-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, BuPt88Ai8DtIvA8sLof5u4k7YVlAYBI8zhC2oSmhvsSmhl+lP6duodrOkLykqrnY QwqlqxO3+OaBOk/G1XQ7gA== 0000096638-94-000013.txt : 19940812 0000096638-94-000013.hdr.sgml : 19940812 ACCESSION NUMBER: 0000096638-94-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: 6141 IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14120 FILM NUMBER: 94543090 BUSINESS ADDRESS: STREET 1: 650 NAAMANS RD STREET 2: BRANDYWINE CORPORATE CENTER CITY: CLAYMONT STATE: DE ZIP: 19703 BUSINESS PHONE: 2156574000 MAIL ADDRESS: STREET 1: BRANDYWINE CORPORATE CENTER STREET 2: 650 NAAMANS ROAD CITY: CLAYMONT STATE: DE ZIP: 19703 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-Q 1 Form 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 1994 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission File Number 0-14120 Advanta Corp. (Exact name of registrant as specified in its charter) Delaware 23-1462070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Brandywine Corporate Center, 650 Naamans Rd., Claymont, DE 19703 (Address of Principal Executive Offices) (Zip Code) (302) 791-4400 (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 ____ * Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ____ * Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Outstanding at August 1, 1994 Common Stock, $.01 par value 17,347,018 shares Class B Outstanding at August 1, 1994 Common Stock, $.01 par value 23,109,277 shares Table of Contents Page Part I - Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Income Statements 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Part II - Other Information 26 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) June 30, December 31, 1994 1993 ASSETS (Unaudited) Cash $ 30,803 $ 31,162 Federal funds sold and interest-bearing deposits with banks 220,228 234,196 Investments available for sale 297,132 308,026 Loan and lease receivables, net: Available for sale 966,779 667,774 Other loan and lease receivables, net 360,931 614,879 Total loan and lease receivables, net 1,327,710 1,282,653 Premises and equipment, net 21,380 17,045 Amounts due from credit card securitizations 119,382 117,764 Other assets 175,207 149,349 Total assets $2,191,842 $2,140,195 LIABILITIES Deposits $1,041,005 $1,254,881 Debt and other borrowings 670,592 473,699 Other liabilities 91,027 68,874 Total liabilities 1,802,624 1,797,454 STOCKHOLDERS' EQUITY (See Notes 10 & 11) Class A preferred stock, $1,000 par value: authorized, issued and outstanding -- 1,010 shares in 1994 and 1993 1,010 1,010 Class B preferred stock, $.01 par value: authorized -- 1,000,000 shares in 1994 and 1993; none issued Class A common stock, $.01 par value: authorized -- 200,000,000 shares; issued -- 17,344,568 shares in 1994 and 17,240,064 in 1993 173 172 Class B common stock, $.01 par value: authorized -- 200,000,000 shares; issued -- 23,100,209 in 1994 and 22,603,088 in 1993 231 226 Additional paid in capital, net 172,588 166,646 Retained earnings, net 215,838 174,687 Less: Treasury stock at cost, 63,396 Class B common shares in 1994 (622) 0 Total stockholders' equity 389,218 342,741 Total liabilities and stockholders' equity $2,191,842 $2,140,195 See Notes to Consolidated Condensed Financial Statements ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENTS (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, (Unaudited) (Unaudited) 1994 1993 1994 1993 Interest income: Loans and leases $ 23,123 $31,662 $ 52,332 $ 61,575 Investments 7,020 6,715 13,046 12,794 Total interest income 30,143 38,377 65,378 74,369 Interest expense: Deposits 11,485 13,381 23,920 26,736 Other debt 10,095 6,284 18,415 13,158 Total interest expense 21,580 19,665 42,335 39,894 Net interest income 8,563 18,712 23,043 34,475 Provision for credit losses 15,434 6,364 22,263 13,545 Net interest income after provision for credit losses (6,871) 12,348 780 20,930 Noninterest revenues: Gain on sale of credit cards 18,352 0 18,352 0 Other noninterest revenues 89,154 58,338 168,934 115,389 Total noninterest revenues 107,506 58,338 187,286 115,389 Operating expenses 60,022 41,651 108,387 81,658 Income before income taxes 40,613 29,035 79,679 54,661 Provision for income taxes 14,856 10,564 28,998 20,046 Net income before extraordinary item 25,757 18,471 50,681 34,615 Extraordinary item, net (See Note 12) 0 (1,273) 0 (1,273) Net income $ 25,757 $17,198 $ 50,681 $ 33,342 Earnings per common share before extraordinary item (A) $ .63 $ .46 $ 1.23 $ .90 Earnings per common share (A) $ .63 $ .43 $ 1.23 $ .87 Weighted average common shares outstanding (A) 41,173 40,299 40,957 38,165 (A) All share and per share amounts have been adjusted to reflect the three-for-two stock split effective October 15, 1993. See Note 10 of Notes to Consolidated Condensed Financial Statements. See Notes to Consolidated Condensed Financial Statements ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six Months Ended June 30, 1994 1993 OPERATING ACTIVITIES (Unaudited) Net income $ 50,681 $ 33,342 Adjustments to reconcile net income to net cash provided by operating activities: Proceeds from sales/securitizations of receivables 865,458 479,962 Purchase of mortgage/lease portfolios (57,294) (46,493) Principal collected on mortgages 11,206 12,218 Mortgages made to customers (246,489) (221,440) Depreciation and amortization of intangibles 3,605 2,271 Provision for credit losses 22,263 13,545 Change in other assets and amounts due from credit card securitizations 4,772 9,589 Change in other liabilities 27,039 11,336 Gain on securitization of mortgages and leases (14,046) (10,041) Loss on repurchase of senior subordinated debentures 0 1,928 Net cash provided by operating activities 667,195 286,217 INVESTING ACTIVITIES Purchase of investments (1,168,013) (509,702) Proceeds from sales of investments 503,866 294,589 Proceeds from maturing investments 667,516 61,145 Change in fed funds sold and interest- bearing deposits 13,968 70,746 Change in credit card receivables, excluding sales (597,337) (415,278) Change in premises and equipment (7,563) (2,902) Excess of cash collections over income recognized on direct financing leases 9,271 8,597 Equipment purchased for direct financing lease contracts (70,606) (40,538) Net change in other loans (108) 103 Net cash used by investing activities (649,006) (533,240) FINANCING ACTIVITIES Increase in demand and savings deposits 113,617 20,251 Proceeds from sales of time deposits 139,533 353,792 Payments for maturing time deposits (467,026) (336,686) Change in repurchase agreements 140,000 166,398 Proceeds from issuance of subordinated debt 15,919 46,324 Payments on redemption of subordinated debt (26,565) (59,173) Redemption of senior subordinated debentures 0 (36,404) Proceeds from issuance of notes payable to banks 2,300 54,204 Repayment of notes payable to banks (9,787) (66,318) Proceeds from issuance of medium term notes 75,026 0 Proceeds from issuance of stock 3,051 92,198 Cash dividends paid (4,616) (3,233) Net cash (used)/provided by financing activities (18,548) 231,353 Net decrease in cash (359) (15,670) Cash at beginning of period 31,162 35,753 Cash at end of period $ 30,803 $ 20,083 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands) June 30, 1994 1) In the opinion of management, the accompanying audited and unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly the financial position of Advanta Corp. and Subsidiaries as of June 30, 1994 and December 31, 1993, and the results of their operations and the statements of cash flows for the three and six month periods ended June 30, 1994 and 1993. The results of operations for the three and six month periods ended June 30, 1994 are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform with current year classifications. 2) Investments available for sale include securities that the Company sells from time to time to provide liquidity and in response to changes in the market. In 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement requires that debt and equity securities classified as available for sale be reported at market value. This statement is effective for fiscal years beginning after December 15, 1993, although a company may elect earlier adoption as of the end of a fiscal year for which annual statements have not been previously issued. The Company elected to adopt this statement as of December 31, 1993, and as such, these securities are recorded at market value. Unrealized holding gains and losses on these securities are reported as a separate component of stockholder's equity and included in retained earnings. 3) Loan and lease receivables available for sale represent receivables that the Company generally intends to sell or securitize within the next six months. These receivables are reported at the lower of book or fair market value. 4) Loan and lease receivables on the balance sheet, including those available for sale, consisted of the following: June 30, December 31, 1994 1993 Gross loan and lease receivables $1,329,740 $1,277,305 Add: Deferred origination costs, net of deferred fees 48,192 36,575 Less: Reserve for credit losses (50,222) (31,227) Loan and lease receivables, net $1,327,710 $1,282,653 Number of Accounts: Credit cards 433,019 514,334 Other loans and leases 10,668 8,035 Total 443,687 522,369 Receivables and accounts serviced for others consisted of the following: June 30, December 31, 1994 1993 Receivables: Credit cards $3,344,024 $2,790,719 Mortgage loans 1,115,265 1,058,524 Leases 144,092 119,613 Total $4,603,381 $3,968,856 Number of Accounts: Credit cards 2,664,901 2,183,024 Mortgage loans 23,470 23,925 Leases 31,181 27,566 Total 2,719,552 2,234,515 5) The Company accounts for credit card origination costs under Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"). This accounting standard requires certain loan and lease origination fees and costs to be deferred and amortized over the life of a loan or lease as an adjustment to interest income. Origination costs are defined under this standard to include costs of loan origination associated with transactions with independent third parties and certain costs relating to underwriting activities and preparing and processing loan documents. The Company engages third parties to solicit and originate credit card account relationships. Amounts deferred under these arrangements were $25.4 million and $16.3 million in the first six months of 1994 and 1993, respectively. For credit card receivables, deferred origination costs have been amortized over 60 months. At the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board, the task force reached a consensus regarding the acquisition of individual credit card accounts from independent third parties (EITF Issue 93-1). The consensus was that credit card accounts acquired individually should be accounted for as originations under SFAS 91 and EITF Issue 92-5. Amounts paid to a third party to acquire individual credit card accounts should be deferred and netted against the related credit card fee, if any, and the net amount should be amortized on a straight line basis over the privilege period. If a significant fee is charged, the privilege period is the period that the fee entitles the cardholder to use the card. If there is no significant fee, the privilege period should be one year. In accordance with this consensus, direct origination costs incurred related to credit card originations initiated after the May 20, 1993 consensus date are deferred and amortized over 12 months. Costs incurred for originations which were initiated prior to May 20, 1993 will continue to be amortized over a 60 month period. Prior to the EITF Issue 93-1 consensus, it was the Company's practice to write off deferred origination costs related to credit card receivables that have been securitized. This practice had effectively written off credit card origination costs much more quickly than the 60 month period previously utilized. In connection with the prospective adoption of a 12 month amortization period for deferred credit card origination costs, the Company will no longer write off deferred