-----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, OPxeAqWVw61zVid36g9aixwc6tQiroul/CoHkR4lAxrvhXFxFz1ENa3RsOoPZNVC xDvEbak9CaLGIFObMefhjQ== 0000096638-97-000015.txt : 19971117 0000096638-97-000015.hdr.sgml : 19971117 ACCESSION NUMBER: 0000096638-97-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-14120 FILM NUMBER: 97718373 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 SEPTEMBER 30, 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 September 30, 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 November 1, 1997 Common Stock, $.01 par value 18,193,512 shares Class B Outstanding at November 1, 1997 Common Stock, $.01 par value 26,131,211 shares Table of Contents Page Part I - Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Income Statements 4 Consolidated Condensed Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Part II Other Information 31 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) September 30, December 31, 1997 1996 ASSETS (Unaudited) Cash $ 109,787 $ 165,875 Federal funds sold and interest-bearing deposits with banks 1,406,688 885,709 Investments available for sale 1,399,007 785,600 Loan and lease receivables, net: Available for sale 1,040,028 1,476,146 Other loan and lease receivables, net 1,599,045 1,136,857 Total loan and lease receivables, net 2,639,073 2,613,003 Premises and equipment, net 136,636 108,130 Amounts due from credit card securitizations 286,680 399,359 Other assets 724,796 626,283 Total assets $6,702,667 $5,583,959 LIABILITIES Deposits $2,942,115 $1,860,058 Debt and other borrowings 2,517,552 2,462,084 Other liabilities 262,813 309,781 Total liabilities 5,722,480 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 -- 18,180,612 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 -- 26,482,135 shares in 1997, and 25,592,764 in 1996 264 256 Additional paid-in capital, net 342,806 309,250 Retained earnings, net 548,638 541,383 Less: Treasury stock at cost, 357,784 Class B common shares in 1997, 1,231 Class B common shares in 1996 (12,713) (42) Total stockholders' equity 880,187 852,036 Total liabilities and stockholders' equity $6,702,667 $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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (Unaudited) (Unaudited) Interest income: Loans and leases $ 95,410 $ 75,449 $224,994 $200,844 Investments 38,231 25,669 107,051 56,367 Total interest income 133,641 101,118 332,045 257,211 Interest expense: Deposits 44,147 28,142 105,342 83,975 Other debt 44,267 49,555 134,331 116,989 Total interest expense 88,414 77,697 239,673 200,964 Net interest income 45,227 23,421 92,372 56,247 Provision for credit losses 48,243 24,230 158,886 66,963 Net interest income after provision for credit losses (3,016) (809) (66,514) (10,716) Noninterest revenues: Gain on sale of credit cards 0 0 0 33,820 Other noninterest revenues 209,080 209,338 560,547 553,880 Total noninterest revenues 209,080 209,338 560,547 587,700 Operating expenses: Amortization of credit card deferred origination costs, net 14,395 22,690 47,916 67,670 Other operating expenses 134,509 118,619 408,363 311,579 Total operating expenses 148,904 141,309 456,279 379,249 Income before income taxes 57,160 67,220 37,754 197,735 Provision for income taxes 14,748 22,864 9,741 67,229 Net income $ 42,412 $ 44,356 $ 28,013 $130,506 Earnings per common share $ .92 $ .98 $ .60 $ 2.89 Weighted average common shares outstanding 46,115 45,181 46,108 45,097 Cash dividends declared: Class A $ .110 $ .090 $ .330 $ .270 Class B $ .132 $ .108 $ .396 $ .324 See Notes to Consolidated Condensed Financial Statements Consolidated Condensed Statements of Changes in Stockholders' Equity
($ in thousands) Class A Class B Class A Class B Additional Retained Total Preferred Preferred Common Common Paid-In Earnings, Treasury Stockholders' Stock Stock Stock Stock Capital net Stock Equity Balance at Dec. 31,1995 $1,010 $0 $175 $240 $280,294 $391,245 $ 0 $672,964 Change in unrealized appreciation of investments (338) (338) Preferred and common cash dividends declared (24,588) (24,588) Exercise of stock options 4 7 7,503 7,514 Issuance of stock Benefit plans 9 2,185 2,228 4,422 Amortization of deferred compensation 11,960 11,960 Termination/tax benefit benefit plans 7,308 (2,270) 5,038 Foreign currency translation adjustment (593) (593) Net Income 175,657 175,657 Balance at Dec. 31, 1996 1,010 0 179 256 309,250 541,383 (42) 852,036 Change in unrealized appreciation of investments 232 232 Preferred and common cash dividends declared (21,247) (21,247) Exercise of stock options 3 5 7,289 7,297 Issuance of stock: Benefit plans 3 2,521 1,297 3,821 Dividend reinvestment plan 788 788 Amortization of deferred compensation 8,995 8,995 Termination/tax benefit- benefit plans 13,963 (13,968) (5) Foreign currency translation adjustment 257 257 Net Income 28,013 28,013 Balance at September 30, 1997 $1,010 $0 $182 $264 $342,806 $548,638 $(12,713) $880,187 See Notes to Consolidated Condensed Financial Statements
ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES (Unaudited) Net income $ 28,013 $ 130,506 Adjustments to reconcile net income to net cash provided by operating activities: Sales/valuation adjustments-equity securities 10,113 (10,978) Depreciation and amortization of intangibles 25,243 12,628 Provision for credit losses 158,886 66,963 Change in other assets and amounts due from credit card securitizations (37,767) (244,655) Change in other liabilities (36,823) 146,469 Gain on securitization of receivables (67,592) (65,334) Net cash provided by operating activities 80,073 35,599 INVESTING ACTIVITIES Purchase of investments available for sale (33,475,817) (25,716,757) Proceeds from sales of investments available for sale 1,057,644 846,689 Proceeds from maturing investments available for sale 31,800,974 24,583,740 Change in fed funds sold and interest-bearing deposits (557,198) (1,323) Change in credit card receivables, excluding sales 369,906 (3,342,542) Proceeds from sales/securitizations of receivables 2,705,381 4,319,128 Purchase of personal finance loan/lease portfolios (136,887) (107,995) Principal collected on personal finance loans 85,324 33,386 Personal finance loans made to customers (2,531,997) (841,943) Purchases of premises and equipment (53,709) (49,078) Proceeds from sale of premises and equipment 226 675 