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, 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 receding 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 2, 1994
Common Stock, $.01 par value 17,347,468 shares
Class B Outstanding at November 2, 1994
Common Stock, $.01 par value 23,113,477 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)
September 30, December 30,
1994 1993
(Unaudited)
ASSETS
Cash $ 36,292 $ 31,162
Federal funds sold and interest-bearing
deposits with banks 295,570 234,196
Investments available for sale 296,649 308,026
Loan and lease receivables, net:
Available for sale 1,180,561 667,774
Other loan and lease receivables, net 181,533 614,879
Total loan and lease receivables, net 1,362,094 1,282,653
Premises and equipment, net 24,653 17,045
Amounts due from credit card
securitizations 133,032 117,764
Other assets 200,678 149,349
Total assets $2,348,968 $2,140,195
LIABILITIES
Deposits $1,015,581 $1,254,881
Debt and other borrowings 826,412 473,699
Other liabilities 91,257 68,874
Total liabilities 1,933,250 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 -- 17,347,468 shares in 1994
and 17,240,064 in 1993 173 172
Class B common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 23,113,127 in 1994 and
22,603,088 in 1993 231 226
Additional paid in capital, net 174,509 166,646
Retained earnings, net 240,041 174,687
Less: Treasury stock at cost, 25,074
Class B common shares in 1994 (246) 0
Total stockholders' equity 415,718 342,741
Total liabilities and stockholders'
equity $2,348,968 $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 Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
1994 1993 1994 1993
Interest income:
Loans and leases $19,333 $35,821 $ 71,665 $ 97,396
Investments 7,300 5,368 20,346 18,162
Total interest income 26,633 41,189 92,011 115,558
Interest expense:
Deposits 11,091 13,455 35,011 40,191
Other debt 11,528 6,221 29,943 19,379
Total interest expense 22,619 19,676 64,954 59,570
Net interest income 4,014 21,513 27,057 55,988
Provision for credit losses 5,750 8,027 28,013 21,572
Net interest income after
provision for credit losses (1,736) 13,486 (956) 34,416
Noninterest revenues:
Gain on sale of credit cards 0 0 18,352 0
Other noninterest revenues 97,202 64,948 266,136 180,337
Total noninterest revenues 97,202 64,948 284,488 180,337
Operating expenses 53,313 44,719 161,700 126,377
Income before income taxes 42,153 33,715 121,832 88,376
Provision for income taxes 15,386 13,430 44,384 33,476
Net income before
extraordinary item 26,767 20,285 77,448 54,900
Extraordinary item, net
(See Note 12) 0 0 0 (1,273)
Net income $26,767 $20,285 $ 77,448 $ 53,627
Earnings per common share
before extraordinary item $ .65 $ .50 $ 1.88 $ 1.40
Earnings per common share $ .65 $ .50 $ 1.88 $ 1.37
Weighted average common
shares outstanding 41,192 40,732 41,095 39,009
See Notes to Consolidated Condensed Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
1994 1993
OPERATING ACTIVITIES (Unaudited)
Net income $ 77,448 $ 53,627
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from sales/securitizations of
receivables 1,656,566 1,087,447
Purchase of mortgage/lease portfolios (129,900) (60,503)
Principal collected on mortgages 17,352 17,900
Mortgages made to customers (337,215) (348,633)
Depreciation and amortization of intangibles 5,712 3,738
Provision for credit losses 28,013 21,572
Change in other assets and amounts due from
credit card securitizations (22,940) (9,476)
Change in other liabilities 28,899 37,400
Gain on securitization of mortgages and leases (20,013) (11,239)
Loss on repurchase of senior subordinated
debentures 0 1,928
Net cash provided by operating activities 1,303,922 793,761
INVESTING ACTIVITIES
Purchase of investments available for sale (1,560,723) (596,288)
Proceeds from sales of investments available
for sale 662,896 512,780
Proceeds from maturing investments available
for sale 901,248 72,276
Change in fed funds sold and interest-bearing
deposits (61,374) 58,764
Change in credit card receivables, excluding
sales (1,241,494) (857,403)
Change in premises and equipment (12,783) (10,213)
Excess of cash collections over income
recognized on direct financing leases 14,458 16,669
Equipment purchased for direct financing
lease contracts (111,399) (65,588)
Net change in other loans (3) 134
Net cash used by investing activities (1,409,174) (868,869)
FINANCING ACTIVITIES
Increase in demand and savings deposits 68,431 6,703
Proceeds from sales of time deposits 290,799 514,262
Payments for maturing time deposits (598,530) (548,163)
Change in repurchase agreements 164,450 0
Proceeds from issuance of subordinated debt 22,027 113,309
Payments on redemption of subordinated debt (44,051) (84,758)
Redemption of senior subordinated debentures 0 (36,404)
Proceeds from issuance of notes payable to
banks 2,300 104,657
Repayment of notes payable to banks (9,787) (82,916)
Proceeds from issuance of medium term notes 217,774 0
Proceeds from issuance of stock 3,836 92,968
Cash dividends paid (6,867) (5,076)
Net cash provided by financing activities 110,382 74,582
Net increase/(decrease) in cash 5,130 (526)