origination costs related to credit card receivables being securitized, as under the EITF Issue 93-1 consensus such costs are not directly associated with the receivables. The Company records excess servicing income on credit card securitizations representing additional cash flow from the receivables initially sold based on the repayment term, including prepayments. Prior to the EITF Issue 93-1 consensus, net gains were not recorded at the time each transaction was completed as excess servicing income was offset by the write-off of deferred origination costs and the establishment of recourse reserves. Subsequent to the prospective adoption discussed above, excess servicing income has been recorded at a lower level at the time of each transaction, and is predominantly offset by the establishment of recourse reserves. The lower level of excess servicing income corresponds with the discontinuance of deferred origination cost write-offs upon securitization of receivables as discussed above. During the "revolving period" of each securitization, income is recorded based on additional cash flows from the new receivables which are sold to the securitization trust on a continual basis to replenish the investors' interest in trust receivables which have been repaid by the credit cardholders. 6) The following table shows the changes in the reserve for credit losses for the periods presented: Six Months Ended Year Ended June 30, December 31, 1994 1993 Balance, beginning of period $ 31,227 $ 40,228 Current provision 22,263 29,802 Transfer of reserves to recourse reserves 0 (12,027) Transfer of recourse reserves to mortgage reserves 11,335 0 Net charge-offs (14,603) (26,776) Balance, end of period $ 50,222 $ 31,227 7) At June 30, 1994 and December 31, 1993, the Company had $119.4 million and $117.8 million, respectively, of amounts due from credit card securitizations. These amounts include excess servicing, accrued interest receivable and other amounts related to these securitizations and are net of recourse reserves established. A portion of these amounts are subject to liens held by the providers of credit enhancement facilities for the respective securitizations. 8) Selected Balance Sheet Information Other Assets June 30, December 31, 1994 1993 Excess mortgage servicing rights $ 73,981 $ 57,017 Accrued interest receivable 29,148 25,735 Prepaid assets 24,551 16,307 Deferred costs 6,790 5,583 Due from trustees - mortgage 6,041 6,040 Goodwill 5,483 5,648 Excess servicing - leasing 4,278 1,287 Other real estate owned 2,907 1,447 Due from trustees - leasing 1,744 1,297 Other 20,284 28,988 Total other assets $175,207 $149,349 Other Liabilities June 30, December 31, 1994 1993 Current and deferred income taxes $30,350 $37,844 Accounts payable and accrued expenses 25,545 15,139 Accrued interest payable 16,604 8,387 Other 18,528 7,504 Total other liabilities $91,027 $68,874 9) Income tax expense for the three and six month periods ended June 30, 1994 was at an effective tax rate of approximately 36.4%, compared to 36.7% for the comparable 1993 period. Effective January 1, 1993, the Company implemented the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") with no material effect on the financial statements. SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and the tax bases of assets and liabilities given the provisions of the enacted tax laws. Prior to the implementation of SFAS 109, the Company accounted for income taxes using Accounting Principles Board Opinion No. 11. Income tax expense consisted of the following components: Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Current: Federal $18,212 $ 6,974 $30,476 $11,033 State 2,224 1,235 4,496 2,953 Total current 20,436 8,209 34,972 13,986 Deferred: Federal (5,205) 2,104 (6,224) 5,978 State (375) 251 250 82 Total deferred (5,580) 2,355 (5,974) 6,060 Total tax expense before extraordinary item $14,856 $10,564 $28,998 $20,046 The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows: Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Statutory federal income tax $14,228 $ 9,872 $27,901 $18,585 State income taxes 1,202 981 3,085 2,003 Other (574) (289) (1,988) (542) Consolidated tax expense before extraordinary item $14,856 $10,564 $28,998 $20,046 Tax benefit on loss from repurchase of debentures 0 (656) 0 (656) Consolidated tax expense $14,856 $ 9,908 $28,998 $19,390 The net deferred tax liability is comprised of the following: June 30, December 31, 1994 1993 Deferred taxes: Gross assets $ 34,239 $ 25,755 Gross liabilities (47,726) (43,815) Total deferred taxes $(13,487) $(18,060) The Company did not record any valuation allowances against deferred tax assets at June 30, 1994 and December 31, 1993. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows: June 30, December 31, 1994 1993 SFAS 91 $(17,454) $(13,344) Loan losses 24,897 23,631 Mortgage banking income 2,381 (2,395) Securitization income (27,554) (25,817) Insurance underwriting (2,516) (2,258) Deferred compensation 1,092 592 Other 5,667 1,531 Net deferred tax liabilities $(13,487) $(18,060) 10) On September 23, 1993, the Board of Directors approved a three-for- two stock split effected in the form of a 50% stock dividend on both the Class A and Class B Common Stock to shareholders of record as of October 4, 1993, which dividend was paid on October 15, 1993. All share and per share amounts reflect the three-for- two stock split as a result of the stock dividend. Earnings per share for the six month period ended June 30, 1993 have been adjusted to reflect the impact of this dividend, as if it had already occurred at the beginning of the period. 11) On March 24, 1993, in a public offering, the Company sold 2,575,000 shares (pre-split) of Class B Common Stock. Proceeds from the offering, net of the underwriting discount, were $77.5 million. On April 21, 1993, the underwriters of the offering purchased an additional 450,000 shares (pre-split) of Class B Common Stock, pursuant to the overallotment option granted to them by the Company. This brought the Company's total proceeds of the offering, net of related expenses, to approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including the financing of growth in its subsidiaries. 