Excess of cash collections over income recognized on direct financing leases 28,520 65,992 Equipment purchased for direct financing leases (242,624) (249,644) Change in business card receivables,excluding sales (314,126) (187,960) Net change in other loans (36,178) (17,519) Net cash used by investing activities (1,300,561) (665,151) FINANCING ACTIVITIES Change in demand and savings deposits 180,973 (14,705) Proceeds from sales of time deposits 1,621,209 1,280,478 Payments for maturing time deposits (720,125) (1,351,480) Change in repurchase agreements and term fed funds (10,000) (373,000) Proceeds from issuance of subordinated/senior debt 11,784 26,359 Payments on redemption of subordinated/senior debt (73,714) (27,709) Proceeds from issuance of medium-term notes 436,333 605,625 Payments on maturity of medium-term notes (203,235) (247,900) Change in notes payable (69,481) 830,942 Proceeds from issuance of stock 11,903 6,466 Cash dividends paid (21,247) (17,686) Net cash provided by financing activities 1,164,400 717,390 Net (decrease) increase in cash (56,088) 87,838 Cash at beginning of period 165,875 45,714 Cash at end of period $ 109,787 $ 133,552 See Notes to Consolidated Condensed Financial Statements ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands) September 30, 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. ("the Company") and subsidiaries as of September 30, 1997 and December 31, 1996, the results of their operations for the three and nine month periods ended September 30, 1997 and 1996, their changes in stockholders' equity for the nine months ended September 30, 1997 and for the twelve months ended December 31, 1996, and their cash flows for the nine month periods ended September 30, 1997 and 1996. The results of operations for the three and nine month periods ended September 30, 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 aggregate cost or fair market value. 5) Loan and lease receivables on the balance sheet, including those available for sale, consisted of the following: September 30, December 31, 1997 1996 Credit cards $ 1,651,977 $ 2,045,219 Personal finance loans 581,883 376,260 Business loans and leases 390,813 214,327 Other loans 57,009 20,835 Gross loan and lease receivables 2,681,682 2,656,641 Add: Deferred origination costs, net of deferred fees 84,002 45,546 Less: Reserve for credit losses: Credit cards (110,084) (76,084) Personal finance loans (5,554) (8,785) Business loans and leases (10,741) (4,241) Other loans (232) (74) Total (126,611) (89,184) Net loan and lease receivables $ 2,639,073 $ 2,613,003 Receivables and accounts serviced for others consisted of the following: September 30, December 31, 1977 1996 Receivables: Credit cards $ 8,895,450 $10,646,177 Personal finance loans* 4,000,250 2,377,430 Business loans and leases 809,935 608,945 Total $13,705,635 $13,632,552 Number of Accounts: Credit cards 4,920,805 5,185,624 Personal finance loans* 70,586 41,103 Business loans and leases 199,964 141,673 Total 5,191,355 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 $8.9 billion and $3.7 billion at September 30, 1997 and December 31, 1996, September 30, 1997 and December 31, 1996, respectively. The related number of accounts serviced at September 30, 1997 and December 31, 1996 were 130,615 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 $39.0 million for the first nine months of 1997, compared to $43.9 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 retained interest-only strip, 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: Nine Months Ended Year Ended September 30, December 31, 1997 1996 Balance, beginning of period $ 89,184 $53,494 Current provision 158,886 96,862 Transfer of recourse reserves to on-balance sheet reserves 1,417 3,000 Reserves on receivables (sold)/purchased, net (6,405) 6,404 Net charge-offs (116,471) (70,576) Balance, end of period $126,611 $89,184 8) At September 30, 1997 and December 31, 1996, the Company had $286.7 million and $399.4 million, respectively, of amounts due from credit card securitizations. These amounts include the income on 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 September 30, December 31, 1997 1996 Retained interest only strip - personal finance loans $198,976 $149,418 Prepaid assets 158,215 117,934 Accrued interest receivable 88,220 101,021 Investment in affordable housing 66,493 48,059 Servicing advances-mortgage 65,576 34,503 Deferred costs 48,142 42,252 Investments in operating leases 13,702 17,276 Due from trustees - business loans and leases 9,149 19,531 Retained interest only strip - business loans and leases 2,884 14,205 Current and deferred federal income taxes 0 28,169 Goodwill 5,224 5,795 Other real estate owned 486 2,513 Other 67,729 45,607 Total other assets $724,796 $626,283 Other Liabilities September 30, December 31, 1997 1996 Accounts payable and accrued expenses $ 56,800 $ 59,432 Accrued interest payable 94,902 55,320 Deferred fees and other reserves 22,733 86,877 Current and deferred income taxes 48,453 10,300 Other 39,925 97,852 Total other liabilities $262,813 $309,781 10)Income tax expense reflects an effective tax rate of approximately 25.8%, for both the three and nine month periods ended September 30, 1997, compared to a 34% tax rate for both of the comparable 1996 periods. 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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Current: Federal $(1,079) $29,065 $14,732 $57,482 State 4,232 276 3,893 4,542 Total current 3,153 29,341 18,625 62,024 Deferred: Federal 12,742 (6,667) (7,115) 5,372 State (1,147) 190 (1,769) (167) Total deferred 11,595 (6,477) (8,884) 5,205 Total tax expense $14,748 $22,864 $ 9,741 $67,229 The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Statutory federal income tax $19,983 $23,536 $13,142 $69,207 State income taxes 2,006 303 1,380 2,844 Insurance income (2,981) 0 (5,177) 0 Tax credits (1,346) (667) (4,075) (1,250) APB 28 adjustment (3,960) 0 3,617 0 Other 1,046 (308) 854 (3,572) Consolidated tax expense $14,748 $22,864 $ 9,741 $67,229 The net deferred tax asset/(liability) is comprised of the following: September 30, December 30, 1997 1996 Deferred taxes: Gross assets $75,619 $112,861 Gross liabilities (78,177) (83,226) Total deferred taxes $(2,558) $ 29,635 The Company did not record any valuation allowances against deferred tax assets at September 30, 1997 and December 31, 1996. