-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UJcztH8zc/MiRqxqWLpGwp9oS+pSU60XY5TPy/vo7lQUiTHXOlx4ArxOtalPTe/m CfY0aD3SY+PQbqrqJ5kRgg== 0000096638-97-000004.txt : 19970520 0000096638-97-000004.hdr.sgml : 19970520 ACCESSION NUMBER: 0000096638-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [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: 97606923 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19044 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, 1997 10Q 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, 1997 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.) Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477 (Address of Principal Executive Offices) (Zip Code) (215) 657-4000 (Registrant's telephone number, including area code) 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 1, 1997 Common Stock, $.01 par value 18,180,246 shares Class B Outstanding at May 1, 1997 Common Stock, $.01 par value 25,843,707 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 23 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1997 1996 ASSETS (Unaudited) Cash $ 147,175 $ 165,875 Federal funds sold and interest-bearing deposits with banks 1,615,028 885,709 Investments available for sale 857,889 785,600 Loan and lease receivables, net: Available for sale 1,571,155 1,476,146 Other loan and lease receivables, net 905,692 1,136,857 Total loan and lease receivables, net 2,476,847 2,613,003 Premises and equipment, net 131,999 108,130 Amounts due from credit card securitizations 386,971 399,359 Other assets 628,357 626,283 Total assets $6,244,266 $5,583,959 LIABILITIES Deposits $1,958,791 $1,860,058 Debt and other borrowings 3,048,182 2,462,084 Other liabilities 300,482 309,781 Total liabilities 5,307,455 4,631,923 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of the Company 100,000 100,000 STOCKHOLDERS' EQUITY Class A preferred stock, $1,000 par value: authorized, issued and outstanding -- 1,010 shares in 1997 and 1996 1,010 1,010 Class B preferred stock, $.01 par value: authorized -- 1,000,000 shares in 1997 and 1996; issued -- 25,000 shares in 1997 and 1996 0 0 Class A common stock, $.01 par value: authorized -- 200,000,000 shares; issued -- 18,157,262 shares in 1997, and 17,945,471 shares in 1996 182 179 Class B common stock, $.01 par value: authorized -- 200,000,000 shares; issued -- 26,045,299 shares in 1997, and 25,592,764 in 1996 260 256 Additional paid-in capital, net 320,123 309,250 Retained earnings, net 515,236 541,383 Less: Treasury stock at cost 1,231 Class B common shares in 1996 0 (42) Total stockholders' equity 836,811 852,036 Total liabilities and stockholders' equity $6,244,266 $5,583,959 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) 1997 1996 Interest income: Loans and leases $ 66,022 $ 58,502 Investments 31,052 14,144 Total interest income 97,074 72,646 Interest expense: Deposits 27,096 27,746 Other debt 44,366 28,189 Total interest expense 71,462 55,935 Net interest income 25,612 16,711 Provision for credit losses 60,364 15,082 Net interest income after provision for credit losses (34,752) 1,629 Noninterest revenues 156,854 171,029 Operating expenses: Amortization of credit card deferred origination costs, net 18,063 20,493 Other operating expenses 130,748 90,002 Total operating expenses 148,811 110,495 Income (loss) before income taxes (26,709) 62,163 Provision (benefit) for income taxes (6,891) 21,133 Net income (loss) $(19,818) $ 41,030 Earnings (loss) per common share $ (.43) $ .91 Weighted average common shares outstanding 46,153 44,875 See Notes to Consolidated Condensed Financial Statements ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Three Months Ended March 31, 1997 1996 OPERATING ACTIVITIES (Unaudited) Net income (loss) $ (19,818) $ 41,030 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Sales/valuation adjustments - equity securities 4,670 (1,858) Depreciation and amortization of intangibles 7,997 3,527 Provision for credit losses 60,364 15,082 Change in other assets and amounts due from credit card securitizations 8,597 (97,207) Change in other liabilities 22,765 36,653 Gain on securitization of receivables (23,929) (20,718) Net cash provided/(used) by operating activities 60,646 (23,491) INVESTING ACTIVITIES Purchase of investments available for sale (7,442,421) (2,468,573) Proceeds from sales of investments available for sale 66,142 369,776 Proceeds from maturing investments available for sale 7,296,061 2,149,348 Change in fed funds sold and interest-bearing deposits (729,229) 69,614 Change in credit card receivables, excluding sales 237,929 (1,851,356) Proceeds from sales/securitizations of receivables 711,515 1,906,167 Purchase of personal finance loan/lease portfolios (63,952) (13,727) Principal collected on personal finance loans 36,583 7,728 Personal finance loans made to customers (658,569) (235,599) Purchases of premises and equipment (31,992) (16,387) Proceeds from sale of premises and equipment 186 43 Excess of cash collections over income recognized on direct financing leases 11,333 17,534 Equipment purchased for direct financing leases (82,435) (74,573) Change in business card receivables,excluding (104,891) (33,650) sales Net change in other loans (11,046) (998) Net cash (used) by investing activities (764,786) (174,653) FINANCING ACTIVITIES Change in demand and savings deposits 26,489 73,593 Proceeds from sales of time deposits 