ITEM 1. BUSINESS
OVERVIEW
MBNA Corporation (the "Corporation"), a registered bank holding company, was incorporated under the laws of Maryland on December 6, 1990. It is the parent company of MBNA America Bank, N.A. (the "Bank"), a national bank organized in January 1991 as the successor to a national bank formed in 1982. The Bank has two wholly owned foreign bank subsidiaries, MBNA International Bank Limited ("MBNA International") formed in 1993 and located in the United Kingdom and MBNA Canada Bank ("MBNA Canada") formed in 1997. Through the Bank, MBNA International and MBNA Canada, the Corporation is the world's largest independent credit card lender and is the leading issuer of affinity credit cards, marketed primarily to members of associations and Customers of financial institutions. In addition to its credit card lending, the Corporation also makes other consumer loans and offers insurance and deposit products.
PRODUCTS
Credit Cards
The Corporation offers two general types of credit cards, premium and standard, issued under either the MasterCard(R) or Visa(R) name.* The Corporation markets standard and premium cards to new Customers and it markets premium cards to qualifying standard card Customers. Premium cards include Gold and Platinum Plus cards. Premium card usage and average account balances are generally higher than those of standard card Customers.
Other Consumer Loans
The Corporation's other consumer loan products include unsecured lines of credit accessed by check and unsecured installment loans. These products are used by Customers primarily for large purchases or consolidation of other consumer debt. The Bank markets these products to customers of retailers, to the Bank's existing credit card Customers and to others.
The Corporation also offers home equity loans through MBNA America Bank (Delaware), a state bank, and airplane loans to individuals through MBNA Consumer Services, Inc.
Deposits
The Corporation offers money market deposit accounts and certificates of deposit through the Bank. Money market deposit accounts provide Customers with liquidity and convenience of service, as well as insurance up to $100,000 per depositor by the Federal Deposit Insurance Corporation ("FDIC"). Certificates of deposit are traditional fixed term investments with maturities that typically range from six to sixty months. They are also insured by the FDIC up to $100,000. Deposit products are offered to members of the Corporation's endorsing associations, to existing credit card Customers and to others.
Insurance
The Corporation offers credit insurance to credit card Customers of the Bank, MBNA International and MBNA Canada. It also offers automobile insurance and life insurance through the Bank to Customers. In July 1998, the Corporation suspended marketing new automobile insurance policies and later terminated its agreement with TIG, its insurance underwriter. In December 1998, the Corporation signed a letter of intent with American International Group, Inc. ("AIG") to underwrite automobile, homeowners, and personal umbrella insurance products for the Corporation's Customers. The Corporation and AIG expect to begin marketing AIG automobile insurance to the Corporation's Customers during 1999.
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* MasterCard(R) is a federally registered servicemark of MasterCard International Inc.; Visa(R) is a federally registered servicemark of Visa U.S.A., Inc.
MARKETING
The Corporation directs its marketing efforts primarily to members of endorsing groups, to customers of financial institutions, and to targeted lists of people with a strong common interest. The Corporation is the recognized leader in affinity marketing, with endorsements from thousands of membership organizations and financial institutions.
Credit cards issued to affinity group members or financial institution customers usually carry custom graphics and the name and logo of the endorsing organization. The Corporation develops a customized marketing program for each endorsing organization or financial institution. In addition to servicing the credit cards, the Corporation offers economic incentives to the endorsing groups and financial institutions.
The Corporation's affinity marketing approach includes created personal interest and regional affinity programs for people with strong common interests but without a specific group affiliation. Personal interest programs are offered to people with common interests through purchased targeted lists. Regional programs include state and city series cards that bear images of regional or local scenes.
The Corporation also offers co-branded cards through relationships with commercial firms, including professional sports teams. These programs typically include incentives to Customers to purchase services or merchandise from the co-branding firm.
The Corporation primarily uses direct mail, telemarketing, person-to-person and internet marketing to market its credit cards and other products. Thousands of different marketing campaigns are developed each year, generating millions of direct mail pieces designed to add accounts and stimulate use. The Corporation customizes its marketing approach for each program. The Corporation's in-house advertising agency designs custom graphics for credit cards and prepares direct mail programs and advertisements. The Corporation conducts internet marketing through a combination of banner, e-mail and search engine advertisements. In addition, the Corporation's marketing activities include efforts to retain profitable accounts and programs designed to activate new accounts and stimulate usage of existing accounts, primarily through balance transfer programs.
The Corporation conducts marketing activities in the United States through MBNA Marketing Systems, Inc., a subsidiary of the Bank. The Corporation markets credit cards and other consumer loans in the United Kingdom through MBNA International and in Canada through MBNA Canada.
