality of the Corporation’s loans, the stability of the market for securitization transactions, and the legal, regulatory, accounting, and tax environments impacting securitization transactions. The Corporation does not believe adverse outcomes from these events are likely to occur. If the Corporation were unable to continue to securitize its loan receivables at current levels, the Corporation would use its investment securities and money market instruments in addition to alternative funding sources to fund increases in loan receivables and meet its other liquidity needs. The resulting change in the Corporation’s current liquidity sources could potentially subject the Corporation to certain risks. These risks would include an increase in the Corporation’s cost of funds, increase s in the reserve for possible credit losses and the provision for possible credit losses as more loans would remain in the Corporation’s consolidated statements of financial condition, and restrictions on loan growth if the Corporation were unable to find alternative and cost-effective funding sources. In addition, if the Corporation could not continue to remove the loan principal receivables from the Corporation’s consolidated statements of financial condition, the Corporation would likely need to raise additional capital to support loan and asset growth and meet regulatory capital requirements.

Stock Repurchases

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, 2004, the Corporation issued 7.3 million common shares upon the exercise of stock options and issuance of restricted stock, and purchased 7.2 million common shares for $193.8 million. The Corporation received $65.6 million in proceeds from the exercise of stock options during the three months ended March 31, 2004.

Credit Facilities

The Corporation, the Bank, MBNA Europe, and MBNA Canada have various credit facilities. These facilities may be used for general corporate purposes and were not drawn upon at March 31, 2004.

“Note 27: Commitments and Contingencies” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, provides further detail regarding the Corporation’s credit facilities.

	-62-

Borrowed Funds

Short-term borrowings used by the Corporation include federal funds purchased and securities sold under repurchase agreements. Federal funds purchased and securities sold under repurchase agreements are overnight borrowings that normally mature within one business day of the transaction date. Other short-term borrowings consist primarily of federal funds purchased that mature in more than one business day, short-term bank notes issued from the global bank note program established by the Bank, short-term deposit notes issued by MBNA Canada, on-balance-sheet structured financings, and other transactions with maturities greater than one business day but less than one year. Short-term borrowings were $2.2 billion at March 31, 2004 and $1.0 billion at December 31, 2003.

In connection with the PCL acquisition in the first quarter of 2004, the Corporation assumed a short-term on-balance-sheet structured financing transaction with an available limit of £750.0 million (approximately $1.4 billion). At March 31, 2004, this structured financing transaction had an outstanding balance of £627.0 million (approximately $1.2 billion) consisting of several tranches with maturities ranging between one to three months. These tranches are renewable upon maturity. This structured financing transaction was secured by £627.0 million (approximately $1.2 billion) of loan receivables.

Other funding programs established by the Corporation for long-term borrowings include senior medium-term notes and senior notes. Other funding programs established by the Corporation’s bank subsidiaries include the Bank’s global bank note program, MBNA Europe’s euro medium-note program, and MBNA Canada’s medium-term deposit note program. MBNA Europe’s and MBNA Canada’s notes are unconditionally and irrevocably guaranteed in respect to all payments by the Bank.

Long-term debt and bank notes were $12.2 billion at March 31, 2004 and $12.1 billion at December 31, 2003. See Table 25 for estimated maturities of the contractual obligations related to long-term debt and bank notes at March 31, 2004.

 

Deposits

The Corporation utilizes deposits to fund loan and other asset growth and to diversify funding sources. The Corporation categorizes its deposits into either direct or other deposits. Direct deposits are deposits marketed to and received from individual Customers and are an important, stable, low-cost funding source that typically react more slowly to interest rate changes than other deposits. Other deposits include brokered deposits.

Total deposits were $31.8 billion at March 31, 2004 and December 31, 2003.

Table 26 provides the maturities of the Corporation’s deposits at March 31, 2004. Included in the deposit maturity category of one year or less are money market deposit accounts, noninterest-bearing deposits, interest-bearing transaction accounts, and savings accounts totaling $10.5 billion. Based on past activity, the Corporation expects to retain a majority of its deposit balances as they mature.