339,971 359,901 Payments for maturing time deposits (267,727) (296,792) Change in repurchase agreements and term fed funds 204,130 (378,000) Proceeds from issuance of subordinated/senior debt 6,880 12,782 Payments on redemption of subordinated/senior debt (18,570) (9,358) Proceeds from issuance of medium-term notes 285,500 305,333 Payments on maturity of medium-term notes (45,000) (52,500) Change in notes payable 153,068 215,832 Proceeds from issuance of stock 7,881 2,252 Cash dividends paid (7,182) (5,927) Net cash provided by financing activities 685,440 227,116 Net (decrease) increase in cash (18,700) 28,972 Cash at beginning of period 165,875 45,714 Cash at end of period 147,175 74,686 See Notes to Consolidated Condensed Financial Statements ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands) March 31, 1997 1) In the opinion of management, the accompanying unaudited and audited consolidated condensed financial statements contain all adjustments necessary to present fairly the financial position of Advanta Corp. and subsidiaries as of March 31, 1997 and December 31, 1996, the results of their operations for the three month periods ended March 31, 1997 and 1996, and their cash flows for the three month periods ended March 31, 1997 and 1996. The results of operations for the three month period ended March 31, 1997 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) The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3) 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. Debt and equity securities classified as Available for Sale are reported at market value under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, unrealized gains and losses on these securities (except those held by the Company's venture capital unit, Advanta Partners LP) are reported as a separate component of stockholders' equity and included in retained earnings. Changes in the fair value of Advanta Partners LP investments are reported in noninterest revenues as equity securities gains or losses. The fair value of publicly traded investments takes into account their quoted market prices with adjustments made for liquidity or sale restrictions. For investments that are not publicly traded, estimates of fair value have been made by management that consider several factors including the investees' financial results, conditions and prospects, and the values of comparable public companies. Because of the nature of these investments, the equity method of accounting is not used in situations where the Company has a greater than 20 percent ownership interest. 4) Loan and lease receivables available for sale represent receivables currently on the balance sheet 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. 5) Loan and lease receivables on the balance sheet, including those available for sale, consisted of the following: March 31, December 31, 1997 1996 Gross loan and lease receivables $2,535,217 $2,656,641 Add: Deferred origination costs, net of deferred fees 47,007 45,546 Less: Reserve for credit losses (105,377) (89,184) Loan and lease receivables, net $2,476,847 $2,613,003 Number of Accounts: Credit cards 740,530 510,392 Other loans and leases 67,468 39,275 Total 807,998 549,667 Receivables and accounts serviced for others consisted of the following: March 31, December 31, 1997 1996 Receivables: Credit cards $10,418,110 $10,646,177 Personal finance loans* 2,872,106 2,377,430 Business loans and leases 625,612 608,945 Total $13,915,828 $13,632,552 Number of Accounts: Credit cards 5,407,813 5,185,624 Personal finance loans* 56,825 41,103 Business loans and leases 133,156 141,673 Total 5,597,794 5,368,400 * Excludes personal finance loans which were never owned by the Company, but which the Company services for a fee ("contract servicing"). Contract servicing receivables were $5.6 million and $3.7 million at March 31, 1997 and December 31, 1996, respectively. The related number of accounts serviced at March 31, 1997 and December 31, 1996 were 83,682 and 59,681, respectively. 6) 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. 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 approximated $16.4 million for the first three months of 1997, compared to $26.5 million for the same period of 1996. The Company amortizes deferred credit card origination costs following the consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") regarding the acquisition of individual credit card accounts from independent third parties (EITF Issue 93-1). Under this consensus amounts paid to third parties are deferred and amortized on a straight-line basis over one year. Costs incurred for originations which were initiated prior to May 20, 1993 continue to be amortized over a 60 month period as was the practice prior to the EITF Issue 93-1 consensus. The Company adopted SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125") effective January 1, 1997. Under SFAS 125, a transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. SFAS 125 requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. The adoption of SFAS 125 did not have a material effect on the Company's financial statements. Under SFAS 125, the Company records a gain on the securitization of credit card receivables sold based on the estimated fair value of assets obtained and liabilities incurred in the sale. The gain recognized at the time of the sale, which principally represents the