MBNA Marketing Systems, Inc. has regional centers in Maine, Ohio, Texas, Maryland, Florida and California and sales offices in New York City, Chicago and Atlanta. MBNA International has its headquarters in Chester, England and sales and marketing offices in London, England, Dublin, Ireland and Edinburgh, Scotland. MBNA Canada has its headquarters in Gloucester, Ontario and a sales and marketing office in Montreal, Quebec. These regional centers and sales offices assist the Corporation to obtain endorsements, increase its familiarity with local markets, better understand the needs and motivations of Customers and keep in close touch with what competitors are doing.
MBNA Marketing Systems, Inc. has 13 telemarketing facilities in 9 states. As of December 31, 1998, it employed approximately 3,300 people in telemarketing, the majority of whom worked part time. The telemarketing organization generates new accounts by calling prospects obtained from membership lists of endorsing organizations and other prospects lists.
CREDIT
The Corporation makes credit decisions by combining sophisticated technology and predictive models with the insight of a credit analyst. Approved credit applications are reviewed individually by a credit analyst, who assigns a credit line based on a review of the potential Customer's financial history and capacity to repay. Less than half of the credit applications received by the Corporation in 1998 were approved. Credit analysts review credit reports obtained through an independent credit reporting agency, and use a delinquency probability model to assist them in reaching a credit decision for each applicant. Credit analysts also review and verify other information, such as employment and income, when necessary to make a credit decision.
Further levels of review are automatically triggered, depending upon the level of risk indicated by the delinquency probability model and a combination of other factors indicative of credit quality. Credit lines for existing Customers are regularly reviewed for credit line increases, and when appropriate, reductions in credit lines. The Corporation's Loan Review Department independently reviews selected applications to ensure quality and consistency. The Corporation's losses have been consistently below the Visa and MasterCard industry average.
RISK CONTROL
The Corporation manages risk at the Customer level through sophisticated analytical techniques combined with regular judgmental review. Transactions are evaluated at the point of sale, where risk levels are balanced with profitability and Customer satisfaction. Additionally, Customers showing signs of financial stress are periodically reviewed, a process which includes an examination of the Customer's credit file and in many cases a phone call for clarification of the situation.
A balanced approach is also used when stimulating portfolio growth. Risk levels are measured through statistical models that incorporate payment behavior, employment information, and transaction activity. Credit bureau scores and attributes are obtained and combined with internal information to allow the Corporation to increase credit lines and promote account usage while minimizing additional risk.
The Corporation utilizes technology, including a neural network and expert systems, to detect and prevent fraud at its earliest stages. It also employs authorization strategies to control fraud losses.
COLLECTION (CUSTOMER ASSISTANCE)
The Corporation's collection (Customer Assistance) philosophy, based on a persistent yet professional approach, is to work with each past due Customer at an early stage of delinquency. The Corporation employs several computerized systems to assist in the collection of past due accounts. Initially, the Predictive Management System analyzes each Customer's purchase and repayment habits, and selects accounts for initial contact with the objective of contacting the highest risk accounts first. Subsequently, the accounts selected are queued to the Corporation's proprietary Collection Tracking and Analysis system (CTA) and Outbound Call Management System (OCMS). OCMS sorts accounts by a number of factors, including time zone, degree of delinquency and dollar amount due. OCMS automatically dials delinquent accounts in order of priority. Representatives are automatically linked to the Customer's account information and voice line when a contact is established. Customers who are experiencing significant financial problems and may consider filing for bankruptcy are referred to a specialized group of people who have been educated on effective alternatives to bankruptcy, including debt counseling.
CTA is used to work accounts continually, by market sector, at each stage of delinquency through the 180-day past due level. As an account enters the 180-day delinquency level, it is classified as a potential charge-off. Accounts failing to make a payment during the 180-day cycle are written off. Managers may defer charge-off of an account for another month, pending continued payment activity or other special circumstances. Senior manager approval is required on all exceptions to charge-off.
A Customer account may be reaged to remove existing delinquency. Generally, to qualify for reaging, the account must have been open for at least one year and cannot have been reaged during the preceding 365 days. The Customer must have made payments equal to a total of three minimum payments in the last 90 days, including one full minimum payment during the last 30 days. All account reages are approved by a manager. Collection reages are reviewed by the Loan Review Department.
Once an account has been charged-off, it may be sold to a third party vendor or retained by the Corporation for collection. The Corporation has entered into contracts for the sale of these accounts which provide pricing which is comparable to amounts which were realized from previous charge-off collection efforts, after the deduction of the costs of collection.
In February 1999, the Federal Financial Institutions Examinations Council published a revised policy statement on the classification of consumer loans. The revised policy establishes uniform guidelines for
charge-off of loans to delinquent, bankrupt, and deceased borrowers, for charge-off of fraudulent accounts, and for re-aging, extending, deferring or rewriting delinquent accounts. The guidelines must be implemented by June 30, 1999, unless programming resources are required, in which case they must be implemented by December 31, 2000. The Corporation will accelerate charge-off of some delinquent loans when it implements the guidelines, but does not expect implementation to have a material effect on the Corporation's consolidated financial statements.