12) In April of 1993, the Company repurchased the remaining $33.2 million of its 12 3/4% Senior Subordinated Debentures at a price equal to 104% of par. This transaction resulted in an extraordinary loss of $1.3 million (net of a tax benefit of $.6 million) or $.03 per share for the three and six month periods ended June 30, 1993. 13) Under certain stock based bonus programs, certain employees have received awards in the form of restricted shares of common stock which are subject to forfeiture should the employee terminate employment with the Company prior to vesting. The shares become unrestricted over time if certain performance criteria are met. At June 30, 1994, a total of 1,215,924 shares issued under these plans were subject to restriction and are included in the number of shares outstanding. During 1994, the Company granted 200,000 shares of restricted stock to an executive outside the above mentioned bonus programs, which shares are included in the number of shares outstanding at June 30, 1994. Restricted shares are considered common stock equivalents in the calculation of earnings per common share. Deferred compensation of $16.3 million and $11.0 million related to these programs is reflected as a reduction of equity at June 30, 1994 and December 31, 1993, respectively. 14) In April 1994, the Company, through its subsidiary, Colonial National Bank USA, reached an agreement with NationsBank of Delaware, N.A., to sell certain credit card customer relationships which at that time represented approximately $150 million of securitized credit card receivables (less than 4% of the Company's managed credit card receivables as of June 30, 1994). The receivables associated with these relationships will continue to be serviced by Colonial National until the securitization trust terminates. The Company anticipates this will occur in the second quarter of 1995. In the quarter ended June 30, 1994, the Company recorded an $18.4 million pretax gain on the sale. In addition, the Company deferred a portion of the proceeds related to the excess spread of the receivables to be generated over the remaining life of the trust. These proceeds will be recognized as securitization income over the related period. 15) The following table shows the calculation of earnings per common share reflecting the effect of the three-for-two stock split described in Note 10: Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Net income $25,757 $ 17,198 $50,681 $33,342 less: preferred dividends 0 0 (141) (141) Net income available to common shares $25,757 $ 17,198 $50,540 $33,201 Average common stock outstanding 38,863 37,697 38,759 35,588 Common stock equivalents 2,310 2,602 2,198 2,577 Weighted average shares outstanding (in thousands) 41,173 40,299 40,957 38,165 Earnings per common share $ .63 $ .43 $ 1.23 $ .87 ADVANTA CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended June 30, 1994 was $25.8 million, an $8.6 million or 50% increase from the $17.2 million reported for the second quarter of 1993. Earnings per share for the second quarter of 1994 were $.63, a 47% increase from $.43 per share for the same period of 1993. Earnings for 1993 include a $1.3 million or $.03 per share extraordinary loss on the early retirement of debt. Earnings per share for 1993 have been adjusted to reflect an effective three- for-two stock split as a result of the October 15, 1993 stock dividend. Earnings increased in the second quarter of 1994 primarily as a result of a 44% increase in average managed receivables and continued improvement in credit quality with the total managed charge-off rate decreasing to 2.5% for the second quarter of 1994 from 3.2% for the second quarter of 1993. The Company continues to securitize a majority of the growth in its receivables and report the performance of the securitized receivables as noninterest revenues. Noninterest revenues increased $49.2 million, or 84%, to $107.5 million in the second quarter of 1994 from $58.3 million in the comparable 1993 period. This increase was due to a 44% increase in average managed receivables coupled with an $18.4 million gain on the sale of $150 million of credit card customer relationships. This transaction allowed the Company to make additional investments in marketing and developmental initiatives. The Company also provided an additional $10 million of loan loss reserves. Despite the increase in marketing and developmental expenses, total operating expense growth was maintained at a level in line with the growth in average managed receivables, and the operating expense ratio was flat at 4.27% of average managed receivables for both the 1994 and 1993 second quarter periods. Although asset quality indicators continue to trend favorably, the Company continues to maintain a conservative outlook and to strengthen reserves. For the six months ended June 30, 1994, net income was $50.7 million, a 52% increase over the $33.3 million for the comparable year earlier period. Earnings per share increased 41% to $1.23 in 1994 compared to $.87 in 1993. Earnings per share before extraordinary item were $.90 in 1993. NET INTEREST INCOME Net interest income for the second quarter of 1994 decreased to $8.6 million from $18.7 million for the same period of 1993. This decrease was due to an increase in the amortization of deferred origination costs due to the change in the policy and amortization period for these costs (see Note 5 of Notes to Consolidated Condensed Financial Statements). Also affecting net interest income was a drop in the owned net interest margin to 3.85% from 4.74% for the second quarter of 1993, offset by an increase in average interest earning assets of $245 million. The Company is executing a strategy to market a "risk- adjusted" credit card product in which credit cards are issued with lower rates to customers whose credit quality is expected to result in a lower