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows: September 30, December 31, 1997 1996 SFAS 91 $(16,227) $(17,870) Loan losses 42,723 26,851 Income from personal finance activities 1,548 6,623 Securitization income (31,938) (35,415) Business loan and lease income (8,068) 56,447 Other 9,404 (7,001) Net deferred tax assets (liabilities) $ (2,558) $ 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 September 30, 1997, a total of 1,386,690 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 $29.5 million and $41.2 million related to these shares of restricted stock is reflected as a reduction of equity at September 30, 1997 and December 31, 1996, respectively. 12)In December 1996, Advanta Capital Trust I, a newly formed statutory business trust established by and wholly-owned by the Company (the "Trust"), issued in a private offering $100 million of capital securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The Company used the proceeds from the sale for general corporate purposes. 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 obligations of the Company with respect to the Junior Subordinated Debentures, when considered together with the obligations of the Company under the Indenture relating to the Junior Subordinated Debentures, the Amended and Restated Declaration of Trust relating to the Capital Securities and the Capital Securities Guarantee issued by the Company with respect to the Capital Securities will provide, in the aggregate, a full and unconditional guarantee of payments of distributions and other amounts due on the Capital Securities. In July, 1997, the Company and the Trust exchanged the outstanding Capital Securities and Junior Subordinated Debentures for substantially identical securities which were registered under the Securities Act of 1933, as amended (the "Act"). The Company also exchanged the Capital Securities Guarantee for a substantially identical guarantee which was also registered under the Act. The Trust has no operations or assets separate from its investment in the Junior Subordinated Debentures. Separate financial statements of the Trust are not presented because management has determined that they would not be material to investors. 13)The following table shows the calculation of earnings per common share: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Net income $42,412 $44,356 $28,013 $130,506 less: preferred dividends 0 0 (141) (141) Net income available to common shares $42,412 $44,356 $27,872 $130,365 Average common shares outstanding 42,875 40,818 42,750 40,679 Common stock equivalents 3,240 4,363 3,358 4,418 Weighted average common shares outstanding (in thousands) 46,115 45,181 46,108 45,097 Earnings per common share $ .92 $ .98 $ .60 $ 2.89 In February, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The new standard simplifies the computation of earnings per share (EPS) and increases comparability to international standards. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. "Diluted" EPS, which is computed similarly to fully diluted EPS, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company is required to adopt the new standard in its year-end 1997 financial statements. All prior-period EPS information (including interim EPS) is required to be restated at that time. Early adoption is not permitted. The Company believes that the adoption of SFAS 128 will not have a material effect on EPS. ADVANTA CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended September 30, 1997 was $42.4 million or $.92 per share compared to $44.4 million or $.98 per share for the third quarter of 1996. For the nine months ended September 30, 1997 the Company reported net income of $28.0 million or $.60 per share compared to net income of $130.5 million or $2.89 per share for the same period last year. The net income for the third quarter of 1997 reflects a substantial increase in the managed net interest margin, which increased to 8.01% from 6.19% in the same period of 1996, and includes a $10 million cash rebate received as a result of prior periods' credit card processing performance. Offsetting these increases were increases in operating expenses, a $6 million addition to mortgage contingency reserves and a $10 million addition to credit card loan loss reserves, as a result of increased charge- offs and delinquency rates. The managed charge-off rate increased to 5.4% for the third quarter of 1997 from 3.2% for the same period in 1996. The managed delinquency rate was 5.7% for the third quarter of 1997 compared to 4.2% for the third quarter of 1996. The 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. In the third quarter of 1997, operating expenses increased to $148.9 million compared to $141.3 million for the same period of 1996. The operating expense ratio increased to 3.3% in the third quarter of 1997 from 3.0% for the third quarter of 1996. The increase was due, in part, to increased collection efforts related to the credit card portfolio and to additional costs associated with the substantial growth in personal finance loans including the contract servicing portfolio. That portfolio, which is not a component of managed receivables, grew from an average of $1.8 billion in the third quarter of 1996 to $8.1 billion in the third quarter of 1997. On October 28, 1997, the Company announced that it had reached a definitive agreement under which Fleet Financial Group ("Fleet") would acquire the Company's consumer credit card business and would combine it with Fleet's consumer credit card business. The Company will continue to operate its mortgage and business services companies. The Company intends to seek shareholder approval and the transaction is subject to regulatory approval. The transaction, which is expected to close by late 1997 or early 1998, is anticipated to have a total value to the Company of approximately $1.3 billion, including an after-tax gain of approximately $500 million. The Company also announced that it intends to make a tender offer to repurchase between $750 and $850 million of the Company's common stock in 1998, following the closing of the transaction. The Company presently expects the tender offer to be at a price between $40 and $45 per share. The Company also announced that Dennis Alter would resume his long-held position as Chief Executive Officer of Advanta. Alex W. "Pete" Hart, former Chief Executive Officer, and Jim Allhusen, Group Executive of Advanta Personal Payment Services, are leaving to pursue other interests. 