OPERATIONS
Account processing services performed by MBNA Hallmark Information Services, Inc. ("Information Services"), a wholly-owned subsidiary of the Bank, include data processing, payment processing, statement rendering, card production and network services. Information Services' data network provides an interface to MasterCard and Visa for performing authorizations and settlement funds transfers. Most data processing and network functions are performed at Information Services' facilities in Dallas, Texas, and Newark, Delaware. Information Services generates and mails to Customers monthly statements summarizing account activity and processes Customer payments.
TECHNOLOGY
The Corporation uses sophisticated systems and technology in all aspects of its business operations to enhance Customer service and improve efficiency. These systems include marketing databases, advanced telecommunications networks to support Customer service and telemarketing, a credit decisioning system which processes credit card applications with on-line credit bureaus to support credit, neural networks to identify and prevent fraud, and selective statement insertion for customizing communications with Customers. These systems enable the Corporation to implement customized marketing and service strategies for endorsed organizations. The Corporation relies primarily on internal development of technology solutions to ensure the flexibility, quality and responsiveness of computer and telecommunication systems needed in its business. For a discussion of Year 2000 compliance, see "Year 2000 Readiness Disclosure" on pages 31 through 33 of the 1998 Annual Report to Stockholders, which is incorporated herein by reference.
TERMS AND CONDITIONS
Each Customer and the Corporation enter into an agreement which governs the terms and conditions of the Customer's account. The Corporation reserves the right to add or change any terms, conditions, services or features of its accounts at any time, including increasing or decreasing periodic finance charges, other charges or minimum payment terms. The agreement with each Customer provides that the Corporation may apply such changes, when applicable, to current outstanding balances as well as to future transactions. The Customer can avoid a rate increase by notice to the Corporation and by not using the account.
A Customer may use an account for purchases and cash advances. Monthly periodic finance charges are calculated by multiplying the applicable average daily balances on the account by the applicable daily periodic rates and by the number of days in the billing cycle.
Finance charges are calculated on purchases from the date of the purchase or the first day of the billing cycle in which the purchase posts to the account, whichever is later, and with respect to credit card accounts are not assessed in most circumstances on new purchases if all balances shown in the previous billing statement are paid in full by the payment due date, which is generally 1 day before the next billing date. Finance charges on credit card accounts are not assessed in most circumstances on previous purchases if all balances shown on the two previous billing statements are paid by their respective due dates. Finance charges on cash advances are calculated from the date of the transaction.
Credit card Customers are required to make a minimum monthly payment equal to the greater of $15 or 2% of the outstanding balance on the account. With respect to certain consumer loan products, Customers are required to make a minimum monthly payment sufficient to repay the account balance over a set term.
The Corporation offers fixed and variable rates on accounts and also offers temporary promotional rates. Variable rates are offered at a percentage rate tied to the U.S. prime rate published in The Wall Street Journal and are adjusted, if applicable, quarterly.
The Corporation assesses an annual fee on some Customer accounts. Annual fees, when assessed, are generally waived for the first year on new accounts and thereafter may be waived or rebated. The Corporation assesses cash advance transaction, certain purchase, late, overlimit and returned check fees on Customer accounts in accordance with agreements with Customers.
REGULATORY MATTERS
General
As a bank holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956 (the "BHCA") and to the BHCA's examination and reporting requirements. Under the BHCA, bank holding companies may not directly or indirectly acquire the ownership or control of more than five percent of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). In addition, bank holding companies generally are prohibited under the BHCA from engaging in non-banking activities, subject to certain exceptions.
The earnings of the Bank and the Corporation are affected by general economic conditions, monetary policies and the actions of various regulatory authorities, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the "OCC"). In addition, there are numerous governmental requirements and regulations which affect the activities of the Corporation.
The Bank is subject to supervision and examination by the OCC, the Bank's primary regulator. The Bank is insured by, and therefore also is subject to the regulations of, the FDIC, and is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered.
MBNA International is subject to regulation and supervision by the Bank of England, the Federal Reserve Board and the OCC. MBNA America Bank (Delaware) is subject to regulation and supervision by the State Bank Commissioner of Delaware and the FDIC. MBNA Canada is subject to regulations and supervision by the Office of Superintendent of Financial Institutions, the Canadian Deposit Insurance Corporation, the Federal Reserve Board and the OCC.
Dividends
The principal source of funds to the Corporation to pay dividends, interest and principal on debt securities and to meet other obligations is dividends from the Bank. The Bank is subject to limitations on the dividends it may pay to the Corporation. The Corporation may also be subject to limitations on the payment of dividends to stockholders. See "Capital Adequacy and Dividend Limitations" on pages 35 and 36 of the 1998 Annual Report to Stockholders, which is incorporated herein by reference. In addition, both the Corporation and the Bank are subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The OCC and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings.
