-----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, SxePxDCQO7WceIrr0jbaCfq86gsBGL1bOkpMzqF6uZmGk5yP+pTmsnySyM+xw0vD RZK7zIWtLOsoEFLS8dOX8w== 0000096638-94-000007.txt : 19940518 0000096638-94-000007.hdr.sgml : 19940518 ACCESSION NUMBER: 0000096638-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940512 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: 94527525 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 MARCH 31, 1994 10-Q 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 March 31, 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 May 2, 1994 Common Stock, $.01 par value 17,296,634 shares Class B Outstanding at May 2, 1994 Common Stock, $.01 par value 23,015,020 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 13 Part II - Other Information 22 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1994 1993 ASSETS (Unaudited) Cash $ 29,227 $ 31,162 Federal funds sold and interest-bearing deposits with banks 214,040 234,196 Investments available for sale 344,582 308,026 Loan and lease receivables, net: Available for sale 891,897 667,774 Other loan and lease receivables, net 521,688 614,879 Total loan and lease receivables, net 1,413,585 1,282,653 Premises and equipment, net 19,148 17,045 Amounts due from credit card securitizations 119,542 117,764 Other assets 185,017 149,349 Total assets $2,325,141 $2,140,195 LIABILITIES Deposits $1,144,399 $1,254,881 Debt and other borrowings 732,970 473,699 Other liabilities 83,369 68,874 Total liabilities 1,960,738 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 -- 30,000,000 shares; issued -- 17,274,289 shares in 1994 and 17,240,064 in 1993 173 172 Class B common stock, $.01 par value: authorized -- 30,000,000 shares; issued -- 22,934,955 in 1994 and 22,603,088 in 1993 229 226 Additional paid in capital, net 168,825 166,646 Retained earnings, net 194,166 174,687 Total stockholders' equity 364,403 342,741 Total liabilities and stockholders' equity $2,325,141 $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 March 31, (Unaudited) 1994 1993 Interest income: Loans and leases $29,209 $29,913 Investments 6,026 6,079 Total interest income 35,235 35,992 Interest expense: Deposits 12,435 13,355 Other debt 8,320 6,874 Total interest expense 20,755 20,229 Net interest income 14,480 15,763 Provision for credit losses 6,829 7,181 Net interest income after provision for credit losses 7,651 8,582 Noninterest revenues 79,780 57,051 Operating expenses 48,365 40,008 Income before income taxes 39,066 25,625 Provision for income taxes 14,142 9,481 Net income $24,924 $16,144 Earnings per common share (A) $ .61 $ .45 Weighted average common shares outstanding (A) 40,941 35,829 (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) Three Months Ended March 31, 1994 1993 OPERATING ACTIVITIES (Unaudited) Net income $ 24,924 $ 16,144 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of intangibles 1,628 1,151 Provision for credit losses 6,829 7,181 Change in other assets and amounts due from credit card securitizations 1,554 2,587 Change in other liabilities 17,015 17,611 Gain on securitization of mortgages and leases (7,715) (5,020) Net cash provided by operating activities 44,235 39,654 INVESTING ACTIVITIES Purchase of investments (426,185) (96,884) Proceeds from sales of investments 358,015 50,642 Proceeds from maturing investments 26,815 23,294 Change in fed funds sold and interest- bearing deposits 20,156 (77,596) Change in credit card receivables, excluding sales (121,415) (58,035) Proceeds from sales/securitizations of receivables 109,962 185,121 Purchase of mortgage/lease portfolios (18,897) (2,251) Principal collected on mortgages/loans 3,215 3,800 Mortgages/loans made to customers (119,069) (93,876) Change in premises and equipment (3,543) (1,153) Excess of cash collections over income recognized on direct financing leases 6,920 2,988 Equipment purchased for direct financing lease contracts (29,950) (19,131) Net cash used by investing activities (193,976) (83,081) FINANCING ACTIVITIES Increase in demand and savings deposits 22,742 7,825 Proceeds from sales of time deposits 104,013 130,812 Payments for maturing time deposits (237,237) (193,918) Change in repurchase agreements 195,000 0 Proceeds from issuance of subordinated debt 13,619 29,127 Payments on redemption of subordinated debt (16,874) (31,117) Proceeds from issuance of notes payable to banks 2,300 31,359 Proceeds from issuance of medium-term notes 75,013 0 Repayment of notes payable to banks (9,787) (23,203) Proceeds from