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