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 of debt of the Company and its subsidiaries. The transaction described above also may be affected by factors which include the timing of closing as well as contingencies. The proposed tender offer also may be affected by factors which include the closing of the transaction and the price at which the Company's stock is trading at the time of the proposed tender offer. 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 third quarter of 1997 increased $21.8 million or 93.1% to $45.2 million from $23.4 million for the same period of 1996. This resulted from an increase in the owned net interest margin to 3.34% for the third quarter of 1997, from 1.87% for the third quarter of 1996. The increase in the net interest margin was negatively impacted by a change in the mix of earning assets. For the third quarter of 1997, the investment portfolio, which generally has lower yields than the loan and lease portfolio, comprised 48.9% of owned interest earning assets versus 35.8% in the comparable 1996 period. The year to date period of 1997 was also impacted by this change in earning asset composition. For the nine months ended September 30, 1997 net interest income rose to $92.4 million, a 64.2% increase over the $56.2 million reported for the same period of 1996. The owned net interest margin rose to 2.51% for the first nine months of 1997 from 1.71% in the same period of 1996. Throughout 1997, the Company continued to realize improved managed net interest margins over 1996 levels. The managed net interest margin climbed to 7.55% during the nine months ended September 30, 1997 compared to 6.08% reported for the same period of 1996. This increase reflects the continued repricing of credit card receivables under the Company's account management initiatives and the contractual repricing of introductory rate receivables throughout the first nine months of 1997. Average managed receivables increased to $16.2 billion for the first nine months of 1997 from $14.5 billion in the same period of 1996. The following tables provide an analysis of both owned and managed interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest earning assets and the average rate paid to fund interest earning assets) for the three and nine month periods ended September 30, 1997 and 1996. Average owned loan and lease receivables and the related interest revenues include certain loan fees. INTEREST RATE ANALYSIS
(Dollars in thousands) Three Months Ended September 30, 1997 1996 Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate On-balance sheet Credit cards $ 1,711,826 $ 68,981 15.99% $ 2,774,292 $ 62,353 8.94% Personal finance loans 711,034 16,000 8.93 291,575 7,756 10.58 Business loans 345,420 10,378 11.95 195,613 5,742 11.68 Other loans 54,583 1,320 9.60 12,326 548 17.69 Gross receivables(2) 2,822,863 96,679 13.59 3,273,806 76,399 9.28 Investments(2) 2,697,379 38,256 5.63 1,822,774 25,696 5.51 Total interest earning assets $ 5,520,242 $134,935 9.70% $ 5,096,580 $102,095 7.93% Interest-bearing liabilities $ 5,528,703 $ 88,414 6.35% $ 5,133,987 $ 77,697 5.99% Net interest spread 3.35% 1.94% Net interest margin 3.34% 1.87% Off-balance sheet Credit cards $9,190,092 $10,143,760 Personal finance loans 3,522,496 1,916,299 Business loans 790,383 462,496 Total average securitized receivables $13,502,971 $12,522,555 Total average managed receivables $16,325,834 $15,796,361 Managed credit cards $10,901,918 $466,792 16.99% $12,918,052 $424,820 13.08% Managed net interest spread (3) 8.02% 6.22% Managed net interest margin (3) 8.01% 6.19% (1)Includes assets held and available for sale and nonaccrual loans and leases. (2)Interest and average rate for tax-free securities, loans and leases Computed on a tax equivalent basis using a statutory rate of 35%. (3)Includes owned interest earning assets/owned interest-bearing liabilities and securitized credit card assets/liabilities.
INTEREST RATE ANALYSIS
(Dollars in thousands) Nine Months Ended September 30, 1997 1996 Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate On-balance sheet Credit cards $ 1,684,932 $ 154,490 12.26% $ 2,695,338 $ 167,326 8.29% Personal finance loans 567,086 41,300 9.74 235,668 18,276 10.36 Business loans 325,470 30,213 12.40 187,328 16,865 12.01 Other loans 37,570 2,561 9.11 10,436 936 11.98 Gross receivables (2) 2,615,058 228,564 11.68 3,128,770 203,403 8.68 Investments (2) 2,508,087 107,124 5.69 1,338,713 56,516 5.49 Total interest earning assets $ 5,123,145 $ 335,688 8.75% $ 4,467,483 $ 259,919 7.72% Interest-bearing liabilities $ 5,124,867 $ 239,673 6.23% $ 4,389,218 $ 200,964 6.06% Net interest spread 2.52% 1.66% Net interest margin 2.51% 1.71% Off-balance sheet Credit cards $ 9,918,540 $ 9,272,172 Personal finance loans 3,022,539 1,785,072 Business loans 683,030 362,158 Total average securitized receivables $13,624,109 $11,419,402 Total average managed receivables $16,239,167 $14,548,172 Managed credit cards $11,603,472 $1,353,459 15.60% $11,967,510 $1,139,601 12.72% Managed net interest spread (3) 7.55% 6.07% Managed net interest margin (3) 7.55% 6.08% (1)Includes assets held and available for sale and nonaccrual loans and leases. (2)Interest and average rate for tax-free securities, loans and leases computed on a tax equivalent basis using a statutory rate of 35%. (3)Includes owned interest earning assets/owned interest-bearing liabilities and securitized credit card assets/liabilities.