Included in the Corporation’s direct deposits at March 31, 2004 and December 31, 2003, are noninterest-bearing deposits of $2.7 billion and $2.4 billion, representing 8.3% and 7.6% of total deposits, respectively. The Corporation also had interest-bearing direct deposits at March 31, 2004 of $23.2 billion, as compared to $22.9 billion at December 31, 2003.

 

Included in the Corporation’s other deposits at March 31, 2004 and December 31, 2003, are brokered deposits of $6.0 billion and $6.5 billion, representing 18.8% and 20.5% of total deposits, respectively.

If any of the brokered deposits are not renewed at maturity, the funding they provide could be replaced by funds from maturing investment securities and money market instruments or other funding sources to fund increases in its loan receivables and meet the Corporation’s other liquidity needs. During the three months ended March 31, 2004, other deposits decreased because the Corporation determined it had adequate liquidity from other sources to meet its funding needs. While the Corporation utilized other alternative funding sources during this period, it expects that brokered deposits will continue to be part of its funding activities. The Federal Deposit Insurance Corporation Improvement Act of 1991 limits the use of brokered deposits to “well-capitalized” insured deposito ry institutions, and with a waiver from the Federal Deposit Insurance Corporation, to “adequately capitalized” institutions. At March 31, 2004, the Bank and MBNA Delaware were “well-capitalized” as defined under the federal bank regulatory guidelines. Based on the Corporation’s historical access to the brokered deposit market, it expects to replace maturing brokered deposits with new brokered deposits or with the Corporation’s direct deposits.

	-63-

Table 26 provides the maturities of the Corporation’s deposits at March 31, 2004.

 

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Table 26: Maturities of Deposits at March 31, 2004 (dollars in thousands) (unaudited)
		Maturities
		Within 1 Year			1-2 Years			2-3 Years			3-4 Years			4-5 Years			Over 5 Years			Total  Deposits
Domestic:
Direct deposits		$	17,041,651		$	3,847,778		$	1,665,446		$	1,532,308		$	989,311		$	9,006		$	25,085,500
Other deposits (a)			2,320,628			1,799,277			1,047,500			775,728			29,311			-			5,972,444
Total domestic   deposits			19,362,279			5,647,055			2,712,946			2,308,036			1,018,622			9,006			31,057,944
Foreign:
Direct deposits			760,863			-			-			-			-			-			760,863
Other deposits (a)			16,958			-			-			-			-			-			16,958
Total foreign deposits			777,821			-			-			-			-			-			777,821
Total deposits		$	20,140,100		$	5,647,055		$	2,712,946		$	2,308,036		$	1,018,622		$	9,006		$	31,835,765
(a) At March 31, 2004, all other deposits were brokered deposits.

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Investment Securities and Money Market Instruments

The Corporation held $5.1 billion of investment securities and $7.5 billion of money market instruments at March 31, 2004, compared to $4.7 billion of investment securities and $4.9 billion in money market instruments at December 31, 2003. The investment securities primarily consist of high-quality, AAA-rated securities, most of which can be used as collateral under repurchase agreements. Of the investment securities held at March 31, 2004, $1.6 billion are anticipated to mature within 12 months. The Corporation’s investment securities available-for-sale portfolio, which consists primarily of U.S. Treasury obligations or short-term and variable-rate securities, was $4.7 billion at March 31, 2004, and $4.4 billion at December 31, 2003. These investment securities, along with the money market instruments, provide increased liquidity and flexibility to support the Corporation’s funding requireme nts. Investment securities and money market instruments increased at March 31, 2004, as compared to December 31, 2003, to provide liquidity to support loan portfolio and other acquisition activity and anticipated loan growth.

	-64-

Table 27 presents the summary of investment securities.