rate of credit losses (the "risk-adjusted" pricing strategy). This strategy resulted in a drop in credit card yields thereby lowering the owned net interest margin. Also affecting the owned net interest margin was a lag in the repricing of the interest rates on the Company's credit cards, as the result of multiple changes in the prime rate during the quarter. The Company's credit cards are contractually indexed monthly to the prime rate. The following tables provide an analysis of both owned and managed interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest earning assets and the average rate paid to fund interest earning assets) for the three and six month periods ended June 30, 1994 and 1993. Average owned loan and lease receivables and the related interest revenues exclude deferred origination costs and deferred fees and the amortization thereof (see Notes to Consolidated Condensed Financial Statements) and include certain loan fees. INTEREST RATE ANALYSIS
Three Months Ended June 30, 1994 1993 Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate On-balance sheet Credit cards $1,099,843 $ 28,006 10.19% $ 833,751 $ 25,746 12.35% Mortgage loans 135,025 2,550 7.57 164,137 4,051 9.90 Leases 52,894 1,909 14.43 63,998 2,784 17.40 Other loans 3,772 68 7.23 1,649 40 9.73 Gross receivables 1,291,534 32,533 10.08 1,063,535 32,621 12.27 Investments (2) 621,424 7,463 4.80 604,687 6,860 4.54 Total interest earning assets $1,912,958 $ 39,996 8.37% $1,668,222 $ 39,481 9.47% Interest-bearing liabilities $1,747,315 $ 21,580 4.87% $1,531,943 $ 19,665 5.14% Net interest spread 3.50% 4.33% Net interest margin 3.85% 4.74% Off-balance sheet Credit cards $3,118,461 $1,903,216 Mortgage loans 1,073,957 860,567 Leases 135,160 78,017 Total average securitized receivables $4,327,578 $2,841,800 Total average managed receivables $5,619,112 $3,905,335 Managed Net Interest Analysis (3): Interest earning assets $5,031,419 $151,233 12.03% $3,571,438 $113,794 12.75% Interest-bearing liabilities $4,865,776 $ 63,898 5.23% $3,435,159 $ 44,834 5.22% Net interest spread 6.80% 7.53% Net interest margin 6.95% 7.72% (1)Includes assets held and available for sale and nonaccrual loans and leases. (2)Interest and average rate for tax-free securities computed on a tax equivalent basis using a statutory rate of 35%. (3)Combination of owned interest earning assets/owned interest-bearing liabilities and securitized credit card assets/liabilities.
INTEREST RATE ANALYSIS
Six Months Ended June 30, 1994 1993 Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate On-balance sheet Credit cards $1,115,658 $ 58,210 10.44% $ 776,851 $ 48,749 12.55% Mortgage loans 127,038 5,361 8.51 186,197 9,493 10.28 Leases 49,453 3,652 14.77 58,693 5,176 17.64 Other loans 3,707 135 7.34 1,698 81 9.62 Gross receivables 1,295,856 67,358 10.41 1,023,439 63,499 12.42 Investments (2) 602,759 13,912 4.63 559,582 12,956 4.64 Total interest earning assets $1,898,615 $ 81,270 8.57% $1,583,021 $ 76,455 9.67% Interest-bearing liabilities $1,747,496 $ 42,335 4.83% $1,498,138 $ 39,894 5.36% Net interest spread 3.74% 4.31% Net interest margin 4.07% 4.59% Off-balance sheet Credit cards $2,954,347 $1,893,455 Mortgage loans 1,057,728 803,116 Leases 129,219 80,908 Total average securitized receivables $4,141,294 $2,777,479 Total average managed receivables $5,437,150 $3,800,918 Managed Net Interest Analysis (3): Interest earning assets $4,852,962 $292,669 12.06% $3,476,476 $224,800 12.94% Interest-bearing liabilities $4,701,843 $118,883 5.05% $3,391,593 $ 90,187 5.33% Net interest spread 7.01% 7.61% Net interest margin 7.15% 7.73% (1)Includes assets held and available for sale and nonaccrual loans and leases. (2)Interest and average rate for tax-free securities computed on a tax equivalent basis using a statutory rate of 35%. (3)Combination of owned interest earning assets/owned interest-bearing liabilities and securitized credit card assets/liabilities.
The effects of the amortization of deferred origination costs, deferred fees and tax equivalent interest on net interest income were as follows: Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Net interest income before amortization of deferred origination costs and fees and including tax equivalent interest $18,416 $19,816 $38,935 $36,561 Amortization of deferred origination costs, net of deferred fees (9,395) (959) (15,006) (1,924) Tax equivalent interest (458) (145) (886) (162) Net interest income $ 8,563 $18,712 $ 23,043 $34,475 PROVISION FOR CREDIT LOSSES The provision for credit losses for the second quarter of 1994 was $15.4 million compared to $6.4 million for the comparable period of 1993. For the six month period ended June 30, 1994, the provision for credit losses was $22.3 million compared to $13.5 million for the six months of 1993. Despite lower charge-offs on owned receivables, which on a consolidated basis were 2.3% of average receivables for the first six months of 1994 versus 2.8% a year ago, the Company provided an additional $10 million of general reserves in the second quarter of 1994. At June 30, 1994, the general reserve was $18.8 million. The owned impaired asset level was $48.7 million or 3.7% of receivables at June 30, 1994 compared to $23.9 million or 2.0% of receivables a year ago. This increase was due to several transactions in which the Company repurchased nonperforming mortgage loans from the securitization trusts, in order to lower net funding costs on these managed assets. The Company repurchased $45 million of nonperforming mortgages during the first half of 1994 and transferred approximately $11 million of off-balance sheet recourse reserves to on-balance sheet reserves as a result of these transactions. These repurchases increased the owned impaired asset level while having no impact on either the level of managed impaired assets or the provision for credit losses. (See also Asset Quality below). ASSET QUALITY The reserve for credit losses is maintained for on-balance sheet receivables. The reserve is intended to cover credit losses inherent in the