Borrowings by the Corporation
There are various legal restrictions on the extent to which the Corporation may borrow or otherwise obtain credit from, or engage in certain other transactions with, the Bank. In general, these restrictions require that any such extensions of credit must be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or its non-bank subsidiaries, to 10 percent of the Bank's capital stock and surplus, and as to the Corporation and all such non-bank subsidiaries in the aggregate, to 20 percent of the Bank's capital stock and surplus.
Extensions of credit and other transactions between the Bank and the Corporation must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions with non-affiliated companies.
Capital Requirements
The Corporation is subject to risk-based capital guidelines adopted by the Federal Reserve Board for bank holding companies. The Bank is subject to similar capital requirements adopted by the OCC. The guidelines require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet items, such as interest rate swaps) of 8%. At least half of the total capital may be comprised of common stockholders' equity, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 risk-based capital"). The remainder ("Total risk-based capital") may consist of mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of reserves for possible credit losses. In addition, the Federal Reserve Board has adopted a minimum leverage ratio (Tier 1 risk-based capital to average total assets less goodwill and certain other intangible assets) of 3% for bank holding companies that meet certain specified criteria, including that they have the agency's highest supervisory rating. Under the guidelines, holding companies that do not satisfy the criteria for the lowest requirement and holding companies undertaking expansion programs must maintain a leverage ratio at least 100 basis points to 200 basis points higher than the 3% minimum ratio. See "Table 9: Regulatory Capital Ratios" on page 35 of the 1998 Annual Report to Stockholders, which is incorporated herein by reference. Holding companies and banks may be subject to higher risk-based and leverage capital ratios depending on other specific factors, such as interest rate risk, concentrations of credit risk, and the conduct of non-traditional activities.
Corporation Support of Bank
Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the bank's stockholders and, if any such assessment is not paid, to sell the stock to make good the deficiency. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support it. Any capital loans by the Corporation to the Bank are subordinate in right of payment to deposits and to certain other indebtedness of the Bank.
FDICIA and FDIC Insurance
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") provided increased funding for the Bank Insurance Fund ("BIF") of the FDIC and provided for expanded regulation of banks and bank holding companies. The regulation includes expanded federal banking agency examinations and increased powers of federal banking agencies to take corrective action to resolve the problems of insured depository institutions with capital deficiencies. These powers vary depending on which of several levels of capitalization a particular institution meets.
FDIC regulations adopted under FDICIA prohibit a bank from accepting brokered deposits unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that is adequately capitalized and that accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates; there are no such restrictions on a bank that is well capitalized. As of December 31, 1998 the Bank met the FDIC's definition of
a well capitalized institution for purposes of accepting brokered deposits. For the purposes of the brokered deposit rules, a bank is defined to be "well capitalized" if it maintains a ratio of Tier 1 risk-based capital to risk-adjusted assets of at least 6%, a ratio of total risk-based capital to risk-weighted assets of at least 10% and a leverage ratio of at least 5% and is not subject to any order, direction or written agreement to maintain specific capital levels. Under the regulatory definition of brokered deposits, as of December 31, 1998, the Bank had brokered deposits of $3.4 billion.
The Bank is subject to FDIC deposit insurance assessments for the BIF. Each financial institution is assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The assessment rate applicable to the Bank in the future will depend in part upon the risk assessment classification assigned to the Bank by the FDIC and in part on the BIF assessment schedule adopted by the FDIC. FDIC regulations currently provide that premiums related to deposits assessed by the BIF are to be assessed at a rate of between 0 cents and 27 cents per $100 of deposits.
The Deposit Insurance Funds Act of 1996 ("DIFA") also separated, effective January 1, 1997, the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the BIF and the Savings Association Insurance Fund ("SAIF") assessments. The amount assessed on individual institutions by the FICO will be in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. FICO assessment rates may be adjusted quarterly to reflect a change in assessment base for the BIF. By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first.
Regulation of the Credit Card and Other Consumer Lending Businesses
The relationship between the Corporation and its Customers is extensively regulated by federal and state consumer protection laws. The Truth in Lending Act requires consumer lenders to make certain disclosures along with their applications (for credit card accounts) and solicitations, upon opening an account and with each periodic statement. The Act also imposes certain substantive requirements and restrictions on lenders and provides Customers with certain rights to dispute unauthorized charges and to have their billing errors corrected promptly. Customers are also given the right to have their payments promptly credited to their accounts.
The Equal Credit Opportunity Act prohibits lenders from discriminating in extending credit on certain criteria such as an applicant's sex, race and marital status. In order to protect borrowers from such discrimination, the Act requires that lenders disclose the reasons they took adverse action against an applicant or a Customer.
The Fair Credit Reporting Act generally regulates credit reporting agencies, but also imposes some duties on lenders as users of consumer credit reports. For instance, the Act prohibits the use of a consumer credit report by a lender except in connection with a proposed business transaction with the consumer. The Act also requires that lenders notify consumers when the lenders take adverse action based upon information obtained from credit reporting agencies.