 

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Table 27: Summary of Investment Securities at March 31, 2004
(dollars in thousands) (unaudited)
		Estimated Maturities
		Within 1 Year			1-5 Years			6-10 Years			Over 10 Years			Total			Amortized Cost			Market Value
Available-for-Sale
Domestic:
U.S. Treasury and other   U.S. Government   agencies obligations		$	854,284		$	1,404,695		$	-		$	-		$	2,258,979		$	2,249,481		$	2,258,979
State and political   subdivisions of the   United States			100,980			-			-			-			100,980			100,980			100,980
Asset-backed and other   securities			540,132			1,341,854			64,161			275			1,946,422			1,941,859			1,946,422
Total domestic   investment securities   available-for-sale			1,495,396			2,746,549			64,161			275			4,306,381			4,292,320			4,306,381
Foreign			93,272			339,940			-			-			433,212			434,093			433,212
Total investment   securities   available-for-sale		$	1,588,668		$	3,086,489		$	64,161		$	275		$	4,739,593		$	4,726,413		$	4,739,593
Held-to-Maturity
Domestic:
U.S. Treasury and other   U.S. Government   agencies obligations		$	-		$	-		$	-		$	324,547		$	324,547		$	324,547		$	329,952
State and political   subdivisions of the   United States			100			-			649			5,941			6,690			6,690			6,854
Asset-backed and other   securities			-			-			-			8,842			8,842			8,842			8,818
Total domestic   investment securities   held-to-maturity			100			-			649			339,330			340,079			340,079			345,624
Foreign			-			1,000			-			-			1,000			1,000			1,000
Total investment   securities   held-to-maturity		$	100		$	1,000		$	649		$	339,330		$	341,079		$	341,079		$	346,624

Interest Rate Sensitivity

Interest rate sensitivity refers to the change in earnings resulting from fluctuations in interest rates, variability in the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, and the differences in repricing intervals between assets and liabilities. Interest rate changes also impact the estimated value of the interest-only strip receivable and other-interest earning assets, and securitization income. The management of interest rate sensitivity attempts to maximize earnings by minimizing any negative impacts of changing market rates, asset and liability mix, and prepayment trends. Interest rate sensitive assets/liabilities have yields/rates that can change within a designated time period as a result of their maturity, a change in an underlying index rate, or the contractual ability of the Corporation to change the yield/rate.

Interest rate risk refers to potential changes in current and future net interest income resulting from changes in interest rates and differences in the repricing characteristics between interest rate sensitive assets and liabilities. The Corporation analyzes its level of interest rate risk using several analytical techniques. In addition to on-balance-sheet activities, interest rate risk includes the interest rate sensitivity of securitization income from securitized loans and the impact of interest rate swap agreements and foreign exchange swap agreements. The Corporation uses interest rate swap agreements and foreign exchange swap agreements to change a portion of fixed-rate funding sources to floating-rate funding sources to better match the rate sensitivity of the Corporation's asset s.

For this reason, the Corporation analyzes its level of interest rate risk on a managed basis to quantify and capture the full impact of interest rate risk on the Corporation's earnings. An analytical technique that the Corporation uses to measure interest rate risk is simulation analysis. Assumptions in the Corporation's simulation analysis include cash flows and maturities of interest rate sensitive instruments, changes in market conditions, loan volumes and pricing, consumer preferences, fixed-rate credit card repricings as part of the Corporation's normal planned business strategy, and management's capital plans. Also included in the analysis are various actions which the Corporation would likely undertake to minimize the impact of adverse movements in interest rates. Based on the simu lation analysis at March 31, 2004, the Corporation could experience a decrease in projected net income during the next 12 months of approximately $67 million, if interest rates at the time the simulation analysis was performed increased 100 basis points over the next 12 months evenly distributed on the first day of each of the next four quarters. For each incremental 100 basis points introduced into the simulation analysis, the Corporation could experience an additional decrease of approximately $67 million in projected net income during the next 12 months.

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These assumptions are inherently uncertain and, as a result, the analysis cannot precisely predict the impact of higher interest rates on net income. Actual results would differ from simulated results as a result of timing, magnitude, and frequency of interest rate changes, changes in market conditions, and management strategies to offset the Corporation's potential exposure, among other factors. The Corporation has the contractual right to reprice fixed-rate credit card loans at any time by giving notice to the Customer. Accordingly, a key assumption in the simulation analysis is the repricing of fixed-rate credit card loans in response to an upward movement in interest rates, with a lag of approximately 45 days between interest rate movements and fixed-rate credit card loan repricings. The Corporation has repriced its fixed-rate credit card loans on numerous occasions in the past; its ability to do so in the future will depend on changes in interest rates, market conditions, and other factors.