owned loan portfolio. With regard to securitized assets, anticipated losses and related recourse reserves are reflected in the calculations of securitization income, amounts due from credit card securitizations and other assets. Recourse reserves are intended to cover all probable credit losses over the life of the receivables securitized. The Company periodically evaluates its on-balance sheet and recourse reserve requirements and, as appropriate, effects transfers between these accounts. The reserve for credit losses on a consolidated owned basis was $50.2 million or 3.8% of receivables at June 30, 1994 up from $31.2 million or 2.4% of receivables at December 31, 1993 and $37.2 million or 3.1% of receivables at June 30, 1993. Due to the increase in the proportion of owned impaired mortgages, which have a lower level of reserve coverage, the consolidated coverage of impaired assets dropped to 103.1% at June 30, 1994 from 138.6% at year end 1993 and 155.8% at June 30, 1993. On the total managed portfolio, impaired assets were $90.9 million or 1.5% of receivables at June 30, 1994, versus $95.1 million or 1.8% of receivables at December 31, 1993 and $89.0 million or 2.2% of receivables at June 30, 1993. A key credit quality statistic, the 30+ day delinquency rate on managed credit cards, dropped to 2.0% at June 30, 1994 from 2.9% a year ago and is at its lowest level in over five years. On the total owned portfolio, impaired assets were $48.7 million or 3.7% of receivables at June 30, 1994, compared to $22.5 million or 1.8% of receivables and $23.9 million or 2.0% of receivables at December 31, 1993 and June 30, 1993, respectively. This increase was due to the repurchase of the nonperforming mortgages from the securitization trusts. The total managed charge-off rate for the first six months of 1994 was 2.5%, down from 2.9% for the full year of 1993 and 3.2% for the first six months of 1993. The charge-off rate on managed credit cards was 2.7% for the first six months of 1994, down from 3.5% for the full year 1993 and 4.0% for the comparable 1993 period. The Company believes that charge-offs on mortgages will remain at approximately the current levels throughout 1994. The charge-off rate on owned receivables on a consolidated basis was 2.3% of average receivables for the first six months of 1994, down from 2.4% for the full year 1993 and 2.8% a year ago. The charge-off rate on owned credit cards was 2.0% for the first six months of 1994, down from 2.6% for the full year 1993 and 3.4% for the comparable 1993 period. The following tables provide a summary of impaired assets, delinquencies and charge-offs, as of and for the year-to-date periods indicated. June December June 30, 31, 30, CONSOLIDATED - MANAGED 1994 1993 1993 Nonperforming assets $63,062 $ 63,589 $ 61,991 Accruing loans past due 90 days or more 27,831 31,514 26,992 Impaired assets 90,893 95,103 88,983 Total loans 30 days or more delinquent 173,725 186,297 173,463 As a percentage of gross receivables: Nonperforming assets 1.1% 1.2% 1.5% Accruing loans past due 90 days or more .5 .6 .7 Impaired assets 1.5 1.8 2.2 Total loans 30 days or more delinquent 2.9 3.6 4.2 Net charge-offs: Amount $67,859 $122,715 $ 60,644 As a percentage of average gross receivables(annualized) 2.5% 2.9% 3.2% CREDIT CARDS - MANAGED Nonperforming assets $13,885 $ 10,881 $ 7,984 Accruing loans past due 90 days or more 27,793 31,489 26,953 Impaired assets 41,678 42,370 34,937 Total loans 30 days or more delinquent 89,306 94,035 84,092 As a percentage of gross receivables: Nonperforming assets .3% .3% .3% Accruing loans past due 90 days or more .6 .8 .9 Impaired assets .9 1.1 1.2 Total loans 30 days or more delinquent 2.0 2.4 2.9 Net charge-offs: Amount $55,862 $105,966 $ 54,512 As a percentage of average gross receivables(annualized) 2.7% 3.5% 4.0% MORTGAGE LOANS - MANAGED Nonperforming assets $47,396 $ 50,418 $ 50,437 Total loans 30 days or more delinquent 69,086 75,747 74,623 As a percentage of gross receivables: Nonperforming assets 3.9% 4.4% 4.7% Total loans 30 days or more delinquent 5.6 6.6 7.0 Net charge-offs: Amount (1) $10,366 $ 13,991 $ 4,818 As a percentage of average gross receivables(annualized) (1) 1.7% 1.3% 1.0% LEASES - MANAGED Nonperforming assets $ 1,771 $ 2,290 $ 3,570 Total loans 30 days or more delinquent 15,239 16,476 14,691 As a percentage of receivables: Nonperforming assets .9% 1.3% 2.6% Total loans 30 days or more delinquent 7.6 9.7 10.6 Net charge-offs: Amount $ 1,648 $ 2,759 $ 1,299 As a percentage of average receivables (annualized) 1.8% 1.9% 1.9% (1) Restated, where necessary, to exclude interest advances on the serviced portfolio to be consistent with presentation of owned portfolio. June December June 30, 31, 30, CONSOLIDATED - OWNED 1994 1993 1993 Reserve for credit losses $50,222 $31,227 $37,165 Nonperforming assets 41,783 11,487 13,648 Accruing loans past due 90 days or more 6,907 11,038 10,206 Impaired assets 48,690 22,525 23,854 Reserve as a percentage of impaired assets 103.1% 138.6% 155.8% As a percentage of gross receivables: Reserve 3.8% 2.4% 3.1% Nonperforming assets 3.1 .9 1.2 Accruing loans past due 90 days or more .5 .9 .9 Impaired assets 3.7 1.8 2.0 Net charge-offs: Amount $14,603 $26,776 $14,224 As a percentage of average gross receivables(annualized) 2.3% 2.4% 2.8% CREDIT CARDS - OWNED Reserve for credit losses $18,125 $25,859 $23,876 Nonperforming assets 2,875 3,062 2,288 Accruing loans past due 90 days or more 6,869 11,013 10,167 Impaired assets 9,744 14,075 12,455 Reserve as a percentage of impaired assets 186.0% 183.7% 191.7% As a percentage of gross receivables: Reserve 1.6% 2.3% 2.4% Nonperforming assets .2 .3 .2 Accruing loans past due 90 days or more .6 1.0 1.0 Impaired assets .8 1.2 1.3 Net charge-offs: Amount $11,074 $23,623 $13,096 As a percentage of average gross receivables(annualized) 2.0% 2.6% 3.4% MORTGAGE LOANS - OWNED (1) Reserve for credit losses $11,953 $ 2,706 $ 3,166 Nonperforming assets 38,453 7,090 9,292 Reserve as a percentage of impaired assets 31.1% 38.2% 34.1% As a