estimated fair value of the interest-only strip retained, is substantially offset by the estimated fair value of the Company's recourse obligation for anticipated charge-offs. As these estimates are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. During the "revolving period" of each trust, securitization income is recorded representing gains on the sale of new receivables which are sold to the trusts on a continuous basis to replenish the investors' interest in trust receivables which have been repaid by the credit cardholders. Prior to January 1, 1997 the Company recorded excess servicing income on credit card securitizations representing additional cash flow from the receivables initially sold based on estimates of the repayment term, including prepayments. As the estimates used to record excess servicing income were influenced by factors outside the Company's control, there was uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Excess servicing income recorded at the time of each transaction was substantially offset by the establishment of recourse reserves for anticipated charge-offs. During the "revolving period" of each trust, income was recorded based on additional cash flows from the new receivables which were sold to the trusts on a continual basis to replenish the investors' interest in trust receivables which had been repaid by the credit cardholders. Beginning in the third quarter of 1996 credit card securitization activities were affected by the adoption in that quarter of a new charge-off methodology relating to bankruptcies (see Asset Quality), the upward repricing of interest rates and fees, increases in charge-offs and the related impact on reserves. 7) 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, 1997 1996 Balance, beginning of period $ 89,184 $53,494 Current provision 60,364 96,862 Transfer of recourse reserves to on-balance sheet reserves --- 3,000 Reserves on receivables purchased (6,406) 6,404 Net charge-offs (37,765) (70,576) Balance, end of period $105,377 $89,184 8) At March 31, 1997 and December 31, 1996, the Company had $387.0 million and $399.4 million, respectively, of amounts due from credit card securitizations. These amounts include the retained interest-only strip, accrued interest receivable and other amounts related to these securitizations and are net of recourse reserves established. A portion of these amounts is subject to liens held by the providers of credit enhancement facilities for the respective securitizations. 9) Selected Balance Sheet Information Other Assets March 31, December 31, 1997 1996 Retained interest-only strip - personal finance loans $157,957 $149,418 Prepaid assets 100,707 117,934 Accrued interest receivable 93,391 101,021 Deferred costs 45,971 42,252 Due from trustees - mortgage 19,284 14,298 Investments in operating leases 16,264 17,276 Retained interest-only strip - business loans and leases 9,793 14,205 Due from trustees - business loans and leases 6,028 5,326 Current and deferred federal income taxes --- 28,169 Goodwill 5,419 5,795 Other real estate owned 2,229 2,513 Other 171,314 128,076 Total other assets $628,357 $626,283 Other Liabilities March 31, December 31, 1997 1996 Deferred fees and other reserves $ 17,916 $ 86,877 Accounts payable and accrued expenses 61,044 59,432 Accrued interest payable 72,120 55,320 Current and deferred state income taxes 33,800 10,300 Other 115,602 97,852 Total other liabilities $300,482 $309,781 10) Income tax expense reflects an effective tax benefit of approximately 25.8%, for the three month period ended March 31, 1997, compared to a 34.0% tax expense for the comparable 1996 period. The Company accounts for income taxes under the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Income tax expense consisted of the following components: Three Months Ended March 31, 1997 1996 Current: Federal $(6,649) $ 970 State (574) 3,077 Total current (7,223) 4,047 Deferred: Federal 287 17,711 State 45 (625) Total deferred 332 17,086 Total tax expense (benefit) $(6,891) $21,133 The reconciliation of the statutory federal income tax to the consolidated tax expense (benefit) is as follows: Three Months Ended March 31, 1997 1996 Statutory federal income tax $(9,356) $21,757 State income taxes (344) 1,593 Insurance income (1,442) (1,701) Tax credits (1,335) (224) APB 28 adjustment 5,255 --- Other 331 (292) Consolidated tax expense (benefit) $(6,891) $21,133 The net deferred tax asset/(liability) is comprised of the following: March 31, December 31, 1997 1996 Deferred taxes: Gross assets $ 78,015 $112,861 Gross liabilities (85,352) (83,226) Total deferred taxes $ (7,337) $ 29,635 The Company did not record any valuation allowances against deferred tax assets at March 31, 1997 and December 31, 1996. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows: March 31, December 31, 1997 1996 SFAS 91 $(17,279) $(17,870) Loan losses 34,861 26,851 Mortgage banking income 6,010 6,623 Securitization income (33,370) (35,415) Leasing income 3,808 56,447 Other (1,367) (7,001) Net deferred tax assets $ (7,337) $ 29,635 11) The Company has adopted several management incentive plans designed to provide incentives to participating employees to remain in the employ of the Company and devote themselves to its success. Under these plans, certain eligible employees were required and others were given the opportunity to elect to take portions of their anticipated or "target" bonus payments for future years in the form of restricted shares of common stock. The restricted shares 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, 1997, a total of 1,521,510 shares issued under these plans were subject to restrictions and were included in the number of shares outstanding. These shares are considered common stock equivalents in the calculation of earnings per common share. Deferred compensation of $38.0 million and $41.2 million related to these shares of restricted stock is reflected as a reduction of equity at March 31, 1997 and December 31, 1996, respectively. 