Foreign Currency Exchange Rate Sensitivity

Foreign currency exchange rate risk refers to the potential changes in current and future earnings or capital arising from movements in foreign exchange rates and occurs as a result of cross-currency investment and funding activities. The Corporation's foreign currency exchange rate risk is limited to the Corporation's net investment in its foreign subsidiaries which is unhedged. The Corporation uses forward exchange contracts and foreign exchange swap agreements to reduce its exposure to foreign currency exchange rate risk. Management reviews the foreign currency exchange rate risk of the Corporation on a routine basis. During this review, management considers the net impact to stockholders' equity under various foreign exchange rate scenarios. At March 31, 2004, the Corporation could ex perience a decrease in stockholders' equity, net of tax, of approximately $206 million, as a result of a 10% depreciation of the Corporation's unhedged capital exposure in foreign subsidiaries to the U.S. dollar position.

Regulatory and Other Matters

MasterCard and Visa Litigation and Competition

The Corporation issues credit cards on MasterCard's and Visa's networks. MasterCard and Visa are facing significant litigation and increased competition. MasterCard and Visa recently settled a suit by Wal-Mart and other merchants who claimed that MasterCard and Visa unlawfully tied acceptance of debit cards to acceptance of credit cards. Under the settlement MasterCard and Visa would, among other things, allow merchants to accept MasterCard or Visa branded credit cards without accepting their debit cards (and vice versa), reduce the prices charged to merchants for off-line signature debit transactions for a period of time, and pay over ten years amounts totaling $3.05 billion into a settlement fund. In addition, MasterCard and Visa are parties to (i) a Department of Justice anti-trust suit that could ultimately permit member banks to issue cards on networks of competitors (such as American Express or Discov er), (ii) suits alleging that MasterCard's and Visa's currency conversion practices are unlawful and (iii) suits by U.S. merchants who opted out of the Wal-Mart settlement described above. The costs associated with these and other matters could cause MasterCard and Visa to invest less in their networks and marketing efforts and could adversely affect the interchange paid to their member banks, including the Corporation's banking subsidiaries.

Future changes in laws and regulations and in policies applied by banking or other regulators also could affect the Corporation’s consolidated financial condition and results of operations in future periods.

See “Regulatory Matters” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003 for further detail regarding regulatory matters.

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Important Factors Regarding Forward-Looking Statements

From time to time the Corporation may make forward-looking oral or written statements concerning the Corporation’s future performance. Such statements are subject to risks and uncertainties that may cause the Corporation’s actual performance to differ materially from that set forth in such forward-looking statements. Words such as “believe”, “expect”, “anticipate”, “intend” or similar expressions are intended to identify forward-looking statements. Such statements speak only as of the date on which they are made. The Corporation undertakes no obligation to update publicly or revise any such statements. Factors which could cause the Corporation’s actual financial and other results to differ materially from those projected by the Corporation in forward-looking statements include, but are not limited to, the following:

Legal and Regulatory

The banking and consumer credit industry is subject to extensive regulation and examination. Changes in federal, state and foreign laws and regulations affecting banking, consumer credit, bankruptcy, privacy, consumer protection or other matters could materially impact the Corporation’s performance. In recent years, changes in policies and regulatory guidance issued by banking regulators, and affecting credit card and consumer lending in particular, have had a significant impact on the Corporation and are likely to continue to do so in the future. The Corporation cannot predict the impact of these changes. The impact of changes in bank regulatory guidance is particularly difficult to assess as the guidance in recent years has provided, and is likely to continue to provide, considerable discretion to bank regu lators in interpreting how the guidance should be applied generally or to particular lenders . In addition, the Corporation could incur unanticipated litigation or compliance costs.