percentage of gross receivables: Reserve 10.6% 3.0% 2.3% Nonperforming assets 34.1 7.8 6.6 Net charge-offs: Amount $ 3,145 $ 2,207 $ 633 As a percentage of average gross receivables(annualized) 5.0% 1.4% .7% LEASES - OWNED Reserve for credit losses $ 1,385 $ 1,826 $ 1,448 Nonperforming assets 445 1,335 2,068 Reserve as a percentage of impaired assets 311.2% 136.8% 70.0% As a percentage of receivables: Reserve 2.4% 3.6% 2.3% Nonperforming assets .8 2.6 3.2 Net charge-offs: Amount $ 401 $ 947 $ 480 As a percentage of average receivables (annualized) 1.6% 1.6% 1.6% (1) Beginning March 1994, the Company initiated a program for repurchasing nonperforming assets from the securitized portfolios (see "Provision for Credit Losses"). NONINTEREST REVENUES Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Gain on sale of credit cards $ 18,352 $ 0 $ 18,352 $ 0 Other noninterest revenues: Credit card securitization income 49,824 27,939 95,048 57,394 Credit card servicing income 15,336 9,397 29,136 18,690 Income from mortgage banking activities 8,587 8,851 16,792 17,236 Leasing revenues, net 5,787 1,319 10,380 2,665 Other credit card revenues 3,253 2,511 6,501 4,808 Insurance revenues, net 3,056 2,058 5,966 4,141 Credit card interchange income 2,992 4,981 4,448 7,803 Other 319 1,282 663 2,652 Total other noninterest revenues $ 89,154 $58,338 $168,934 $115,389 Total noninterest revenues $107,506 $58,338 $187,286 $115,389 For the second quarter of 1994, noninterest revenues increased 84% to $107.5 million from $58.3 million for the same period of 1993. During the quarter, the Company sold $150 million of credit card customer relationships from a securitization trust. The Company will continue to service the receivables until the securitization trust terminates, which is anticipated to occur in the second quarter of 1995. The Company recorded a gain of $18.4 million on this transaction. (See Note 14 of Notes to Consolidated Condensed Financial Statements.) Excluding this gain, other noninterest revenues of $89.2 million increased $30.9 million or 53% from the second quarter of 1993. Securitization income increased $21.9 million or 78% as average securitized credit card receivables grew 64% from the comparable quarter of 1993 and interchange income paid to the credit card trusts (included in securitization income) also increased. Securitization income as an annualized percentage of average securitized credit card receivables was 6.4% for the second quarter of 1994 versus 5.9% for the second quarter of 1993. Credit card servicing income increased $5.9 million due to higher securitized balances. Leasing revenues, net, increased $4.5 million primarily due to a 73% growth in average securitized lease receivables from the comparable quarter of 1993. Credit card interchange income represents approximately 1.4% of credit card purchases less amounts paid to the securitization trusts, which amounts range from 1% to 2% of securitized balances and are included in credit card securitization income. Interchange income decreased $2.0 million due to a higher level of interchange fees being included in credit card securitization income, as well as an increase in the volume of balance transfer activity which yields no interchange income. Other income declined $1.0 million primarily due to $.9 million of securities gains included in the second quarter of 1993. For the six month period ended June 30, 1994, noninterest revenues rose to $187.3 million from $115.4 million for the comparable 1993 period, a 62% increase. This improvement resulted from the gain on sale of credit cards, as well as a 56% growth in average securitized credit card receivables and a 60% growth in average securitized lease receivables. OPERATING EXPENSES Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Salaries and employee benefits $21,460 $15,671 $42,023 $30,070 Marketing 11,976 5,037 18,360 9,428 External processing 5,349 3,828 10,006 7,414 Credit card fraud losses 4,737 3,482 8,244 6,787 Postage 3,052 2,333 5,753 4,591 Equipment expense 2,291 1,464 4,346 2,840 Occupancy expense 2,076 1,488 3,863 3,012 Professional fees 1,824 2,119 3,576 4,815 Telephone expense 1,804 1,288 3,597 2,458 Credit and collection expense 1,769 1,748 3,435 3,424 Other 3,684 3,193 5,184 6,819 Total operating expenses $60,022 $41,651 $108,387 $81,658 Operating expenses of $60.0 million for the three months ended June 30, 1994 increased 44% from $41.7 million for the same period of 1993. Operating expenses as a percentage of average managed receivables were 4.27% for the second quarter of 1994, flat with the comparable 1993 period. Included in expenses for the second quarter of 1994 was approximately $9 million of marketing and developmental expenses related to new initiatives. The remainder of the growth in operating expenses was driven by a 44% growth in average managed receivables. As a result, the Company experienced an increase in salaries and employee benefits with a 20% increase in the number of employees from 1,414 at June 30, 1993 to 1,693 at June 30, 1994 to effectively service the current and anticipated account growth. Other expenses, including postage, telephone expense and external processing increased consistent with the increase in the number of credit card accounts managed. For the first six months of 1994, operating expenses increased 33% to $108.4 million from $81.7 million for the same 1993 period. Average managed receivables grew 43% over the same period of time. Operating expenses as a percentage of average managed receivables were 3.99% for the six months ended June 30, 1994, down from 4.30% for the six months ended June 30, 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's goal is to maintain an adequate level of liquidity, both long- and short-term, through active management of both assets and liabilities. During the first six months of 1994, the Company, through its subsidiaries, securitized $550 million of credit card receivables, $183 million of mortgage loans and $43 million of equipment lease receivables. Cash generated