MANAGED PORTFOLIO DATA The Company analyzes its financial results on a managed assets basis in addition to analyzing data as reported under generally accepted accounting principles. The following table provides selected information on a managed basis (excluding mortgage contract servicing assets), as well as a summary of the effects of credit card securitizations on selected line items of the Company's consolidated condensed income statements as of and for the nine months ended September 30, 1997 and 1996. Nine Months Ended September 30, 1997 1996 Balance sheet data: ($ in thousands) Average managed receivables $16,239,167 $14,548,172 Managed receivables 16,387,317 15,797,358 Total managed assets 20,795,966 18,356,622 Managed net interest margin (on a fully tax equivalent basis) 7.55% 6.08% As a percentage of gross managed receivables: Total loans 30 days or more delinquent New methodology (1) 5.7% 4.2% Prior methodology 4.0% Net charge-offs New methodology (1) 5.4% 3.0% Prior methodology 3.3% Managed Income Statement: Net interest income $ 860,004 $ 625,081 Provision for credit losses 666,760 331,385 Noninterest revenues 300,789 283,288 Operating expenses 456,279 379,249 Income before income taxes $ 37,754 $ 197,735 (1)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 credit card receivables remained as owned and the provision for securitized credit card losses been equal to actual reported charge-offs (see Asset Quality). Noninterest revenues on the Managed Income Statement 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 third quarter of 1997 was $48.2 million compared to $24.2 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 $40.0 million for the third quarter of 1997 from $17.6 million for the third quarter of 1996. For the first nine months of 1997 the provision for credit losses increased to $158.9 million from $67.0 million for the same period of 1996, resulting from an increase in charge-offs on owned receivables to $116.5 million in the first nine months of 1997 from $45.9 million during the same period of 1996 as well as increases in impaired assets and delinquency levels. 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 $126.6 million or 4.7% of receivables at September 30, 1997 compared to $89.2 million or 3.4% of receivables at December 31, 1996 and $77.6 million or 2.6% of receivables at September 30, 1996. On the total managed portfolio, impaired assets were $456.6 million or 2.8% of receivables at September 30, 1997, up from $420.5 million or 2.6% of receivables at December 31, 1996 and $307.1 million or 1.9% of receivables at September 30, 1996. On the total owned portfolio, impaired assets were $74.2 million or 2.8% of receivables at September 30, 1997, compared to $70.4 million or 2.7% of receivables at December 31, 1996, and $54.9 million or 1.8% of receivables at September 30, 1996. The 30 day and over delinquency rate on managed credit cards rose to 5.2% at September 30, 1997 up from 3.9% a year ago. The 30-day and over delinquency rate on owned credit cards rose to 6.5% at September 30, 1997, from 3.5% at September 30, 1996. The credit risk associated with both the owned and managed portfolios are very similar; impaired asset, delinquency and charge-off ratios on the owned portfolio, which is largely comprised of retained interests in credit card trusts, are affected by the amount and timing of securitizations. Additionally, the ratios are affected by the lower level of owned credit card receivables in 1997. The total managed charge-off rate for the first nine months of 1997 was 5.4%, up from 3.2% for the full year of 1996 and 3.0% for the first nine months of 1996. The charge-off rate on managed credit cards was 7.1% for the first nine months of 1997, up from 3.7% for the full year of 1996 and 3.4% for the comparable 1996 period. The charge-off rate on managed personal finance loans was .7% for the first nine months of 1997, equal to the rate for both the full year of 1996 and the comparable 1996 period. The charge-off rate on managed business loans and leases was 3.0% for the first nine months of 1997, up from 2.3% for the full year of 1996 and 2.2% for the first nine months of 1996. The total owned charge- off rate rose to 5.9% for the nine months ended September 30, 1997 up from 2.3% for the full year of 1996 and 2.0% for the comparable period in 1996. The charge-off rate on owned credit cards was 8.5% for the first nine months of 1997, up from 2.5% for the full year of 1996 and 2.1% for the first nine months of 1996. The charge-off rate for owned personal finance loans was .8% for the nine months ended September 30, 1997, down from 1.3% for the full year of 1996 and 1.4% for the first nine months of 1996. The charge-off rate on owned business loans rose to 2.4% for the nine months ended September 30, 1997 compared to 1.5% for the full year of 1996 and the first nine months of 1996. The following tables provide a summary of impaired assets, delinquencies and charge-offs, as of and for the year-to-date periods indicated. ($ in thousands) September 30, December 31, September 30, CONSOLIDATED - MANAGED 1997 1996 1996 Nonperforming assets $272,946 $191,668 $152,723 Accruing loans past due 90 days or more 183,651 228,845 154,340 Impaired assets 456,597 420,513 307,063 Total loans 30 days or more delinquent 940,595 886,717 668,718 As a percentage of gross receivables: Nonperforming assets 1.7% 1.2% 1.0% Accruing loans past due 90 days or more 1.1 1.4 1.0 Impaired assets 2.8 2.6 1.9 Total loans 30 days or more delinquent: New methodology(1) 5.7 5.4 4.2 Prior methodology(2) 5.2 4.0 Net charge-offs: Amount(1) $656,920 $479,992 $325,422 As a percentage of average gross receivables(annualized) New methodology(1) 5.4% 3.2% 3.0% Prior methodology(2) 3.5 3.3 CREDIT CARDS - MANAGED Nonperforming assets $ 98,781 $ 89,064 $ 69,702 Accruing loans past due 90 days or more 183,574 228,822 154,321 Impaired assets 282,355 317,886 224,023 Total loans 30 days or more delinquent 548,298 632,083 494,308 As a percentage of gross receivables: Nonperforming assets .9% .7% .6% Accruing loans past due 90 days or more 1.7 1.8 1.2 Impaired assets 2.7 2.5 1.8 Total loans 30 days or more delinquent New methodology(1) 5.2 5.0 3.9 Prior methodology(2) 4.6 3.7 Net charge-offs: Amount(1) $615,105 $451,239 $305,795 As a percentage of average gross receivables(annualized) New methodology(1) 7.1% 3.7% 3.4% Prior methodology(2) 4.1 3.7 PERSONAL FINANCE LOANS - MANAGED Nonperforming assets $152,887 $ 93,101 $ 75,611 Total loans 30 days or more delinquent 322,860 194,412 125,989 As a percentage of gross receivables: Nonperforming assets 3.3% 3.4% 3.2% Total loans 30 days or more delinquent 7.1 7.1 5.4 Net charge-offs: Amount $ 19,075 $ 14,981 $ 10,762 As a percentage of average gross receivables(annualized) .7% .7% .7% BUSINESS LOANS AND LEASES - MANAGED Nonperforming assets $ 21,123 $ 9,503 $ 7,402 Impaired assets 21,195 9,503 7,402 Total loans 30 days or more