 

Competition

The Corporation’s business is highly competitive. Competition from other lenders could affect the Corporation’s loans outstanding, Customer retention, and the rates and fees charged on the Corporation’s loans.

Economic Conditions

The Corporation’s business is affected by general economic conditions beyond the Corporation’s control, including employment levels, consumer confidence and interest rates. A recession or slowdown in the economy of the U.S. or in other markets in which the Corporation does business may cause an increase in delinquencies and credit losses and reduce new account and loan growth and charge volume.

Delinquencies and Credit Losses

An increase in delinquencies and credit losses could affect the Corporation’s financial performance. Delinquencies and credit losses are influenced by a number of factors, including the credit quality of the Corporation’s credit card and other consumer loans, the composition of the Corporation’s loans between credit card and other consumer loans, general economic conditions, the success of the Corporation’s collection efforts, the seasoning of the Corporation’s accounts and the impact of actual or proposed changes in bankruptcy laws or regulatory policies. See “Loan Quality” for a discussion of the Corporation’s delinquencies and credit losses.

Interest Rate Increases

An increase in interest rates could increase the Corporation’s cost of funds and reduce its net interest margin. The Corporation’s ability to manage the risk of interest rate increases in the U.S. and other markets is dependent on its overall product and funding mix and its ability to successfully reprice outstanding loans. See “Liquidity and Rate Sensitivity—Interest Rate Sensitivity” for a discussion of the Corporation’s efforts to manage interest rate risk.

Availability of Funding and Securitization

Changes in the amount, type, and cost of funding available to the Corporation could affect the Corporation’s performance. A major funding alternative for the Corporation is the securitization of credit card and other consumer loans. Difficulties or delays in securitizing loans or changes in the current legal, regulatory, accounting, and tax environments governing securitizations could adversely affect the Corporation. See “Liquidity and Rate Sensitivity—Liquidity Management” for a discussion of the Corporation’s liquidity.

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Customer Behavior

The acceptance and use of credit card and other consumer loan products for consumer spending has increased significantly in recent years. The Corporation’s performance could be affected by changes in such acceptance and use, and overall consumer spending, as well as different acceptance and use in international markets.

New Products and Markets

The Corporation’s performance could be affected by difficulties or delays in the development of new products or services, including products or services other than credit card and other consumer loans, and in the expansion into new international markets. These may include the failure of Customers to accept products or services when planned, losses associated with the testing of new products or services, or financial, legal or other difficulties that may arise in the course of such implementation. In addition, the Corporation could face competition with new products or services or in new markets, which may affect the success of such efforts. With the expansion to new markets, the Corporation could experience difficulties and delays related to legal and regulatory issues, local customs, competition, and other factors.

Growth

The growth of the Corporation’s existing business and the development of new products and services will be dependent upon the ability of the Corporation to continue to develop the necessary operations, systems, and technology, hire qualified people, obtain funding for significant capital investments, and selectively pursue loan portfolio and other acquisitions.

In the second quarter of 2004, the Corporation expects to complete a multi-phase project, which began in 2001, extending the use of the Corporation’s U.S. core Customer information systems to MBNA Europe’s business in the U.K. and Ireland, which are currently dependent on third-party vendors for such information systems. MBNA Canada already uses this system. The project will provide standardization of systems, appropriate infrastructure for “internationalized” technical platforms, and systems enhancements for the MBNA Europe processing environment. The completion of the project includes a significant system conversion for MBNA Europe’s loans. Management believes that the conversion will proceed as scheduled and will be completed successfully. The Corporation has implemented control processes, and performed extensive testing on this project. However, as with any significant system co nversion, there are inherent risks and uncertainties that could negatively impact the Corporation.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The information called for by this item is provided under the caption “Liquidity and Rate Sensitivity—Interest Rate Sensitivity” and “Liquidity and Rate Sensitivity—Foreign Currency Exchange Rate Sensitivity” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 4. CONTROLS AND PROCEDURES

The Corporation's management (including the Chief Executive Officer and the Chief Financial Officer) conducted an evaluation of the Corporation's disclosure controls and procedures (as such term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the last day of the period covered by this report as required by Rule 13a-15(b) under the Exchange Act. Based on such evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded as of the last day of the period covered by this report that the Corporation's disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in the Corporation's reports filed or submitted under the Exchange Act, particularly during the period in which this quarterly report was being prepared.