The federal regulators are authorized to impose penalties for violations of these statutes and, in certain cases, to order the Corporation to pay restitution to injured Customers. Customers may bring actions for damages for certain violations. In addition, a Customer may be entitled to assert a violation of these consumer protection laws by way of set-off against the Customer's obligation to pay the outstanding loan balance.
The National Bank Act, which governs the activities of national banks, authorizes national banks to use various alternative interest rates when they make loans, including the highest interest rate authorized for state chartered lenders located in the state where the national bank is located. This ability to "export" rates, as provided for in the Act, is relied upon by the Bank to charge Customers the interest rates and fees permitted
by Delaware law regardless of an inconsistent law of the state in which the Customer is located, thereby facilitating the Bank's nationwide lending activities.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies, with Federal Reserve Board approval, to acquire banks located in states other than the holding company's home state, generally without regard to whether the transaction is prohibited under state law. In addition, effective June 1, 1997, national and state banks with different home states were permitted to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation prior to this date expressly prohibiting interstate bank mergers.
Insurance
Section 92 of the National Bank Act authorizes the Bank to engage in the business of insurance as an agency from a place of less than 5,000 people. In order to conduct an agency business the Bank must obtain licensing approval in each state in which it intends to operate and is subject to state regulation on agency and agent licensing, disclosure requirements, policy delivery and other matters. State requirements which are so burdensome or onerous as to significantly impair the exercise by a national bank of the powers granted to it under Section 92 are preempted. There are differences among federal and state regulators as to the extent of federal preemption of state insurance agency regulation which have not been resolved.
COMPETITION
The Corporation's business is highly competitive. The Corporation competes with numerous banks with national, regional and local operations in domestic and international markets and with non-bank competitors who issue credit and charge cards and make other consumer loans. Strategies used by the Corporation's competitors include targeted marketing, low introductory rates, no annual fee credit cards, balance transfers and discounts on products and services. The Corporation also uses these strategies and, in addition, relies on its strategy of marketing to people with a strong common interest and its superior Customer service to compete with its competitors.
EMPLOYEES
As of December 31, 1998, the Corporation had approximately 19,000 employees.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
From time to time the Corporation may make forward-looking statements concerning the Corporation's future performance. Such statements are subject to risks and uncertainties that may cause the Corporation's actual performance to differ materially from that set forth in such forward-looking statements. Factors which could cause the Corporation's actual financial and other results to differ materially from those projected by the Corporation in forward-looking statements include, but are not limited to the following:
Competition
The Corporation's business is highly competitive. Competition from other lenders could affect the Corporation's loans outstanding, Customer retention, and the rates and fees charged on the Corporation's loans.
Economic Conditions
The Corporation's business is affected by general economic conditions beyond the Corporation's control, including employment levels, consumer confidence, and interest rates. A recession or slowdown in the economy may cause an increase in delinquencies and credit losses and reduce new account growth and charge volume.
Delinquencies and Credit Losses
An increase in delinquencies and credit losses could affect the Corporation's financial performance. Delinquencies and credit losses are influenced by a number of factors, including the quality of the Corporation's credit card and other consumer loans, general economic conditions, the success of the Corporation's collection efforts, and the average seasoning of the Corporation's accounts.
Interest Rate Increases
An increase in interest rates could increase the Corporation's cost of funds and reduce the net interest margin. The Corporation's ability to manage the risk of interest rate increases is dependent on its overall product and funding mix and its ability to successfully reprice outstanding loans.
Availability of Funding and Securitization
Changes in the amount, type, and cost of funding available to the Corporation could affect the Corporation's performance. A major funding alternative for the Corporation is the securitization of credit card and other consumer loans. Difficulties or delays in securitizing loans or changes in the current legal, regulatory, accounting, and tax environment governing securitizations could adversely affect the Corporation.
Customer Behavior
The acceptance and use of credit card and other consumer loan products for consumer spending has increased significantly in recent years. The Corporation's performance could be affected by changes in such acceptance and use, and overall consumer spending.
New Products and Services
The Corporation's performance could be affected by difficulties or delays in the development of new products or services, including products or services beyond credit card and other consumer loans. These may include failure of Customers to accept these products or services when planned, losses associated with the testing of new products or services, or financial, legal or other difficulties that may arise in the course of such implementation. In addition, the Corporation could face competition with new products or services, which may affect the success of such products or services.
Growth
The growth of the Corporation's existing business and the development of new products and services will be dependent upon the ability of the Corporation to continue to develop the necessary operations, systems, and technology; hire qualified people; and obtain funding for significant capital investments.