delinquent 68,502 59,880 48,361 As a percentage of receivables: Nonperforming assets 1.8% 1.2% 1.0% Impaired assets 1.8 1.2 1.0 Total loans 30 days or more delinquent 5.7 7.3 6.7 Net charge-offs: Amount $ 22,737 $ 13,777 $ 8,872 As a percentage of average receivables(annualized) 3.0% 2.3% 2.2% (1) 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. September December September 30, 31, 30, CONSOLIDATED - OWNED 1997 1996 1996 Nonperforming assets $ 37,079 $ 29,822 $ 27,612 Accruing loans past due 90 days or more 37,116 40,597 27,251 Impaired assets 74,195 70,419 54,863 Total loans 30 days or more delinquent 159,244 145,613 109,654 As a percentage of gross receivables: Nonperforming assets 1.4% 1.1% .9% Accruing loans past due 90 days or more 1.4 1.5 .9 Impaired assets 2.8 2.7 1.8 Total loans 30 days or more deliquent: New methodology(1) 5.9 5.5 3.6 Prior methodology(2) 5.3 3.5 Net charge-offs: Amount(1) $116,471 $ 70,576 $ 45,911 As a percentage of average gross receivables(annualized) New methodology(1) 5.9% 2.3% 2.0% Prior methodology(2) 2.5 2.1 CREDIT CARDS - OWNED Nonperforming assets $ 19,149 $ 13,890 $ 12,079 Accruing loans past due 90 days or more 37,039 40,574 27,232 Impaired assets 56,188 54,464 39,311 Total loans 30 days or more delinquent 107,661 107,263 88,525 As a percentage of gross receivables: Nonperforming assets 1.2% .7% .5% Accruing loans past due 90 days or more 2.2 2.0 1.1 Impaired assets 3.4 2.7 1.5 Total loans 30 days or more delinquent New methodology(1) 6.5 5.2 3.5 Prior methodology(2) 5.0 3.3 Net charge-offs: Amount(1) $107,232 $ 64,520 $ 41,373 As a percentage of average gross receivables(annualized) New methodology(1) 8.5% 2.5% 2.1% Prior methodology(2) 2.7 2.2 PERSONAL FINANCE LOANS - OWNED Nonperforming assets $ 11,279 $ 13,005 $ 13,265 Total loans 30 days or more delinquent 33,862 28,546 14,463 As a percentage of gross receivables: Nonperforming assets 1.9% 3.5% 6.2% Total loans 30 days or more deliquent 5.8 7.6 6.7 Net charge-offs: Amount $ 3,442 $ 3,060 $ 2,428 As a percentage of average gross receivables (annualized) .8% 1.3% 1.4% BUSINESS LOANS AND LEASES - OWNED Nonperforming assets $ 6,496 $ 2,927 $ 2,260 Impaired assets 6,568 2,927 2,260 Total loans 30 days or more delinquent 17,416 9,462 6,606 As a percentage of receivables: Nonperforming assets 1.7 % 1.4% .9% Impaired assets 1.7 1.4 .9 Total loans 30 days or more delinquent 4.5 4.4 2.6 Net charge-offs: Amount $ 5,794 $ 3,001 $ 2,117 As a percentage of average receivables (annualized) 2.4% 1.5% 1.5% (1) 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 ($ in thousands) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Gain on sale of credit cards $ 0 $ 0 $ 0 $ 33,820 Other noninterest revenues: Credit card securitization income 58,445 65,592 133,906 183,192 Credit card servicing income income 43,169 46,365 136,152 128,977 Credit card interchange income 21,035 26,682 63,222 75,881 Income from personal finance activities 43,260 30,350 116,430 76,477 Business loan and lease other revenues 21,924 13,974 54,293 38,735 Insurance revenues, net 8,260 13,886 28,605 28,198 Other 12,987 12,489 27,939 22,420 Total other noninterest revenues $209,080 $209,338 $560,547 $553,880 Total noninterest revenues $209,080 $209,338 $560,547 $587,700 Total noninterest revenues for the third quarter of 1997 were $209.1 million, level with the $209.3 million reported for the same period of 1996. For the nine month period ended September 30, 1997 total noninterest revenues were $560.5 million, down from $587.7 reported for the same period of 1996. The 1996 year-to-date amount includes a $33.8 million gain on the sale of credit card customer relationships. Although total other noninterest revenues were flat in the third quarter of 1997 compared to the same period of 1996, revenues from credit card securitization activities have decreased while revenues from personal finance activities and business loan and lease revenues have increased. Income from personal finance activities totalled $43.3 million for the third quarter of 1997, up more than 42.5% from the $30.4 million reported for the third quarter of 1996. This increase resulted from a $1.3 billion increase in personal finance loans securitized year over year, an increase in contract servicing fees, and is net of a $6 million addition to contingency reserves. Business loan and lease revenues rose almost 57% to $21.9 million for the third quarter of 1997 from $14.0 million for the same period last year. Credit card securitization income declined to $58.4 million for the three months ended September 30, 1997 from $65.6 million reported for the same period last year and credit card servicing income decreased by $3.2 million or 6.9% partially due to lower securitized balances for the quarter. Credit card interchange income decreased by 21.2% during the third quarter of 1997 to $21.0 million from $26.7 million for the same period of 1996. Insurance revenues of $8.3 million in the third quarter of 1997 were down from the $13.9 million reported for the third quarter in 1996, due, in part, to the decrease in credit card receivables. During the nine month period ended September 30, 1997, total other noninterest revenues increased to $560.5 million from $553.9 reported for the same period of 1996. This increase is attributable primarily to higher personal finance and business loan noninterest revenues, and other credit card revenues included in other noninterest revenues, offset by decreases in credit card securitization income and credit card interchange income. OPERATING EXPENSES ($ in thousands) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Amortization of credit card deferred origination costs, net $ 14,395 $ 22,690 $ 47,916 $ 67,670 Other operating expenses: Salaries and employee benefits 63,964 50,893 178,594 132,081 Marketing 14,277 7,902 37,928 24,371 Professional fees 13,533 10,349 29,638 26,723 Equipment expense 8,491 6,051 26,759 15,229 Postage 6,489 6,214 21,232 18,893 Telephone expense 5,450 4,979 15,667 13,599 Occupancy expense 5,369 3,817 16,765 9,846 Credit and collection expense 5,121 3,969 15,155 9,594 Credit card fraud losses 4,554 8,220 17,730 16,982 External processing 4,126 11,043 29,572 30,848 Other 3,135 5,182 19,323 13,413 Total other operating expenses $134,509 $118,619 $408,363 $311,579 Total operating