Cash at beginning of period 31,162 35,753
Cash at end of period $ 36,292 $ 35,227
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
September 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 September 30, 1994 and
December 31, 1993, the results of their operations for the three
and nine month periods ended September 30, 1994 and 1993, and
their cash flows for the nine month periods ended September 30,
1994 and 1993. The results of operations for the three and nine
month periods ended September 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
gains and losses on these securities are reported as a separate
component of stockholders' 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:
September 30, December 31,
1994 1993
Gross loan and lease receivables $1,363,403 $1,277,305
Add: Deferred origination costs,
net of deferred fees 45,881 36,575
Less: Reserve for credit losses (47,190) (31,227)
Loan and lease receivables, net $1,362,094 $1,282,653
Number of Accounts:
Credit cards 204,245 514,334
Other loans and leases 9,369 8,035
Total 213,614 522,369
<PAGE>
Receivables and accounts serviced for others consisted of the
following:
September 30, December 31,
1994 1993
Receivables:
Credit cards $3,955,859 $2,790,719
Mortgage loans 1,156,213 1,058,524
Leases 166,417 119,613
Total $5,278,489 $3,968,856
Number of Accounts: 3,010,922 2,183,024
Credit cards
Mortgage loans 24,097 23,925
Leases 34,599 27,566
Total 3,069,618 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 $35.2 million and $20.5 million in the first nine months of
1994 and 1993, respectively. For credit card originations
initiated prior to May 20, 1993, deferred origination costs have
been and continue to be 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 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 adoption of a 12 month amortization period for
deferred credit card origination costs, the Company no longer
writes 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:
Nine Months Ended Year Ended
September 30, December 31,
1994 1993
Balance, beginning of period $ 31,227 $ 40,228
Current provision 28,013 29,802
Transfer of reserves to
recourse reserves 0 (12,027)
Transfer of recourse
reserves to mortgage
reserves 12,469 0
Net charge-offs (24,519) (26,776)
Balance, end of period $ 47,190 $ 31,227
<PAGE>
7) At September 30, 1994 and December 31, 1993, the Company had $133.0
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
September 30, December 31,
1994 1993
Excess mortgage servicing rights $ 73,408 $ 57,017
Accrued interest receivable 32,703 25,735
Prepaid assets 21,244 16,307
Deferred costs 7,936 5,583
Due from trustees - mortgage 6,263 6,040
Excess servicing - leasing 5,518 1,287
Goodwill 5,400 5,648
Other real estate owned 4,295 1,447
Due from trustees - leasing 2,119 1,297
Other 41,792 28,988
Total other assets $200,678 $149,349
Other Liabilities
September 30, December 31,
1994 1993
Current and deferred income taxes $33,206 $37,844
Accounts payable and accrued
expenses 20,133 15,139
Accrued interest payable 21,070 8,387
Other 16,848 7,504
Total other liabilities $91,257 $68,874
9) Income tax expense reflects an effective tax rate of approximately
36.5%, for both the three and nine month periods ended September
30, 1994, compared to 39.8% and 37.9% for the comparable 1993
periods. 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 of accounting for income taxes 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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Current:
Federal $12,106 $15,635 $42,582 $26,668
State 790 1,192 5,286 4,145
Total current 12,896 16,827 47,868 30,813
Deferred:
Federal 2,791 (3,489) (3,433) 1,901
State (301) 92 (51) 762
Total deferred 2,490 (3,397) (3,484) 2,663
Total tax
expense before
extraordinary item $15,386 $13,430 $44,384 $33,476
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,
1994 1993 1994 1993
Statutory federal
income tax $14,739 $11,800 $42,640 $30,931
State income taxes 317 1,180 3,402 3,183
Tax-free income (289) (283) (858) (388)
Other 619 733 (800) (250)
Consolidated tax
expense before
extraordinary item $15,386 $13,430 $44,384 $33,476
Tax benefit on loss
from repurchase of
debentures 0 0 0 (655)
Consolidated tax
expense $15,386 $13,430 $44,384 $32,821
<PAGE>
The net deferred tax liability is comprised of the following:
September 30, December 31,
1994 1993
Deferred taxes:
Gross assets $ 36,375 $ 25,755
Gross liabilities (49,902) (43,815)
Total deferred taxes $(13,527) $(18,060)
The Company did not record any valuation allowances against
deferred tax assets at September 30, 1994 and December 31, 1993.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
September 30, December 31,
1994 1993
SFAS 91 $(16,408) $(13,344)
Loan losses 27,741 23,631
Mortgage banking income (1,316) (2,395)
Securitization income (27,639) (25,817)
Insurance underwriting (4,189) (2,258)
Deferred compensation 1,250 592
Mark to market adjustment 2,911 0
Change in accounting method 614 0
Other 3,509 1,531
Net deferred tax liabilities $(13,527) $(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.