Legal and Regulatory
The banking and consumer credit industry is subject to extensive regulation. Changes in the laws and regulations and in policies applied by banking or other regulators affecting banking, consumer credit or other matters could impact the Corporation's performance. For example, in recent years Congress has considered legislation which would have had the effect of limiting the interest rate that could be charged on credit card accounts. In addition, the Corporation could incur unanticipated litigation or compliance costs.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation has approximately 3,000,000 square feet of administrative offices and credit card facilities in five office complexes that it owns in Delaware. The majority of these facilities were designed and built expressly for the Corporation's credit card operations. These complexes include space for future expansion.
MBNA Information Services conducts its processing from an approximately 557,000 square foot facility that the Corporation owns in Dallas, Texas as well as from approximately 300,000 square feet of office space at the Corporation's facilities in Newark, Delaware.
MBNA Marketing Systems, Inc. has regional offices in Camden and Belfast, Maine, Cleveland, Ohio, Dallas, Texas (part of Information Services' facility), Boca Raton, Florida and Hunt Valley, Maryland. These facilities are owned by the Corporation.
MBNA Marketing Systems, Inc. has a leased regional office in San Francisco and leased sales offices in New York City and Chicago. The leases are for 10-year terms and contain renewal options which, if exercised, would extend the leases up to five additional years in New York City and San Francisco and 10 additional years in Chicago. Marketing Systems leases telesales facilities in Delaware, Georgia, Maine, Maryland, New Hampshire, Ohio and Pennsylvania.
MBNA International's credit card operations are located in approximately 252,000 square feet of space in Chester, England. It is constructing additional expansion space in Chester. It maintains a sales office in London, England and Edinburgh, Scotland. MBNA International conducts operations in Ireland from an office in Dublin, Ireland.
MBNA Canada's credit card operations are located in approximately 55,000 square feet of leased office space in Gloucester and Montreal, Quebec.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In May 1996, Andrew B. Spark filed a lawsuit against the Corporation, the Bank and certain of its officers and its subsidiary MBNA Marketing Systems, Inc. The case is pending in the United States District Court for the District of Delaware. This suit is a purported class action. The plaintiff alleges that the Bank's advertising of its cash promotional annual percentage rate program was fraudulent and deceptive. The plaintiff seeks unspecified damages including actual, treble and punitive damages and attorneys' fees for an alleged breach of contract, violation of the Delaware Deceptive Trade Practices Act and violation of the federal Racketeer Influenced and Corrupt Organizations Act. In February 1998, a class was certified by the District Court. In October 1998, Gerald D. Broder filed a lawsuit against the Corporation and the Bank in the Supreme Court of the State of New York, County of New York. This suit is a purported class action. The plaintiff alleges that the Bank's advertising of its cash promotional annual percentage rate program was fraudulent and deceptive. The plaintiff seeks unspecified damages including actual, treble and punitive damages and attorneys' fees for an alleged breach of contract, common law fraud and violation of New York consumer protection statutes. The Corporation believes that its advertising practices were and are proper under applicable federal and state law and intends to defend these actions vigorously.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of security holders of the Corporation.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Corporation's executive officers is set forth below.
Alfred Lerner (65) has been Chief Executive Officer of MBNA Corporation and Chairman of its Board of Directors since January 1991 and a director of the Bank since December 1991. Mr. Lerner served as Chairman of the Board and Chief Executive Officer of MNC Financial, Inc. ("MNC Financial") from September 1990 to July 1991 and as Chairman of the Board from July 1991 to October 1993. He also served as Chairman of the Board of Equitable Bancorporation from July 1983 until it merged with MNC Financial in January 1990. He has been Chairman of The Town and Country Trust since August 1993 and was Chief Executive Officer from August 1993 until October 1997. He has been Chairman and owner of the Cleveland Browns since October 1998. A graduate of Columbia University and Vice Chairman of its Board of Trustees,
Mr. Lerner also is president of the Cleveland Clinic Foundation and a member of its Board of Trustees. He is also a trustee of Case Western Reserve University and a member of the Board of Directors of the Marine Corps Law Enforcement Foundation.
Charles M. Cawley (58) has been President and a director of the Corporation and Chairman and Chief Executive Officer of the Bank since January 1991. He has more than 33 years of management experience in the financial services industry and was the senior operating executive that formed the Bank in 1982. He has served as Chief Executive Officer of the Bank since 1990, and as President since 1985. He has been a director of the Bank since 1982. He serves on the boards of Georgetown University, the University of Delaware, the Eisenhower Exchange Fellowships, the American Architectural Foundation, and the Marine Corps Law Enforcement Foundation. He is Chairman of the Board of the Grand Opera House in Wilmington, Delaware.
John R. Cochran III (47) oversees all business development and marketing activities, including sales, marketing, advertising, regional marketing, telemarketing, and group administration. He is also responsible for Customer Satisfaction. He has been a Senior Executive Vice President of the Corporation and an Executive Vice Chairman of the Bank since November 1998. He has served as the Chief Marketing Officer since April 1991. He has 26 years of management experience in the financial services industry and was a member of the management team that established the Bank in 1982. He has been a director of the Bank since 1986.