expenses $148,904 $141,309 $456,279 $379,249 Total operating expenses of $148.9 million for the quarter ended September 30, 1997 increased 5.4% from $141.3 million in the same period of 1996. The amortization of credit card deferred origination costs, net, decreased from $22.7 million for the three months ended September 30, 1996 to $14.4 million for the comparable period of 1997. Total other operating expenses as a percentage of average managed receivables were 3.3% for the third quarter of 1997, up from 3.0% in the comparable period in 1996. The increase in operating expenses is attributable in part to an increase in the number of employees from 3,084 at September 30, 1996 to 4,168 at September 30, 1997 primarily in the credit card collection area and to support the growth in loan production and serviced receivables in the personal finance area. Marketing expenses increased 80.7% as a result of increased new business advertising of the Company's personal finance and business card products, and increased advertising of the credit card products with the primary purpose of retaining current customer relationships. Professional fees increased to $13.5 million in the third quarter of 1997 from $10.3 million in the third quarter of 1996 primarily as a result of consulting fees in the credit card area as well as new corporate initiatives. Other expenses including equipment and occupancy expense showed increases consistent with the current and projected increase in the number of employees and serviced customer accounts and the addition of space and new technology required to support this growth. External processing declined to $4.1 million in the third quarter of 1997 from $11.0 million in the same quarter of 1996 as a result of a $10.0 million cash rebate for prior periods' credit card processing performance. Without the rebate, external processing costs would have increased by $3.1 million primarily as a result of customer retention and relationship management programs in our credit card area. Total operating expenses for the first nine months of 1997 increased 20.3% to $456.3 million from $379.2 during the same period in 1996. The operating expense ratio increased to 3.4% from 2.9% reported in 1996. The increase in expenses is consistent with an increase in headcount and accounts and customers serviced throughout the organization. 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 nine months of 1997, the Company, through its subsidiaries, securitized $2.3 billion of personal finance loans and $206.4 million of business loan receivables. In addition, funds were raised during this same period through an increase in deposits at the Banks (as defined below) and unsecured notes totalling approximately $1 billion. 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. Cash and equivalents exceeded amounts normally held to provide liquidity protection subsequent to the Company's March 17, 1997 announcement relating to expected 1997 financial results. At September 30, 1997, the Company had approximately $1.0 billion of loan and lease receivables and $1.4 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 (together with AUS, the "Banks") 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. and the Banks by one or two grades. More recently, on October 28, 1997, Moody's Investors Service ("Moody's") again lowered its rating of the debt securities of each of Advanta Corp. and ANB (as defined below). As of October 28, 1997, debt of ANB was rated at or above the lowest level of investment grade by each agency except Standard & Poors and Moody's, each of which rated it one level below investment grade; senior 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 three levels below investment grade by Moody's. Effective June 30, 1997, Advanta National Bank was merged into AUS, and AUS was renamed Advanta National Bank ("ANB"). The combined institution is larger, more effectively capitalized, and more efficient to run than the two separate entities. Efforts continue to develop new sources of funding, both through previously untapped customer segments and through development of 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, $250 million of which is committed. Also, deposit sources proved readily expandable as demonstrated in the growth noted above. In December 1996, Advanta Capital Trust I, a newly formed statutory business trust established by and wholly-owned by the Company (the "Trust"), issued in a private offering $100 million of capital securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The Company used the proceeds from the sale for general corporate purposes. 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 obligations of the Company with respect to the Junior Subordinated Debentures, when considered together with the obligations of the Company under the Indenture relating to the Junior Subordinated Debentures, the Amended and Restated Declaration of Trust relating to the Capital Securities and the Capital Securities Guarantee issued by the Company with respect to the Capital Securities will provide, in the aggregate, a full and unconditional guarantee of payments of distributions and other amounts due on the Capital Securities. In July, 1997, the Company and the Trust exchanged the outstanding Capital Securities and Junior Subordinated Debentures for substantially identical securities which were registered under the Securities Act of 1933, as amended (the "Act"). The Company also exchanged the Capital Securities Guarantee for a substantially identical guarantee which was also registered under the Act. The Trust has no operations or assets separate from its investment in the Junior Subordinated Debentures. Separate financial statements of the Trust are not presented because management has determined that they would not be material to investors. Advanta Corp. and ANB together have a $1 billion revolving credit facility, of which $1 billion is available to ANB and up to a maximum of $500 million is available to Advanta Corp., subject to the terms and conditions of the facility, including 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. Approximately $600 million of this shelf is still available to the Company. 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 matched 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 personal finance 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. 