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 nine month period ended
September 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 September 30, 1994, a total of 1,229,734 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 September 30, 1994. Restricted
shares are considered common stock equivalents in the calculation
of earnings per common share.
Deferred compensation of $15.3 million and $11.0 million related
to these shares of restricted stock is reflected as a reduction of
equity at September 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 second quarter of 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 are being recognized
as securitization income over the related period.
<PAGE>
15) The following table shows the calculation of earnings per common
share:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Net income $26,767 $20,285 $77,448 $53,627
less: preferred
dividends 0 0 (141) (141)
Net income available
to common shares $26,767 $20,285 $77,307 $53,486
Average common
stock outstanding 38,985 38,011 38,838 36,404
Common stock
equivalents 2,207 2,721 2,257 2,605
Weighted average
common shares
outstanding
(in thousands) 41,192 40,732 41,095 39,009
Earnings per common
share $ .65 $ .50 $ 1.88 $ 1.37
<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 September 30, 1994 was $26.8
million, a $6.5 million or 32% increase from the $20.3 million
reported for the third quarter of 1993. Earnings per share for the
third quarter of 1994 were $.65, a 30% increase from $.50 per share
for the same period last year.
Earnings increased in the third 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 2.2% for the third quarter of 1994 from 2.7% for the
third 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. Consequently, the 44%
increase in average managed receivables resulted in a $32.3 million,
or 50% rise in noninterest revenues to $97.2 million in 1994, from
$64.9 million in 1993. As a result of improved credit quality, the
provision for credit losses in the third quarter of 1994 fell to $5.8
million from $8.0 million in the comparable 1993 period. Disciplined
cost management resulted in operating expenses increasing only 19%,
while average managed receivables grew 44% and the operating expense
ratio decreased to 3.4% of average managed receivables in the third
quarter of 1994, compared to 4.1% in the third quarter of 1993.
For the nine months ended September 30, 1994, net income was $77.4
million, a 44% increase over the $53.6 million for the comparable year
earlier period. Earnings per share increased 37% to $1.88 in 1994
compared to $1.37 in 1993. Earnings per share before extraordinary
item were $1.40 in 1993.
NET INTEREST INCOME
Net interest income for the third quarter of 1994 decreased to $4.0
million from $21.5 million for the same period of 1993. This decrease
was due to an increase in the amortization of deferred origination
costs as a result of the change in the accounting treatment of these
costs and the resultant acceleration of the amortization period (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 3.71% from 5.53% for the third quarter of 1993, offset by an
increase in average interest earning assets of $170 million. The
Company is executing a strategy to market "risk-adjusted" credit card
products 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 a change 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 nine month periods ended September 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 September 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 $1,115,229 $ 28,200 10.11% $ 988,136 $ 30,290 12.26%
Mortgage loans 88,125 1,751 7.88 148,680 3,533 9.43
Leases 66,042 2,256 13.66 74,318 3,684 19.83
Other loans 3,679 70 7.55 1,685 39 9.18
Gross receivables 1,273,075 32,277 10.13 1,212,819 37,546 12.37
Investments (2) 610,034 7,726 5.03 499,884 5,713 4.54
Total interest earning
assets $1,883,109 $ 40,003 8.48% $1,712,703 $ 43,259 10.09%
Interest-bearing
liabilities $1,716,698 $ 22,619 5.18% $1,560,561 $ 19,676 5.01%
Net interest spread 3.30% 5.08%
Net interest margin 3.71% 5.53%
Off-balance sheet
Credit cards $3,699,734 $2,115,467
Mortgage loans 1,147,447 939,401
Leases 146,020 73,029
Total average
securitized receivables $4,993,201 $3,127,897
Total average managed
receivables $6,266,276 $4,340,716
Managed Net Interest
Analysis (3):
Interest earning assets $5,582,843 $170,863 12.24% $3,828,170 $122,928 12.84%