from these transactions was temporarily invested in short-term, high quality investments at money market rates awaiting redeployment to pay down deposits and to fund future credit card, mortgage and lease receivable growth. At June 30, 1994, the Company had approximately $967 million of loan and lease receivables and $297 million of investments available for sale which could be sold to generate additional liquidity. During 1993, the debt securities of Advanta Corp. achieved investment-grade ratings from the nationally recognized rating agencies. These ratings have allowed the Company to further diversify its funding sources. As a result, in 1994 the Company obtained a revolving credit facility totaling $255 million from a consortium of banks. In November 1993, the Company filed a shelf registration statement with the Securities and Exchange Commission for $1 billion of debt securities, and subsequently sold $150 million of three-year notes in the fourth quarter of 1993 and has sold $90 million of medium-term notes under this registration statement through the second quarter of 1994. The Company anticipates selling up to an additional $410 million of medium-term notes as needed. Due to the continued success in marketing credit cards, the Company anticipates that its marketing and developmental expenditures in 1994 will be substantially higher than those of 1993, in order to sustain the rapid growth in managed credit card receivables. While there can be no assurance that this strategy will in fact result in continued rapid receivable growth, the Company believes that, in light of current market conditions, the Company's credit card offers will continue to appeal to consumers and will thus enable the Company to continue to increase its share of the domestic bank credit card market. The Company added 570,000 new credit card accounts during the first six months of 1994, and now manages over 3 million credit card accounts, a 33% increase from a year ago. Credit card sales through June 30, 1994 were $3.6 billion, a 46% increase over the $2.4 billion generated in the first six months of 1993. Subsequent to June 30, 1994, the Company securitized $750 million of credit card receivables, $200 million of which were previously included in securitized receivables, generating additional funding for future asset growth. ASSET/LIABILITY MANAGEMENT The Company attempts to minimize the impact of market interest rate fluctuations on net interest income and net income by regularly evaluating the risk inherent in its asset and liability structure, including securitized assets. The risk arises from continuous changes in the Company's asset/liability mix, market interest rates, the yield curve, prepayment trends, and the timing of cash flows. Computer simulations are used to evaluate net interest income volatility under varying rate, spread and volume assumptions over monthly time periods of up to two years. In managing its rate sensitivity position, the Company periodically securitizes, sells and purchases assets, alters the mix and term structure of its retail and institutional funding base, and complements its basic business activities by changing the investment portfolio and short-term asset positions. The Company has primarily utilized variable rate funding in pricing its credit card securitization transactions in an attempt to match the pricing dynamics of the underlying receivables sold to the trusts. Although credit card receivables are priced at a spread over the prime rate, they generally contain interest rate floors. These floors have the impact of converting the credit card receivables to fixed rate receivables in a low interest rate environment. In instances when a significant portion of credit card receivables are at their floors, the Company may convert part of the underlying funding to a fixed rate by using interest rate hedges, swaps and fixed rate securitizations. In pricing mortgage and lease securitizations, both fixed rate and variable rate funding are used depending upon the characteristics of the underlying receivables. Interest rate fluctuations affect net interest income at virtually all financial institutions. While interest rate volatility does have an effect on net interest income, other factors also contribute significantly to changes in net interest income. Specifically, within the credit card portfolio, pricing decisions and customer behavior regarding convenience usage impact the yield on the portfolio. These factors may counteract or exacerbate income changes due to fluctuating interest rates. The Company closely monitors interest rate movements, competitor pricing and consumer behavioral changes in its ongoing analysis of net interest income sensitivity. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are being filed with this Report: 10(a) Agreement of Limited Partnership of Advanta Partners LP, dated as of May 6, 1994. 10(b) Employment Agreement by and between Advanta Partners LP and Anthony P. Brenner, made as of May 6, 1994. (b) A report on Form 8-K, dated July 20, 1994, was filed by the Company setting forth the financial highlights of the Company's results of operations for the period ended June 30, 1994. A Financial Data Schedule was included as an exhibit in this Form 8-K. SIGNATURES 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 thereto duly authorized. Advanta Corp. (Registrant) August 11, 1994 By /s/David Wesselink Senior Vice President and Chief Financial Officer August 11, 1994 By /s/John J. Calamari Vice President, Finance and Principal Accounting Officer EXHIBIT INDEX Exhibit Description 2 Inapplicable. 4 Inapplicable. 10(a) Agreement of Limited Partnership of Advanta Partners LP, dated as of May 6, 1994 (filed herewith). 10(b) Employment Agreement by and between Advanta Partners LP and Anthony P. Brenner, made as of May 6, 1994 (filed herewith). 11 Inapplicable. 15 Inapplicable. 18 Inapplicable. 19 Inapplicable 22 Inapplicable. 23 Inapplicable. 24 Inapplicable. 27 Inapplicable. 99 Inapplicable. -----END PRIVACY-ENHANCED MESSAGE-----