Bruce L. Hammonds (50) oversees credit, loss prevention, consumer finance and technology services. He has been a Senior Executive Vice President of the Corporation and an Executive Vice Chairman of the Bank since November 1998. He has served as the Chief Operating Officer since 1990. He has 29 years of management experience in consumer lending and was a member of the management team that established the Bank in 1982. He has been a director of the Bank since 1986.
M. Scot Kaufman (49) oversees accounting, finance, and treasury activities. He has been an Executive Vice President and Treasurer of the Corporation since January 1991 and Chief Accounting Officer since July 1991. He has been Chief Financial Officer of the Corporation since July 1992. He has served as Senior Vice Chairman of the Bank since April 1997 and as its Chief Financial Officer since 1985. He has 28 years of experience in the financial services industry and has been with the Corporation since 1985. He has been a director of the Bank since 1986.
Lance L. Weaver (44) oversees corporate affairs, law, government relations, compensation and benefits, and real estate. He also oversees Administrative Services, including corporate insurance, facility management, security, transportation, and purchasing activities. He has been an Executive Vice President of the Corporation since April 1994. He has served as Senior Vice Chairman of the Bank since July 1997 and served as Chief Administrative Officer of the Bank since February 1993. He has 24 years of experience in consumer lending and administration and has been with the Corporation since 1991. He has been a director of the Bank since February 1993.
Ronald W. Davies (57) oversees MBNA Hallmark Information Services, which provides the Corporation with telecommunications, production operations, information systems, and systems operations and development. He has been an Executive Vice President of the Corporation since October 1991. He has served as Senior Vice Chairman of the Bank since December 1997 and Chief Technology Officer of the Bank since April 1991. He has served as Chairman and Chief Executive Officer of MBNA Hallmark Information Services, Inc. since August 1991. He has 34 years of experience in information systems and technology management and has been with the Corporation since 1991. He has been a director of the Bank since April 1991.
Gregg Bacchieri (43) oversees all credit and loss prevention efforts. He has been an Executive Vice President of the Corporation since July 1997 and Senior Vice Chairman of the Bank since November 1998. He has 20 years of management experience in retail lending and was a member of the management team that established the Bank in 1982. He has been a director of the Bank since July 1997.
Richard K. Struthers (43) oversees international, insurance, deposit, travel and business card activities. He has been an Executive Vice President of the Corporation since April 1997. He has served as Senior Vice Chairman of the Bank since December 1997. He has 21 years of experience in consumer lending and was
a member of the management team that established the Bank in 1982. He has been a director of the Bank since January 1997.
Kenneth F. Boehl (44) joined the Corporation in 1988 and serves as the Chief Control Officer and is responsible for risk management and personnel activities. He has been an Executive Vice President of the Corporation and Vice Chairman of the Bank since July 1997. He has been the Senior Control Officer of the Bank since April 1992. He has 23 years of experience in financial management. He has been a director of the Bank since July 1997.
Jules J. Bonavolonta (58) oversees special operations, facility management, security, transportation and purchasing activities. He has been an Executive Vice President of the Corporation and Vice Chairman of the Bank since October 1997. Prior to joining the Corporation, he served as President of Universal Network, Inc., a security consulting firm, from August 1995 to March 1997. He was director of corporate security for Consolidated Edison of New York from January 1991 to August 1992 and for Republic National Bank of New York from August 1992 to July 1995. He had a 23 year career with the Federal Bureau of Investigation which included extensive experience in domestic and international investigations, including as Chief of the Organized Crime and Narcotics Division. He joined the Corporation in March 1997 and has been a director of the Bank since October 1997.
John W. Scheflen (52) is responsible for corporate affairs, corporate insurance, government affairs, law and real estate acquisition. He has been an Executive Vice President, General Counsel and Secretary of the Corporation and Secretary and Cashier of the Bank since March 1992. He has been a Vice Chairman and Director of the Bank since September 1998. Prior to joining the Corporation he was a partner with Venable, Baetjer and Howard from 1984 to March 1992. He has 24 years of experience in law and has been with the Corporation since 1992.
David W. Spartin (41) oversees investor relations, media relations, communications, community education initiatives, business analysis, and administration. He has been an Executive Vice President of the Corporation since April 1997 and has served as Vice Chairman of the Bank since March 1997. He has 20 years of experience in the financial services industry and has been with the Corporation since 1991. He has been a director of the Bank since March 1997.
Michael G. Rhodes (33) oversees Customer Satisfaction. He has been an Executive Vice President of the Corporation and a Vice Chairman and Director of the Bank since August 1998. Prior to joining the Corporation in 1994, he was an associate at Duff & Phelps Capital Markets from July 1993 to April 1994 and was an engineer at Failure Analysis Associates from August 1987 to July 1991. He is Mr. Cawley's son-in-law.