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 September 30, 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: ($ in thousands) Estimated Fair Value September 30, December 31, September 30, 1997 1997 1996 Asset/(Liability) Interest rate swaps $2,393,756 $1,560,444 $22,096 Swaptions 0 153,000 0 Interest rate options: Caps written 1,011,195 1,413,222 (443) Caps purchased 321,195 365,000 443 Corridors/Collars 0 500,000 0 Forward contracts 478,548 386,680 (1,436) Total notional amount $4,204,694 $4,378,346 $20,660 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. The fair value of interest rate swaps, options and forward contracts is the estimated amount that the Company would pay or receive to terminate the agreement at the reporting date, taking into account current interest and foreign exchange rates and the current creditworthiness of the counterparty. The Company's credit exposure to derivatives, with the exception of caps written, is represented by contracts with a positive fair value without giving consideration to the value of any collateral exchanged. For caps written, credit exposure does not exist since the counterparty has performed its obligation to pay the Company a premium payment. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On June 30, 1997, purported shareholders of the Company who are represented by a group of law firms filed a putative class action complaint against the Company and several of its current and former officers and directors in the United States District Court for the Eastern District of Pennsylvania. A second, similar complaint was filed in the same court a few days later by a different group of purported Company shareholders and a different group of law firms. Both complaints allege that the Company made misrepresentations in certain of its public filings and statements in violation of the Securities Exchange Act of 1934. The complaints seek damages of an unspecified amount. The Company believes that the complaints are without merit and will vigorously defend itself against the actions. On August 25, 1997, a cardholder of the Company instituted a putative class action complaint against the Company and certain other subsidiaries in Delaware Superior Court for New Castle County. Subsequently, on September 8, 10, and 12 and on October 2, 1997, similar actions were filed in Orange County California Superior Court, the United States District Court for the Eastern District of Tennessee, Delaware Superior Court and the Circuit Court of Covington County, Alabama, respectively. The complaints allege that cardholder accounts in the specific program were improperly repriced to a higher percentage rate of interest. The complaints assert various violations of federal and state law with regard to such repricings, and each seeks damages of an unspecified amount. The program at issue comprises a very small portion of the Company's consumer credit card receivables. The Company believes that the complaints are without merit and will vigorously defend itself against the actions. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibits are being filed with this report on Form 10-Q: Exhibit Number Description of Document 12 Computation of Ratio of Earnings to Fixed Charges. 27 Financial data schedule incorporated by reference to Exhibit 27 to the Company's Current Report on Form 8-K dated October 15, 1997 filed the same date. (b) Reports on Form 8-K. (b)(1) A current Report on Form 8-K, dated July 14, 1997 was filed by the Company describing certain shareholders' litigation. (b)(2) A current Report on Form 8-K, dated July 16, 1997 was filed by the Company setting forth the financial highlights of the Company's results of operations for the period ended June 30, 1997. (b)(3) A Current Report on Form 8-K, dated July 28, 1997 was filed by the Company incorporating the calculation of the Earnings to Fixed Charges Ratio as of March 31, 1997 into Registration Statement No. 333-05701. (b)(4) A Current Report on Form 8-K, dated August 7, 1997 was filed by the Company incorporating certain documentation into Registration Statement No. 333-05701 including a form of distribution agreement for the Company's retail medium term notes and the form of notes with respect thereto. (b)(5) A Current Report on Form 8-K, dated September 26, 1997 was filed by the Company incorporating certain documentation into Registration Statement No. 333-05701 including a form of distribution agreement for the Company's Medium Term Notes, Series E, and the form of notes with respect thereto. (b)(6) A Current Report on Form 8-K, dated October 15, 1997 was filed by the Company setting forth the financial highlights of the Company's results of operations for the period ended September 30, 1997. A Financial Data Schedule was included as an exhibit in this Form 8-K. (b)(7) A Current Report on Form 8-K, dated October 28, 1997 was filed by the Company reporting certain announcements made by the Company that day. 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) November 14, 1997 By /s/Elizabeth H. Mai Senior Vice President and General Counsel November 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. 12 Computation of Ratio of Earnings to Fixed Charges. 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 October 15, 1997 filed the same date. 99 Inapplicable. EX-12 2 EXHIBIT 12 Exhibit 12 ADVANTA CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Net earnings $ 42,412 $ 44,356 $ 28,013 $130,506 Federal and state income taxes 14,748 22,864 9,741 67,229 Earnings before income taxes 57,160 67,220 37,754 197,735 Fixed charges: Interest 88,414 77,697 239,673 200,964 One-third of all rentals (A) 746 781 2,572 1,947 Preferred stock dividend of subsidiary trust 2,248 0 6,743 0 Total fixed charges 91,408 78,478 248,988 202,911 Earnings before income taxes and fixed charges $148,568 $145,698 $286,742 $400,646 Ratio of earnings to fixed charges (A) 1.63x 1.86x 1.15x 1.97x (A) For purposes of computing these ratios, "earnings" represent income before income taxes plus fixed charges, and "fixed charges" consist of interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense on operating leases, and preferred stock dividends of subsidiary trust. -----END PRIVACY-ENHANCED MESSAGE-----