12) On December 17, 1996, Advanta Capital Trust I, a newly formed statutory business trust established by the Company (the "Trust"), issued in a private offering to two institutional investors $100 million of capital securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The sole assets of the Trust consist of $100 million of 8.99% junior subordinated debentures issued by the Company due December 17, 2026 (the "Junior Subordinated Debentures"). The Capital Securities will be subject to mandatory redemption under certain circumstances, including at any time on or after December 17, 2006 upon the optional prepayment by the Company of the Junior Subordinated Debentures. The Company has guaranteed the obligations of the Trust. The Company used the proceeds from the sale for general corporate purposes. 13) The following table shows the calculation of earnings per common share: Three Months Ended March 31, 1997 1996 Net income (loss) $(19,818) $41,030 less: Class A preferred dividends (141) (141) Net income (loss) available to common shares $(19,959) $40,889 Average common stock outstanding 42,520 40,492 Common stock equivalents 3,633 4,383 Weighted average common shares outstanding (in thousands) 46,153 44,875 Earnings (loss) per common share $ (.43) $ .91 ADVANTA CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW For the three months ended March 31, 1997, the Company reported a net loss of $19.8 million or $.43 per share, compared to net income of $41.0 million or $.91 per share for the same period of 1996. The first quarter loss was the result of several factors, including continuing increases in consumer bankruptcies and charge-offs and lower receivable balances than originally anticipated in the consumer credit card business. The consolidated charge-off rate increased to 5.3% of managed receivables for the first quarter of 1997 from 2.8% for the first quarter of 1996. The managed delinquency rate was 5.5% at March 31, 1997 compared to 3.2% reported last year. The first quarter of 1997 charge-off and delinquency rates reflect the adoption of a new methodology related to credit card bankruptcies in August 1996 (see Asset Quality). This methodology is consistent with that used by others in the credit card industry. The deterioration in the credit quality was confined to the credit card business. Average managed receivables increased $3.3 billion or 25.8% to $16.2 billion from $12.9 billion at March 31, 1996. The managed net interest margin rose to 7.05% for the first quarter up from 6.24% reported in the year ago quarter. The margin improvement reflects a January and March contractual repricing of consumer credit card receivables. The net interest margin is expected to continue to improve as the Company continues to reprice introductory rate receivables and as the Company reprices approximately two-thirds of its consumer credit card receivables by an average of over 200 basis points during the remainder of the year. The operating expense ratio increased to 3.2% for the first quarter of 1997, up from 2.8% reported last year. This Report contains forward-looking statements, including but not limited to projections of future earnings, that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Significant risks and uncertainties include: the Company's managed net interest margin, which in turn is affected by the Company's success in originating new credit card accounts, the receivables volume and initial pricing of new accounts, the impact of repricing existing accounts and account attrition, the mix of account types and interest rate fluctuations; the level of delinquencies, customer bankruptcies, and charge-offs; and the amount and rate of growth in the Company's expenses. Earnings also may be significantly affected by factors that affect consumer debt, competitive pressures from other providers of financial services, the effects of governmental regulation, the amount and cost of financing available to the Company and its subsidiaries, the difficulty or inability to securitize the Company's receivables and the impact of the ratings on debt of the Company and its subsidiaries. Additional risks that may affect the Company's future performance are set forth elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and other filings with the Securities and Exchange Commission. NET INTEREST INCOME Net interest income for the first quarter of 1997 increased $8.9 million or 53.3% to $25.6 million from $16.7 million for the same period of 1996. This resulted from an increase in the owned net interest margin to 2.22% for the first quarter of 1997, from 1.77% for the first quarter of 1996, as well as an $854 million increase in average interest earning assets. 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, 1997 and 1996. Average owned loan and lease receivables and the related interest revenues include certain loan fees. INTEREST RATE ANALYSIS