issuance of stock 1,381 78,369 Cash dividends paid (2,364) (1,403) Net cash provided by financing activities 147,806 27,851 Net decrease in cash (1,935) (15,576) Cash at beginning of period 31,162 35,753 Cash at end of period $ 29,227 $ 20,177 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands) March 31, 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 March 31, 1994 and December 31, 1993, and the results of their operations and the statements of cash flows for the three month periods ended March 31, 1994 and 1993. The results of operations for the three month period ended March 31, 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: March 31, December 31, 1994 1993 Gross loan and lease receivables $1,405,070 $1,277,305 Add: Deferred origination costs, net of deferred fees 42,689 36,575 Less: Reserve for credit losses (34,174) (31,227) Loan and lease receivables, net $1,413,585 $1,282,653 Number of Accounts: Credit cards 528,604 514,334 Other loans and leases 8,211 8,035 Total 536,815 522,369 Receivables and accounts serviced for others consisted of the following: March December 31, 31, 1994 1993 Receivables: Credit cards $2,789,298 $2,790,719 Mortgage loans 1,076,027 1,058,524 Leases 140,549 119,613 Total $4,005,874 $3,968,856 Number of Accounts: Credit cards 2,322,098 2,183,024 Mortgage loans 23,588 23,925 Leases 30,167 27,566 Total 2,375,853 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 $11.1 million and $6.0 million in the first quarters 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: Three Months Ended Year Ended March 31, December 31, 1994 1993 Balance, beginning of period $31,227 $ 40,228 Current provision 6,829 29,802 Transfer of reserves to recourse reserves (318) (12,027) Transfer of recourse reserves to mortgage reserves 2,264 0 Net charge-offs (5,828) (26,776) Balance, end of period $34,174 $ 31,227 7) At March 31, 1994 and December 31, 1993, the Company had $119.5 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 March 31, December 31, 1994 1993 Excess mortgage servicing rights $ 62,894 $ 57,017 Prepaid assets 27,298 16,307 Accrued interest receivable 26,665 25,735 Deferred costs 6,898 5,583 Due from trustees - mortgage 5,735 6,040 Goodwill 5,565 5,648 Trust receivable - leasing 4,090 2,584 Other real estate owned 1,784 1,447 Other 44,088 28,988 Total other assets $185,017 $149,349 Other Liabilities March 31, December 31, 1994 1993 Current and deferred income taxes $43,621 $37,844 Accounts payable and accrued expenses 16,345 15,139 Accrued interest payable 14,409 8,387 Other 8,994 7,504 Total other liabilities $83,369 $68,874 9) Income tax expense for the three month period ended March 31, 1994 was at an effective tax rate of approximately 36.2%, compared to 37.0% 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 March 31, 1994 1993 Current: Federal $12,264 $4,059 State 2,272 1,718 Total current 14,536 5,777 Deferred: Federal (1,019) 3,874 State 625 (170) Total deferred (394) 3,704 Total tax expense $14,142 $9,481 The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows: Three Months Ended March 31, 1994 1993 Statutory federal income tax $13,673 $8,713 State income taxes 1,884 1,022 Other (1,415) (254) Consolidated tax expense $14,142 $9,481 The net deferred tax liability is comprised of the following: March 31, December 31, 1994 1993 Deferred taxes: Gross assets $ 25,882 $ 25,755 Gross liabilities (44,563) (43,815) Total deferred taxes $(18,681) $(18,060) The Company did not record any valuation allowances against deferred tax assets at March 31, 1994 and December 31, 1993. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows: March 31, December 31, 1994 1993 SFAS 91 $(15,435) $(13,344) Loan losses 23,117 23,631 Mortgage banking income (728) (2,395) Securitization income (25,889) (25,817) Insurance underwriting (2,258) (2,258) Deferred compensation 942 592 Other 1,570 1,531 Net deferred tax liabilities $(18,681) $(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-fortwo stock split as a result of the stock dividend. Earnings per share for the three month period ended March 31, 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 to finance the growth of its subsidiaries. 