There was no change in the Corporation's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 

Foreign Currency Conversion Fees Litigation

MasterCard International Incorporated ("MasterCard") and Visa U.S.A., Inc. ("Visa") apply a currency conversion rate, equal to a wholesale rate plus 1%, to credit card transactions in foreign currencies for conversion of the foreign currency into U.S. dollars. They require the Corporation’s banking subsidiaries and other member banks to disclose the 1% add-on to the wholesale rate if the bank chooses to pass it along to the credit cardholder. The Corporation's banking subsidiaries disclose this information in their cardholder agreements. In Schwartz v. Visa and MasterCard, a class action filed in February 2000 in the California Superior Court, the plaintiffs claim that this 1% “fee” is not adeq uately disclosed under federal and California law. The plaintiffs are seeking unspecified monetary damages and injunctive relief. The trial court issued a decision holding that the federal disclosure requirement is not applicable but that the failure to disclose the fee on each statement that includes a fee is unfair under California law. The court held a hearing on restitution of the fees to cardholders. In March 2004, the court ordered MasterCard and Visa to return the 1% currency conversion fee to the class members on a "claims made basis", meaning that members of the class must make a valid claim in order to be entitled to the return of the fee. If all members of the class were to make valid claims, the reported aggregate amount MasterCard and Visa would have to return is approximately $800 million. Visa and MasterCard have appealed the final decision. The Corporation is not a party to the Schwa rtz case and should have no direct potential liability in the matter. However, the inability of MasterCard or Visa to ultimately satisfy the judgment could indirectly affect the Corporation. See "Regulatory and Other Matters- MasterCard and Visa Litigation and Competition" for further discussion.

The Corporation and the Bank are among the many card issuers who are defendants in In Re Currency Conversion Fee Antitrust Litigation, a purported class action, filed in the U.S. District Court for the Southern District of New York, to which the Corporation and the Bank were added as defendants in January 2002. The plaintiffs claim that the defendants conspired in violation of the antitrust laws to charge foreign currency conversion fees and failed to properly disclose the fees in solicitations and applications, in initial disclosure statements and on cardholder statements, in violation of the Truth-in-Lending Act. The plaintiffs claim that the bank defendants and MasterCard and Visa conspired to charge the 1 % foreign currency conversion fee assessed by MasterCard and Visa and an additional fee assessed by some issuers. Unlike most other issuers, in the United States the Corporation's banking subsidiaries do not charge the additional fee on consumer credit cards in addition to the fee charged by MasterCard and Visa, but do charge such an additional fee on business credit cards. The plaintiffs are seeking unspecified monetary damages and injunctive relief. In July 2003, the court granted a motion to dismiss certain Truth-in-Lending Act claims against the Corporation and other defendants, but denied a motion to dismiss the antitrust claims against the defendants. The Corporation and the Bank intend to defend this matter vigorously and believe that the claim is without merit.

The Corporation, the Bank and their affiliates are commonly subject to various pending or threatened legal proceedings, including certain class actions, arising out of the normal course of business. In view of the inherent difficulty of predicting the outcome of such matters, the Corporation cannot state what the eventual outcome of these matters will be. However, the Corporation believes, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the Corporation's consolidated financial condition or results of operations.

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ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

---

Summary of Stock Repurchases
(in thousands, except for average price paid per share) (unaudited)
Period		Total Number of Shares Purchased			Average Price Paid Per Share
January 1, 2004 – January 31, 2004
From employees (a)			43		$	26.63
Open market (b)			1,737			27.47
February 1, 2004 – February 29, 2004
From employees (a)			65			27.36
Open market (b)			746			27.63
March 1, 2004 – March 31, 2004
From employees (a)			325			27.36
Open market (b)			4,317			26.27
Total			7,233		$	26.76
(a) The repurchases from employees represent shares canceled when surrendered for minimum withholding taxes due.
(b) 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.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The 2004 Annual Meeting of the Stockholders of MBNA Corporation was held on May 3, 2004.