Three Months Ended March 31, 1997 1996 Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate On-balance sheet Credit cards $ 1,815,920 $ 46,628 10.41% $2,411,626 $ 48,668 8.12% Personal finance loans 430,948 11,850 11.15 224,024 5,633 10.11 Business loans and leases 256,234 8,122 12.78 151,732 4,758 12.60 Other loans 25,165 543 8.75 9,351 185 7.96 Gross receivables 2,528,267 67,143 10.76 2,796,733 59,244 8.52 Investments (2) 2,198,599 31,076 5.57 1,076,602 14,253 5.15 Total interest earning assets $ 4,726,866 $ 98,219 8.35% $3,873,335 $ 73,497 7.58% Interest-bearing liabilities $ 4,724,566 $ 71,642 6.05% $3,666,393 $ 55,935 6.07% Net interest spread 2.30% 1.51% Net interest margin 2.22% 1.77% Off-balance sheet Credit cards $10,506,076 $8,145,795 Personal finance loans 2,532,504 1,626,741 Business loans and leases 617,073 293,335 Total average securitized receivables $13,655,653 $10,065,871 Total average managed receivables $16,183,920 $12,862,604 Managed credit cards $12,321,996 $435,160 14.32% $10,557,421 $336,275 12.81% Managed Net Interest Analysis (3): Interest earning assets $15,232,942 $486,751 12.94% $12,019,130 $361,104 12.07% Interest-bearing liabilities $15,230,642 $221,202 5.86% $11,812,188 $174,346 5.92% Net interest spread 7.08% 6.15% Net interest margin 7.05% 6.24% (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.
MANAGED PORTFOLIO DATA The Company analyzes its financial results on a managed assets basis in addition to analyzing data as reported under generally accepted accounting principles. The following table provides selected information on a managed basis (excluding mortgage contract servicing assets), as well as a summary of the effects of credit card securitizations on selected line items of the Company's condensed consolidated income statements as of and for the three months ended March 31, 1997 and 1996. Three Months Ended March 31, 1997 1996 Balance sheet data: Average managed receivables $16,183,920 $12,862,604 Managed receivables 16,451,045 14,091,129 Total managed assets 20,160,094 16,064,202 Managed net interest margin (on a fully tax equivalent basis) 7.05% 6.24% As a percentage of gross managed receivables: Total loans 30 days or more delinquent 5.5% (1) 3.2% Net charge-offs 5.3% (1) 2.8% Managed Income Statement: Net interest income 264,404 185,907 Provision for credit losses 228,370 85,575 Noninterest revenues 86,068 72,326 Operating expenses 148,811 110,495 Income (loss) before income taxes (26,709) 62,163 (1) The 1997 figures reflect the adoption of a new charge-off methodology in August 1996 relating to credit card bankruptcies (see Asset Quality). With respect to the Managed Income Statement, net interest income includes owned net interest income and securitized net interest income. In the Consolidated Income Statements, securitized net interest income is reported as noninterest revenues. In addition, the provision for credit losses includes the amount by which the provision for credit losses would have been higher had the securitized receivables remained as owned and the provision for securitized credit card losses been equal to actual reported charge-offs (see Asset Quality). Noninterest revenues exclude the net interest income and credit losses associated with the securitized credit card receivables. PROVISION FOR CREDIT LOSSES The provision for credit losses for the first quarter of 1997 was $60.4 million compared to $15.1 million for the comparable period of 1996. This increase was primarily due to higher charge-offs on owned receivables as well as an increase in impaired assets and delinquency levels. Charge-offs on owned receivables increased to $37.8 million for the first quarter of 1997 from $14.9 million for the first quarter of 1996. ASSET QUALITY The reserve for credit losses is maintained for on-balance sheet receivables. This reserve is intended to cover credit losses inherent in the owned loan portfolio. With regard to securitized assets, the fair value of 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 securitized receivables. The Company periodically evaluates its on-balance sheet and recourse reserve requirements and, as appropriate, effects transfers between these accounts. In the third quarter of 1996, the Company adopted a new charge-off methodology related to bankrupt credit card accounts, providing for up to a 90-day (rather than up to a 30-day) investigative period following notification of the bankruptcy petition, prior to charge-off. This new methodology is consistent with the methodology used by others in the credit card industry. The reserve for credit losses on a consolidated owned basis was $105.4 million or 4.2% of receivables at March 31, 1997 compared to $89.2 million or 3.4% of receivables at December 31, 1996 and $56.7 million or 1.9% of receivables at March 31, 1996. On the total managed portfolio, impaired assets were $470.2 million or 2.9% of receivables at March 31, 1997, compared to $420.5 million or 2.6% of receivables at December 31, 1996 and $202.9 million or 1.4% of receivables at March 31, 1996. The 30 day and over delinquency rate on managed credit cards rose to 5.2% at March 31, 1997 up from 2.7% a year ago. The total managed charge-off rate for the first three months of 1997 was 5.3%, up from 3.2% for the full year of 