12) In 1991, the Company adopted the Advanta Management Incentive Plan with Stock Election II ("AMIPWISE II"), and approved a substantially similar plan in 1993 ("AMIPWISE III"). In 1992, the Company implemented a plan similar to AMIPWISE II, for key employees below the senior management level. Under these stockbased 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 March 31, 1994, a total of 1,264,210 shares issued under these plans and under the predecessor plan to AMIPWISE II were subject to restriction and were included in the number of shares outstanding. These shares are considered common stock equivalents in the calculation of earnings per common share. In January 1994, the Company hired a new senior executive and agreed to the following compensation arrangement. In addition to a base salary, the executive received 200,000 restricted shares of Class B common stock and an option to purchase 100,000 shares of Class B common stock at $27.75 per share. The restricted shares, which as of the date of the grant had a market value of $5.6 million, will vest at the rate of 25% per annum for four years, and the options will become exercisable at the same rate. Should the executive leave the Company's employ before four years have passed, these benefits will vest upon the departure, except in certain limited circumstances. The executive is also to receive a guaranteed one-time bonus of $525, other annual benefits and perquisites estimated at $250, and will also be eligible to receive annual bonuses under AMIPWISE II and AMIPWISE III. Deferred compensation of $16.9 million and $11.0 million related to these plans is reflected as a reduction of equity at March 31, 1994 and December 31, 1993, respectively. 13) The following table shows the calculation of earnings per common share reflecting the effect of the three-for-two stock split described above: Three Months Ended March 31, 1994 1993 Net income $24,924 $16,144 less: preferred dividends (141) (141) Net income available to common shares $24,783 $16,003 Average common stock outstanding 38,650 33,407 Common stock equivalents 2,291 2,422 Weighted average shares outstanding (in thousands) 40,941 35,829 Earnings per common share $ .61 $ .45 ADVANTA CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended March 31, 1994 was $24.9 million, a 54% increase from the $16.1 million reported for the first quarter of 1993. Earnings per share in the first quarter of 1994 were $.61, a 36% increase from $.45 for the same period last year. Earnings per share for the first quarter of 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 first quarter of 1994 primarily as a result of a 42% increase in average managed receivables, continued improvement in credit quality with the total managed charge-off rate decreasing to 2.5% in the first quarter of 1994 from 3.2% in the first quarter of 1993, and controlled growth in operating expenses. The Company continues to securitize a majority of the growth in its receivables and report the performance of the securitized receivables as noninterest revenues. Consequently, the 42% increase in average managed receivables resulted in a $22.7 million, or 40% rise in noninterest revenues to $79.8 million in 1994, from $57.1 million in 1993. As a result of improved credit quality, the provision for credit losses in the first quarter of 1994 fell to $6.8 million from $7.2 million in the first quarter of 1993. Disciplined cost management resulted in operating expenses increasing only 21%, while average managed receivables grew 42% and the operating expense ratio decreased to 3.7% of average managed receivables in the first quarter of 1994, compared to 4.3% in the first quarter of 1993. NET INTEREST INCOME Net interest income for the first quarter of 1994 decreased to $14.5 million from $15.8 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). Also affecting net interest income was a drop in the owned net interest margin to 4.31% from 4.43% for the first quarter of 1993, offset by an increase in average interest earning assets of $385 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. The following table provides 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 month periods ended March 31, 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 March 31, 1994 1993 Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate On-balance sheet Credit cards $1,131,473 $ 30,204 10.68% $ 719,950 $ 23,003 12.78% Mortgage loans 118,962 2,811 9.58 208,502 5,442 10.59 Leases 46,011 1,744 15.16 53,388 2,392 17.92 Other loans 3,642 67 7.46 1,747 41 9.52 Gross receivables 1,300,088 34,826 10.73 983,587 30,878 12.59 Investments (2) 583,837 6,449 4.44 515,193 6,096 4.75 Total interest earning assets $1,883,925 $ 41,275 8.78% $1,498,780 $ 36,974 9.90% Interest-bearing liabilities $1,748,448 $ 20,755 4.78% $1,463,762 $ 20,229 