The stockholders elected the following nominees to the Corporation's Board of Directors to serve for the coming year and until their successors are elected and qualify. The following shows the separate tabulation of votes for each nominee:

 

---

		Number of Votes
		For			Withheld
James H. Berick, Esq.			598,107,418			539,151,279
Benjamin R. Civiletti, Esq.			671,496,990			465,761,707
Bruce L. Hammonds			739,467,757			397,790,940
William L. Jews			990,310,845			146,947,852
Randolph D. Lerner, Esq.			731,985,263			405,273,434
Stuart L. Markowitz, M.D.			980,389,949			156,868,748
William B. Milstead			992,654,909			144,603,788

The Corporation had 1,277,671,875 shares entitled to vote.

The stockholders approved the ratification of the appointment of Ernst & Young LLP as the Corporation’s independent auditors for the fiscal year ending December 31, 2004. There were 1,101,096,958 affirmative votes, 30,204,017 negative votes, and 5,957,722 abstentions.

The stockholders approved a stockholder proposal urging the Board of Directors to adopt a policy that the cost of employee and director stock options be recognized in the Corporation’s income statement. The Board of Directors opposed the proposal. There were 561,120,143 affirmative votes, 409,722,612 negative votes, and 22,948,844 abstentions.

The stockholders approved a stockholder proposal requesting the Board of Directors to adopt a policy to nominate director candidates as soon as possible such that, if elected, at least two-thirds of the directors would be “independent” according to a standard provided by the proponent. The Board of Directors opposed the proposal. There were 555,931,271 affirmative votes, 429,836,044 negative votes, and 8,024,884 abstentions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

a. Exhibits

Index of Exhibits
Exhibit	Description of Exhibit
12.1	Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock   Dividend Requirements (unaudited)
31.1	Section 302 Chief Executive Officer Certification
31.2	Section 302 Chief Financial Officer Certification
32.1	Section 906 Chief Executive Officer Certification
32.2	Section 906 Chief Financial Officer Certification

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b. Reports on Form 8-K
1.	Report dated January 22, 2004 reporting MBNA Corporation’s earnings release for the fourth quarter of 2003.
2.	Report dated January 31, 2004 reporting the net credit losses and loan delinquency ratios for MBNA Corporation,   for its loan receivables and managed loans for January 2004.
3.	Report dated February 25, 2004 reporting the securitization of $600.0 million of credit card loan receivables by   MBNA America Bank, N.A.
4.	Report dated February 29, 2004 reporting the net credit losses and loan delinquency ratios for MBNA Corporation,   for its loan receivables and managed loans for February 2004.
5.	Report dated March 16, 2004 reporting the securitization of $200.0 million of credit card loan receivables by   MBNA America Bank, N.A.
6.	Report dated March 17, 2004 reporting the securitization of $700.0 million of credit card loan receivables by   MBNA America Bank, N.A.
7.	Report dated March 30, 2004 reporting the securitization of £500.0 million of credit card loan receivables by   MBNA Europe Bank Limited.
8.	Report dated March 31, 2004 reporting the net credit losses and loan delinquency ratios for MBNA Corporation,   for its loan receivables and managed loans for March 2004.
9.	Report dated April 1, 2004 reporting the securitization $350.0 million of credit card loan receivables by MBNA   America Bank, N.A.
10.	Report dated April 15, 2004 reporting the securitization of $1.35 billion of credit card loan receivables by MBNA   America Bank, N.A.
11.	Report dated April 22, 2004 reporting MBNA Corporation’s earnings release for the first quarter of 2004.
12.	Report dated April 30, 2004 announcing the appointment of two members to MBNA’s Board of Directors.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		MBNA Corporation
Date: May 10, 2004	/s/	Vernon H.C. Wright
		Vernon H.C. Wright
		Chief Financial Officer

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