1996 and 2.8% for the first three months of 1996. The charge-off rate on managed credit cards was 6.6% for the first three months of 1997, up from 3.7% for the full year of 1996 and 3.2% for the comparable 1996 period. The charge-off rate on managed personal finance loans was .6% for the first three months of 1997, down from .7% for both the full year of 1996 and the comparable 1996 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 1997 1996 1996 Nonperforming assets $237,333 $191,668 $ 97,962 Accruing loans past due 90 days or more 232,879 228,845 104,953 Impaired assets 470,212 420,513 202,915 Total loans 30 days or more delinquent 903,262 886,717 456,397 As a percentage of gross receivables: Nonperforming assets 1.4% 1.2% .7% Accruing loans past due 90 days or more 1.4 1.4 .7 Impaired assets 2.9 2.6 1.4 Total loans 30 days or more delinquent: New methodology(1) 5.5 5.4 Prior methodology 5.2(2) 3.2 Net charge-offs: Amount $212,710 $479,992 $ 89,843 As a percentage of average gross receivables(annualized) New methodology(1) 5.3% 3.2% Prior methodology 3.5(2) 2.8% CREDIT CARDS - MANAGED Nonperforming assets $109,674 $ 89,064 $ 29,136 Accruing loans past due 90 days or more 232,857 228,822 104,584 Impaired assets 342,531 317,886 133,720 Total loans 30 days or more delinquent 628,676 632,083 311,484 As a percentage of gross receivables: Nonperforming assets .9% .7% .2% Accruing loans past due 90 days or more 1.9 1.8 .9 Impaired assets 2.8 2.5 1.1 Total loans 30 days or more delinquent New methodology(1) 5.2 5.0 Prior methodology 4.6(2) 2.7 Net charge-offs: Amount $203,654 $451,239 $ 83,971 As a percentage of average gross receivables(annualized) New methodology(1) 6.6% 3.7% Prior methodology 4.1(2) 3.2% PERSONAL FINANCE LOANS - MANAGED Nonperforming assets $111,555 $ 93,101 $ 63,618 Total loans 30 days or more delinquent 208,018 194,412 105,308 As a percentage of gross receivables: Nonperforming assets 3.4% 3.4% 3.3% Total loans 30 days or more delinquent 6.3 7.1 5.5 Net charge-offs: Amount $ 4,416 $ 14,981 $ 3,299 As a percentage of average gross receivables(annualized) .6% .7% .7% BUSINESS LOANS AND LEASES - MANAGED Nonperforming assets $ 16,019 $ 9,503 $ 5,208 Total loans 30 days or more delinquent 66,285 59,880 39,416 As a percentage of receivables: Nonperforming assets 1.7% 1.2% 1.1% Total loans 30 days or more deliquent 6.9 7.3 8.1 Net charge-offs: Amount $ 4,641 $ 13,777 $ 2,575 As a percentage of average receivables(annualized) 2.1% 2.3% 2.3% (1) The 1997 and December 31, 1996 figures reflect the adoption of a new charge-off methodology in August 1996 relating to credit card bankruptcies (see Asset Quality). (2) Pro forma calculation reflecting charge-off of all credit card bankruptcies within 30 days of notification. NONINTEREST REVENUES Three Months Ended March 31, 1997 1996 Credit card servicing income $ 47,311 $ 39,028 Income from personal finance activities 32,584 21,995 Credit card securitization income 27,061 65,865 Credit card interchange income 20,213 21,962 Business loan and lease other revenues 15,458 10,875 Insurance revenues, net 10,359 6,519 Other 3,868 4,785 Total noninterest revenues $156,854 $171,029 For the first quarter of 1997, noninterest revenues declined 8% to $156.9 million from $171.0 million for the same period of 1996. Credit card securitization income decreased $38.8 million or 59% to $27.1 million as a result of lower spreads due to significantly higher charge- offs, and a higher level of introductory rate credit cards in the trusts. Credit card servicing income increased $8.3 million due to higher securitized balances. Income from personal finance activities increased $10.6 million or 48% primarily due to the gain on sale from a $550 million REMIC transaction in the first quarter of 1997. Business loan and lease other revenues increased to $15.5 million in the first quarter of 1997, a 42% increase over the first quarter of 1996, primarily due to the 110% growth in average securitized receivables. Insurance revenues, net increased $3.8 million from the first quarter of 1996 to $10.4 million due to the successful marketing of insurance products in the credit card, personal finance and business loan and lease areas. OPERATING EXPENSES Three Months Ended March 31, 1997 1996 Amortization of credit card deferred origination costs, net $ 18,063 $ 20,493 Other operating expenses: Salaries and employee benefits 54,661 37,419 External processing 11,989 9,833 Marketing expense 11,129 11,122 Equipment expense 8,559 4,336 Professional fees 8,295 6,830 Postage expense 7,120 5,806 Credit card fraud losses 6,477 2,349 Occupancy expense 5,291 2,576 Telephone expense 4,907 3,967 Credit and collection expense 4,356 2,585 Other 7,964 3,179 Total other operating expenses $130,748 $ 90,002 Total operating expenses $148,811 $110,495 The amortization of credit card deferred origination costs, net, decreased from $20.5 million for the first three months of 1996 to $18.1 million for the first three months of 1997. Total other operating expenses of $130.7 million for the three months ended March 31, 1997 increased 45.3% from $90.0 million for the same period of 1996. Other operating expenses as a percentage of average managed receivables were 3.2% for the first quarter of 1997, up from 2.8% in the comparable 1996 period. The increase in total other operating expenses is attributable, in part, to a 43% increase in the number of employees from 2,624 at March 31, 1996 to 3,751 at March 31, 1997, including the addition of senior management throughout 1996 to assist in the strategic growth and development of the Company. Other expenses, including equipment expense, external processing, postage and occupancy expense showed increases consistent with the increase in the number of managed customer accounts and the addition of space and new technology to support this growth. 