5.59% Net interest spread 4.00% 4.31% Net interest margin 4.31% 4.43% Off-balance sheet Credit cards $2,790,233 $1,883,695 Mortgage loans 1,041,319 745,026 Leases 123,278 83,798 Total average securitized receivables $3,954,830 $2,712,519 Total average managed receivables $5,254,918 $3,696,106 Managed Net Interest Analysis (3): Interest earning assets $4,674,158 $141,437 12.11% $3,382,475 $111,006 13.14% Interest-bearing liabilities $4,538,681 $ 54,985 4.86% $3,347,457 $ 45,353 5.45% Net interest spread 7.25% 7.69% Net interest margin 7.38% 7.74% (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 March 31, 1994 1993 Net interest income before amortization of deferred origination costs and fees and including tax equivalent interest $20,520 $16,745 Amortization of deferred origination costs, net of deferred fees (5,611) (965) Tax equivalent interest (429) (17) Net interest income $14,480 $15,763 PROVISION FOR CREDIT LOSSES The provision for credit losses for the first quarter of 1994 was $6.8 million compared to $7.2 million for the comparable period of 1993. This decrease is attributable, in part, to lower charge-offs on owned receivables, which on a consolidated basis were 1.8% of average receivables for the first three months of 1994 versus 3.2% a year ago. The owned impaired asset level was $28.6 million or 2.0% of receivables at March 31, 1994 compared to $26.3 million or 2.7% of receivables a year ago. In the first quarter of 1994, the Company initiated a program for repurchasing nonperforming mortgage loans from the securitization trusts, in order to lower net funding costs on these managed assets. The Company repurchased $10 million of such mortgages in the first quarter of 1994 and transferred $2.9 million of off-balance sheet recourse reserves to on-balance sheet reserves as a result of this transaction. This repurchase increased the owned impaired asset level while having no impact on the level of managed impaired assets nor the provision for credit losses. Due to the marked improvement in owned credit card charge- offs, which dropped to 1.8% of average gross receivables at March 31, 1994 from 4.1% a year ago, the first quarter 1994 provision was added primarily to the general reserve. The general reserve is established to further strengthen the balance sheet and to provide for additional needs that may arise in the future. At March 31, 1994, the general reserve was $5.7 million. (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 reserve for credit losses on a consolidated owned basis was $34.2 million or 2.4% of receivables at March 31, 1994 compared to $31.2 million or 2.4% of receivables at December 31, 1993 and $39.0 million or 4.0% of receivables at March 31, 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 119.7% at March 31, 1994 from 138.6% at year end 1993 and 148.5% at March 31, 1993. On the total managed portfolio, impaired assets were $96.7 million or 1.8% of receivables at March 31, 1994, $95.1 million or 1.8% of receivables at December 31, 1993 and $92.4 million or 2.4% of receivables at March 31, 1993. A key credit quality statistic, the 30+ day delinquency rate on managed credit cards, dropped to 2.3% at March 31, 1994 from 3.5% a year ago and is at its lowest level in four years. The Company believes that charge-offs on mortgages will remain at approximately the current levels throughout 1994. On the total owned portfolio, impaired assets were $28.6 million or 2.0% of receivables at March 31, 1994, compared to $22.5 million or 1.8% of receivables and $26.3 million or 2.7% of receivables at December 31, 1993 and March 31, 1993, respectively. The total managed charge-off rate for the first three months of 1994 was 2.5%, down from 2.9% for the full year of 1993 and 3.2% for the first three months of 1993. The charge-off rate on managed credit cards was 2.7% for the first three months of 1994, down from 3.5% for the full year 1993 and 4.1% 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. March December March 31, 31, 31, CONSOLIDATED - MANAGED 1994 1993 1993 Nonperforming assets $ 65,742 $ 63,589 $ 60,550 Accruing loans past due 90 days or more 30,908 31,514 31,816 Impaired assets 96,650 95,103 92,366 Total loans 30 days or more delinquent 176,206 186,297 177,265 As a percentage of gross receivables: Nonperforming assets 1.2% 1.2% 1.6% Accruing loans past due 90 days or more .6 .6 .8 Impaired assets 1.8 1.8 2.4 Total loans 30 days or more delinquent 3.3 3.6 4.7 Net charge-offs: Amount $ 32,624 $122,715 $ 29,720 As a percentage