Interest-bearing
liabilities $5,416,432 $ 76,243 5.60% $3,676,028 $ 46,212 5.02%
Net interest spread 6.64% 7.82%
Net interest margin 6.79% 8.05%
<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)
Nine Months Ended September 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 $1,115,515 $ 86,410 10.33% $ 847,279 $ 79,039 12.44%
Mortgage loans 113,924 7,112 8.35 173,554 13,026 10.03
Leases 54,982 5,909 14.33 63,901 8,860 18.49
Other loans 3,698 205 7.41 1,693 120 9.48
Gross receivables 1,288,119 99,636 10.32 1,086,427 101,045 12.41
Investments (2) 605,270 21,638 4.77 539,890 18,669 4.61
Total interest earning
assets $1,893,389 $121,274 8.54% $1,626,317 $119,714 9.82%
Interest-bearing
liabilities $1,736,875 $ 64,954 4.94% $1,518,902 $ 59,570 5.24%
Net interest spread 3.60% 4.58%
Net interest margin 3.95% 4.92%
Off-balance sheet
Credit cards $3,202,809 $1,967,459
Mortgage loans 1,087,963 849,043
Leases 134,819 78,282
Total average
securitized receivables $4,425,591 $2,894,784
Total average managed
receivables $5,713,710 $3,981,211
Managed Net Interest
Analysis (3):
Interest earning assets $5,096,198 $463,533 12.13% $3,593,776 $347,728 12.90%
Interest-bearing
liabilities $4,939,684 $195,126 5.25% $3,486,361 $136,399 5.22%
Net interest spread 6.88% 7.68%
Net interest margin 7.02% 7.83%
<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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Net interest income before
amortization of deferred
origination costs and
fees and including tax
equivalent interest $ 17,384 $23,583 $ 56,320 $60,144
Amortization of deferred
origination costs, net of
deferred fees (12,915) (1,725) (27,921) (3,649)
Tax equivalent interest (455) (345) (1,342) (507)
Net interest income $ 4,014 $21,513 $ 27,057 $55,988
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the third quarter of 1994 was $5.8
million compared to $8.0 million for the comparable period of 1993. For
the nine month period ended September 30, 1994, the provision for credit
losses was $28.0 million compared to $21.6 million for the nine months of
1993. Charge-offs on owned receivables for the third quarter of 1994
were $9.9 million, exceeding the provision by $4.1 million. Reserves had
been previously provided for approximately $4 million of mortgage loan
charge-offs, as part of the mortgage loan repurchase program 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 approximately $50 million of nonperforming mortgages
during the first nine months of 1994 and transferred approximately $12
million of off-balance sheet recourse reserves to on-balance sheet
reserves. 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.) The
owned impaired asset level was $47.2 million or 3.5% of receivables at
September 30, 1994 compared to $23.6 million or 2.0% of receivables a
year ago.
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 $47.2
million or 3.5% of receivables at September 30, 1994 up from $31.2
million or 2.4% of receivables at December 31, 1993 and $34.7 million or
3.0% of receivables at September 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
100.0% at September 30, 1994 from 138.6% at year end 1993 and 147.3% at
September 30, 1993.
On the total managed portfolio, impaired assets were $92.9 million or 1.4%
of receivables at September 30, 1994, compared to $95.1 million or 1.8% of
receivables at December 31, 1993 and $91.6 million or 2.0% of receivables
at September 30, 1993. A key credit quality statistic, the 30+ day
delinquency rate on managed credit cards, dropped to 2.1% at September 30,
1994 from 2.8% a year ago.
On the total owned portfolio, impaired assets were $47.2 million or 3.5%
of receivables at September 30, 1994, compared to $22.5 million or 1.8% of
receivables and $23.6 million or 2.0% of receivables at December 31, 1993
and September 30, 1993, respectively. This increase was due to the
repurchase of the nonperforming mortgages from the securitization trusts
discussed above.
The total managed charge-off rate for the first nine months of 1994 was
2.4%, down from 2.9% for the full year of 1993 and 3.0% for the first nine
months of 1993. The charge-off rate on managed credit cards was 2.6% for
the first nine months of 1994, down from 3.5% for the full year 1993 and
3.8% for the comparable 1993 period. The Company believes that charge-off
rates on managed mortgages will remain at approximately the current levels
for the remainder of 1994.