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 1997, the Company, through its subsidiaries, securitized $654.0 million of personal finance loans and $57.4 million of business loan receivables. Cash generated from these transactions was temporarily invested in short-term, high quality investments at money market rates awaiting redeployment to pay down borrowings and to fund future credit card, personal finance and business loan receivable growth. At March 31, 1997, the Company had approximately $1.6 billion of loan and lease receivables and $.9 billion of investments available for sale which could be sold to generate additional liquidity. Funding diversification is an essential component of the Company's liquidity management. The debt securities of Advanta Corp., Advanta National Bank USA ("AUS"), and Advanta National Bank ("ANB") had investment- grade ratings from the nationally recognized rating agencies throughout 1996. These ratings had allowed the Company to further diversify its funding sources. Beginning March 1997, the various rating agencies lowered their ratings on the debt securities of each of Advanta Corp., AUS and ANB by one or two grades. As of May 12, 1997, debt of the two banks, AUS and ANB, was rated at or above the lowest level of investment grade by each agency except Standard & Poors which rated it one level below investment grade; debt of the parent company, Advanta Corp., maintained investment grade ratings (at or above the lowest investment grade level) from three of the rating agencies, but was rated two levels below investment grade by Standard & Poors and by Moody's Investors Service. Efforts continue to develop new sources of funding, both through previously untapped customer segments and through developing new financing structures. In that regard, on May 1, 1997, Advanta Mortgage Corp. USA and its subsidiaries entered into a $500 million secured revolving credit facility. On December 17, 1996, Advanta Capital Trust I, a newly formed statutory business trust established by the Company (the "Trust"), issued in a private offering to two institutional investors $100 million of capital securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The sole assets of the Trust consist of $100 million of 8.99% junior subordinated debentures issued by the Company due December 17, 2026 (the "Junior Subordinated Debentures"). The Capital Securities will be subject to mandatory redemption under certain circumstances, including at any time on or after December 17, 2006 upon the optional prepayment by the Company of the Junior Subordinated Debentures. The Company has guaranteed the obligations of the Trust. The Company used the proceeds from the sale for general corporate purposes. In September 1995, AUS and ANB (the "Banks") established a $2.25 billion bank note program. Under this program, the Banks may issue an aggregate of $2.0 billion of senior bank notes and $250 million of subordinated bank notes. These notes may have maturities ranging from seven days to fifteen years from date of issuance. Advanta Corp. and the Banks, collectively, have a $1 billion revolving credit facility, of which $1 billion is available to each of the Banks and up to a maximum of $500 million is available to Advanta Corp., provided that no more than $1 billion may be outstanding at any time. The Company also filed a shelf registration statement in 1996 with the Securities and Exchange Commission which allows the Company to sell up to $1.6 billion of debt securities. INTEREST RATE SENSITIVITY Interest rate sensitivity refers to net interest income variability resulting from mismatches between asset and liability indices (basis risk) and the effects which changes in market interest rates have on asset and liability repricing mismatches (gap risk). 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. This 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 projections over monthly time periods of up to two years. In managing its interest rate sensitivity position, the Company periodically securitizes receivables, sells and purchases assets, alters the mix and term structure of its funding base, changes its investment portfolio and short-term investment position, and uses derivative financial instruments. Derivative financial instruments are used to manage exposures to changes in interest rates and foreign exchange rates and create match funding of assets and liabilities. Derivative financial instruments, by policy, are not used for any speculative purposes (see discussion under "Derivatives Activities"). The Company has primarily utilized variable rate funding in pricing its credit card securitization transactions in an attempt to match the variable rate pricing dynamics of the underlying receivables sold to the trusts. Variable rate funding is used on the balance sheet as well, in support of unsecuritized receivables which carry variable rates. Although credit card receivable rates