of average gross receivables(annualized) 2.5% 2.9% 3.2% CREDIT CARDS - MANAGED Nonperforming assets $ 12,983 $ 10,881 $ 8,136 Accruing loans past due 90 days or more 30,905 31,489 31,781 Impaired assets 43,888 42,370 39,917 Total loans 30 days or more delinquent 91,723 94,035 92,657 As a percentage of gross receivables: Nonperforming assets .3% .3% .3% Accruing loans past due 90 days or more .8 .8 1.2 Impaired assets 1.1 1.1 1.5 Total loans 30 days or more delinquent 2.3 2.4 3.5 Net charge-offs: Amount $ 26,858 $105,966 $ 27,009 As a percentage of average gross receivables(annualized) 2.7% 3.5% 4.1% MORTGAGE LOANS - MANAGED Nonperforming assets $ 50,689 $ 50,418 $ 49,776 Total loans 30 days or more delinquent 69,639 75,747 71,028 As a percentage of gross receivables: Nonperforming assets 4.3% 4.4% 5.1% Total loans 30 days or more delinquent 5.9 6.6 7.2 Net charge-offs: Amount (1) $ 4,964 $ 13,991 $ 2,166 As a percentage of average gross receivables(annualized) (1) 1.7% 1.3% .9% LEASES - MANAGED Nonperforming assets $ 2,070 $ 2,290 $ 2,620 Total loans 30 days or more delinquent 14,776 16,476 13,477 As a percentage of receivables: Nonperforming assets 1.1% 1.3% 1.9% Total loans 30 days or more delinquent 7.9 9.7 9.9 Net charge-offs: Amount $ 804 $ 2,759 $ 572 As a percentage of average receivables (annualized) 1.9% 1.9% 1.7% (1) Restated, where necessary, to exclude interest advances on the serviced portfolio to be consistent with presentation of owned portfolio. March December March 31, 31, 31, CONSOLIDATED - OWNED 1994 1993 1993 Reserve for credit losses $34,174 $31,227 $39,017 Nonperforming assets 19,808 11,487 13,795 Accruing loans past due 90 days or more 8,749 11,038 12,487 Impaired assets 28,557 22,525 26,282 Reserve as a percentage of impaired assets 119.7% 138.6% 148.5% As a percentage of gross receivables: Reserve 2.4% 2.4% 4.0% Nonperforming assets 1.4 .9 1.4 Accruing loans past due 90 days or more .6 .9 1.3 Impaired assets 2.0 1.8 2.7 Net charge-offs: Amount $ 5,828 $26,776 $ 7,989 As a percentage of average gross receivables(annualized) 1.8% 2.4% 3.2% CREDIT CARDS - OWNED Reserve for credit losses $21,986 $25,859 $28,570 Nonperforming assets 3,078 3,062 2,523 Accruing loans past due 90 days or more 8,746 11,013 12,452 Impaired assets 11,824 14,075 14,975 Reserve as a percentage of impaired assets 185.9% 183.7% 190.8% As a percentage of gross receivables: Reserve 1.8% 2.3% 3.6% Nonperforming assets .2 .3 .3 Accruing loans past due 90 days or more .7 1.0 1.6 Impaired assets 1.0 1.2 1.9 Net charge-offs: Amount $ 5,108 $23,623 $ 7,319 As a percentage of average gross receivables(annualized) 1.8% 2.6% 4.1% MORTGAGE LOANS - OWNED (1) Reserve for credit losses $ 4,914 $ 2,706 $ 3,046 Nonperforming assets 15,896 7,090 9,762 Reserve as a percentage of impaired assets 30.9% 38.2% 31.2% As a percentage of gross receivables: Reserve 4.4% 3.0% 2.4% Nonperforming assets 14.1 7.8 7.8 Net charge-offs: Amount $ 476 $ 2,207 $ 461 As a percentage of average gross receivables(annualized) 1.6% 1.4% .9% LEASES - OWNED Reserve for credit losses $ 1,536 $ 1,826 $ 1,284 Nonperforming assets 834 1,335 1,492 Reserve as a percentage of impaired assets 184.2% 136.8% 86.1% As a percentage of receivables: Reserve 3.2% 3.6% 2.3% Nonperforming assets 1.8 2.6 2.7 Net charge-offs: Amount $ 246 $ 947 $ 236 As a percentage of average receivables (annualized) 2.1% 1.6% 1.8% (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 March 31, 1994 1993 Credit card securitization income $45,224 $29,455 Credit card servicing income 13,800 9,293 Income from mortgage banking activities 8,205 8,385 Leasing revenues, net 4,593 1,346 Other credit card revenues 3,248 2,297 Insurance revenues, net 2,910 2,083 Credit card interchange income 1,456 2,822 Other 344 1,370 Total noninterest revenues $79,780 $57,051 For the first quarter of 1994, noninterest revenues increased 40% to $79.8 million from $57.1 million for the same period of 1993. Securitization income increased $15.8 million or 54% as average securitized credit card receivables grew 48% 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 6.5% for the first quarter of 1994 versus 6.3% for the first quarter of 1993. Credit card servicing income increased $4.5 million due to higher securitized balances. Leasing revenues, net, increased $3.2 million as average securitized lease receivables grew 47% 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 $1.4 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 first quarter of 1993. OPERATING