Vernon H. C. Wright (56) oversees foreign and domestic treasury activities, including securitization, investments and funding, and corporate finance activities. He has been an Executive Vice President and Chief Corporate Finance Officer of the Corporation and Chief Corporate Finance Officer of the Bank since July 1992. He has been Vice Chairman of the Bank since September 1995. He has more than 30 years of experience in retail and commercial lending and has been with the Corporation since 1991. He has been a director of the Bank since November 1992.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
"Common Stock Price Range and Dividends" on page 74 and "Capital Adequacy and Dividend Limitations" on pages 35 and 36 of the 1998 Annual Report to Stockholders are incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
"Ten-Year Statistical Summary" on pages 22 and 23 of the 1998 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 25 through 42 of the 1998 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
"Interest Rate Sensitivity" and "Foreign Currency Exchange Rate Sensitivity" on pages 39 and 40 of the 1998 Annual Report to Stockholders are incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Report of Independent Auditors", the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, and the "Summary of Consolidated Quarterly Financial Information" on pages 45 through 72 of the 1998 Annual Report to Stockholders are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors" on pages 4 and 5 in the Definitive Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
"Election of Directors" on pages 4 and 5, "Executive Compensation" on pages 6 through 9 and "Compensation Committee Interlocks and Insider Participation" on page 11 in the Definitive Proxy Statement are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Management and Certain Beneficial Owners" on pages 2 and 3 in the Definitive Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Compensation Committee Interlocks and Insider Participation" and "Certain Relationships" on page 11 in the Definitive Proxy Statement are incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. The following consolidated financial statements of MBNA Corporation and subsidiaries are incorporated herein by reference from the pages designated in the 1998 Annual Report to Stockholders:
2. Financial Statement Schedules
No Financial Statement Schedules are required to be filed.
3. Exhibits:
The following exhibits are incorporated by reference or filed herewith. References to the 1990 Form S-1 are to the Registrant's Registration Statement on Form S-1 effective January 22, 1991, Registration No. 33-38125. References to the 1997 Form S-4 are to Amendment No. 1 of the Registrant's Registration Statement on Form S-4, Registration No. 333-21181, filed on February 25, 1997. References to the 1991 Form 10-K, the 1992 Form 10-K, the 1993 Form 10-K, the 1994 Form 10-K, the 1995 Form 10-K, the 1996 Form 10-K and the 1997 Form 10-K are to the Registrant's Annual Reports on Form 10-K for the years ended December 31, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively.
- --------------- * The Registrant agrees to furnish a copy to the Securities and Exchange Commission on request. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
4. REPORTS ON FORM 8-K
1. Report dated October 7, 1998, reporting MBNA Corporation's earnings release for the third quarter of 1998.
2. Report dated October 22, 1998, reporting the securitization of $750.0 million of credit card receivables by MBNA America Bank, N.A.
3. Report dated October 29, 1998, reporting the securitization of $750.0 million of credit card receivables by MBNA America Bank, N.A.
4. Report dated October 31, 1998, reporting the net credit losses and loan delinquencies for MBNA America Bank, N.A., for its net loan portfolio and managed loan portfolio for October 1998.
5. Report dated November 30, 1998, reporting the net credit losses and loan delinquencies for MBNA America Bank, N.A., for its net loan portfolio and managed loan portfolio for November 1998.
6. Report dated December 17, 1998, reporting the securitization of 250.0 million pounds sterling of credit card receivables by MBNA International Bank Limited.
7. Report dated December 23, 1998, reporting the execution of a definitive agreement with PNC Bank, National Association to acquire PNC National Bank.
8. Report dated December 31, 1998, reporting the net credit losses and loan delinquencies for MBNA America Bank, N.A., for its net loan portfolio and managed loan portfolio for December 1998.
9. Report dated January 4, 1999, reporting MBNA Corporation's earnings release for the fourth quarter of 1998.
10. Report dated January 4, 1999, providing the underwriting agreement which supplements the prospectus included in the Registration Statement on Form S-3, previously filed by MBNA Corporation, in connection with the issuance and sale of 50,000,000 shares of Common Stock.
11. Report dated January 7, 1999, reporting MBNA Corporation's financial highlights for the fourth quarter of 1998.
12. Report dated January 31, 1999, reporting the net credit losses and loan delinquencies for MBNA America Bank, N.A., for its net loan portfolio and managed loan portfolio for January 1999.
13. Report dated February 28, 1999, reporting the net credit losses and loan delinquencies for MBNA America Bank, N.A., for its net loan portfolio and managed loan portfolio for February 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MBNA CORPORATION
By: /s/ ALFRED LERNER -------------------------------------- Alfred Lerner Chairman and Chief Executive Officer
March 19, 1999
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
The following exhibits are filed with the MBNA Corporation annual report on Form 10-K for the fiscal year ended December 31, 1998:
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