are generally set at a spread over a floating rate index, they often 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 addition, the Company at times offers fixed rate pricing to consumers for the introductory rate period of its credit cards. In instances when a significant portion of credit card receivables carry fixed rate introductory pricing or 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 business loan and lease securitizations, both fixed rate and variable rate funding are used depending upon the characteristics of the underlying receivables and the overall risk exposure to the Company. Additionally, basis risk exists in on-balance sheet funding as well as in securitizing credit card receivables at a spread over the London Interbank Offered Rate ("LIBOR") when the rate on the underlying assets is indexed to the prime rate. The Company measures the basis risk resulting from potential variability in the spread between prime and LIBOR and incorporates such risk into the asset and liability management process. Substantially all new credit cards have been issued using LIBOR as the repricing index. This will have the effect of reducing prime/LIBOR basis risk over time. The Company continues to seek cost-effective alternatives for minimizing this risk. 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 affect 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. DERIVATIVES ACTIVITIES The Company utilizes derivative financial instruments for the purpose of managing its exposure to interest rate and foreign currency risks. The Company has a number of mechanisms in place that enable it to monitor and control both market and credit risk from these derivatives activities. At the broader level, all derivatives strategies are managed under a hedging policy approved by the Board of Directors that details the use of such derivatives and the individuals authorized to execute derivatives transactions. All derivatives strategies must be approved by the Company's senior management (Chief Executive Officer, Chief Financial Officer and Treasurer). As part of this approval process, a market risk analysis is completed to determine the potential impact on the Company from severe negative (stressed) movements in the market. By policy, derivatives transactions may only be used to manage the Company's exposure to interest rate and foreign currency risks or for cost reduction and may not be used for speculative purposes. As such, the impact of any derivatives transaction is calculated using the Company's asset/liability model to determine its suitability. Procedures and processes are in place to provide reasonable assurance that prior to and after the execution of any derivatives strategy, market, credit and liquidity risks are fully analyzed and incorporated into the Company's asset/liability and risk measurement models and the proper accounting treatment for the transaction is identified and executed. As of March 31, 1997 and December 31, 1996, all of the Company's derivatives were designated as hedges or synthetic alterations and were accounted for as such. The following table summarizes by notional amounts the Company's derivative instruments: March 31, December 31, 1997 1996 Interest rate swaps $1,795,591 $1,560,444 Swaptions 25,000 153,000 Interest rate options: Caps written 1,279,170 1,413,222 Caps purchased 356,280 365,000 Corridors/Collars 500,000 500,000 Forward contracts 286,826 386,680 Total notional amount $4,242,867 $4,378,346 The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of the Company's exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives contracts. 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 8, 1997, the following nominees for reelection as directors of the Company were elected by the votes indicated below: Director Votes For Votes Withheld Alex W. "Pete" Hart 15,994,658 87,989 Ronald J. Naples 15,994,658 87,989 William A. Rosoff 15,994,658 87,989 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibit is being filed with this report on Form 10-Q: Exhibit Number Description of Document 27 Financial data schedule incorporated by reference to Exhibit 27 to the Company's Current Report on Form 8-K dated April 16, 1997 filed the same date. (b) Reports on Form 8-K. (b)(1) A Current Report on Form 8-K, dated March 17, 1997 was filed by the Company regarding certain Company announcements relating to the retention of BT Wolfensohn, certain management changes and 1997 earnings expectations, as well as a shareholder rights plan and certain by-law amendments. (b)(2) A Current Report on Form 8-K, dated April 16, 1997 was filed by the Company setting forth the financial highlights of the Company's results of operations for the period ended March 31, 1997. 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) May 14, 1997 By /s/David D. Wesselink Senior Vice President, and Chief Financial Officer May 14, 1997 By /s/John J. Calamari Vice President, Finance and Principal Accounting Officer EXHIBIT INDEX Exhibit Description 2 Inapplicable. 3 Inapplicable. 4 Inapplicable. 10 Inapplicable. 11 Inapplicable. 15 Inapplicable. 18 Inapplicable. 19 Inapplicable 22 Inapplicable. 23 Inapplicable. 24 Inapplicable. 27 Financial data schedule incorporated by reference to Exhibit 27 to the Company's Current Report on Form 8-K dated April 16, 1997 filed the same date. 99 Inapplicable. -----END PRIVACY-ENHANCED MESSAGE-----