EXPENSES Three Months Ended March 31, 1994 1993 Salaries and employee benefits $20,563 $14,399 Marketing 6,384 4,391 External processing 4,657 3,586 Credit card fraud losses 3,507 3,305 Postage 2,701 2,258 Equipment expense 2,055 1,376 Telephone expense 1,793 1,170 Occupancy expense 1,787 1,524 Professional fees 1,752 2,696 Credit and collection expense 1,666 1,676 Other 1,500 3,627 Total operating expenses $48,365 $40,008 Operating expenses of $48.4 million for the three months ended March 31, 1994 increased 21% from $40.0 million for the same period of 1993, driven by a 42% growth in average managed receivables. Operating expenses as a percentage of average managed receivables were 3.7% for the first three months of 1994, down from 4.3% for the comparable 1993 period. The increase in operating expenses is attributable, in part, to a 21% increase in the number of employees from 1,371 at March 31, 1993 to 1,659 at March 31, 1994 to effectively service the current and anticipated account growth. Marketing, postage and telephone expense increased as the Company promoted its financial products as well as enhanced its general public visibility. The increase in external processing is also consistent with the increase in the number of credit card accounts managed. 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 three months of 1994, the Company, through its subsidiaries, securitized $105 million of mortgage loans and $27 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 March 31, 1994, the Company had approximately $892 million of loan and lease receivables and $345 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 March 1994, the Company obtained a revolving credit facility totaling $245 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 first quarter of 1994. The Company anticipates selling up to an additional $410 million of medium-term notes as needed. Subsequent to quarter-end, the Company, through its subsidiary, Colonial National Bank USA, reached an agreement to sell certain credit card customer relationships which currently represent approximately $150 million of securitized credit card receivables (less than 4% of the Company's managed credit card receivables as of March 31, 1994). The receivables 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. Due to the Company's continuing success in marketing credit cards, the Company anticipates accelerating its marketing expenditures through 1994, 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. 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, primarily fixed rate funding is used as nearly all of the receivables sold to investors carry a fixed rate. 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 4. Submission of Matters to a Vote of Security holders. At the Company's Annual Meeting of Stockholders held on May 5, 1994, the following nominees for reelection as directors of the Company were elected by the votes indicated below: Director Votes For Votes Withheld Richard A. Greenawalt 15,045,098 22,155 Alex W. "Pete" Hart 15,045,146 22,107 Warren Kantor 15,048,498 18,755 Ronald J. Naples 15,046,533 20,720 In addition, at the Annual Meeting the stockholders approved the proposal to amend the Company's Restated Certificate of Incorporation to increase the authorized number of shares of Common Stock from 60,000,000 to 400,000,000, consisting of 200,000,000 shares of Class A Common Stock and 200,000,000 shares of Class B Common Stock by the following vote: votes for - 11,930,592; votes against - 3,077,060; and abstentions and broker non-votes - 59,601. Item 6. Exhibits and Reports on Form 8-K. (a) No exhibits are being filed with this Report. (b) A report on Form 8-K, dated April 19, 1994, was filed by the Company setting forth the financial highlights of the Company's results of operations for the period ended March 31, 1994. 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) May 12, 1994 By /s/Dennis Alter Chairman of the Board and Chief Executive Officer May 12, 1994 By /s/Richard Greenawalt President and Chief Operating Officer May 12, 1994 By /s/David Wesselink Senior Vice President and Chief Financial Officer May 12, 1994 By /s/John J. Calamari Vice President, Finance and Principal Accounting Officer EXHIBIT INDEX Exhibit Description 2 Inapplicable. 4 Inapplicable. 10 Inapplicable. 11 Inapplicable. 15 Inapplicable. 18 Inapplicable. 19 Inapplicable 22 Inapplicable. 23 Inapplicable. 24 Inapplicable. 27 Inapplicable. 99 Inapplicable. -----END PRIVACY-ENHANCED MESSAGE-----