The charge-off rate on owned receivables on a consolidated basis was 2.5%
of average receivables for the first nine months of 1994, compared to 2.4%
for the full year 1993 and 2.5% a year ago. The charge-off rate on owned
credit cards was 2.0% for the first nine months of 1994, down from 2.6% for
the full year 1993 and 2.9% 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>
September December September
30, 31, 30,
CONSOLIDATED - MANAGED 1994 1993 1993
Nonperforming assets $ 60,917 $ 63,589 $ 63,570
Accruing loans past due 90 days or more 31,986 31,514 28,006
Impaired assets 92,903 95,103 91,576
Total loans 30 days or more delinquent 193,009 186,297 182,143
As a percentage of gross receivables:
Nonperforming assets .9% 1.2% 1.4%
Accruing loans past due 90 days or more .5 .6 .6
Impaired assets 1.4 1.8 2.0
Total loans 30 days or more delinquent 2.9 3.6 3.9
Net charge-offs:
Amount $102,671 $122,715 $ 89,464
As a percentage of average gross
receivables(annualized) 2.4% 2.9% 3.0%
CREDIT CARDS - MANAGED
Nonperforming assets $ 13,199 $ 10,881 $ 10,488
Accruing loans past due 90 days or more 31,860 31,489 27,973
Impaired assets 45,059 42,370 38,461
Total loans 30 days or more delinquent 107,325 94,035 92,120
As a percentage of gross receivables:
Nonperforming assets .3% .3% .3%
Accruing loans past due 90 days or more .6 .8 .8
Impaired assets .9 1.1 1.1
Total loans 30 days or more delinquent 2.1% 2.4 2.8
Net charge-offs:
Amount $ 84,500 $105,966 $ 79,475
As a percentage of average gross
receivables(annualized) 2.6% 3.5% 3.8%
MORTGAGE LOANS - MANAGED
Nonperforming assets $ 46,006 $ 50,418 $ 50,975
Total loans 30 days or more delinquent 68,914 75,747 74,948
As a percentage of gross receivables:
Nonperforming assets 3.5% 4.4% 4.6%
Total loans 30 days or more delinquent 5.3 6.6 6.7
Net charge-offs:
Amount $ 15,448 $ 13,991 $ 7,884
As a percentage of average gross
receivables(annualized) 1.7% 1.3% 1.0%
LEASES - MANAGED
Nonperforming assets $ 1,712 $ 2,290 $ 2,107
Total loans 30 days or more delinquent 16,507 16,476 15,025
As a percentage of receivables:
Nonperforming assets .7% 1.3% 1.3%
Total loans 30 days or more delinquent 7.1 9.7 9.5
Net charge-offs:
Amount $ 2,717 $ 2,759 $ 2,113
As a percentage of average receivables
(annualized) 1.9% 1.9% 2.0%
<PAGE>
September December September
30, 31, 30,
CONSOLIDATED - OWNED 1994 1993 1993
Reserve for credit losses $47,190 $31,227 $34,702
Nonperforming assets 38,323 11,487 12,655
Accruing loans past due 90 days or more 8,865 11,038 10,900
Impaired assets 47,188 22,525 23,555
Reserve as a percentage of impaired assets 100.0% 138.6% 147.3%
As a percentage of gross receivables:
Reserve 3.5% 2.4% 3.0%
Nonperforming assets 2.8 .9 1.1
Accruing loans past due 90 days or more .7 .9 .9
Impaired assets 3.5 1.8 2.0
Net charge-offs:
Amount $24,519 $26,776 $20,374
As a percentage of average gross
receivables(annualized) 2.5% 2.4% 2.5%
CREDIT CARDS - OWNED
Reserve for credit losses 21,628 $25,859 $25,748
Nonperforming assets 2,910 3,062 2,790
Accruing loans past due 90 days or more 8,739 11,013 10,867
Impaired assets 11,649 14,075 13,657
Reserve as a percentage of impaired assets 185.7% 183.7% 188.5%
As a percentage of gross receivables:
Reserve 1.9% 2.3% 2.7%
Nonperforming assets .3 .3 .3
Accruing loans past due 90 days or more .8 1.0 1.1
Impaired assets 1.0 1.2 1.4
Net charge-offs:
Amount $16,335 $23,623 $18,389
As a percentage of average gross
receivables(annualized) 2.0% 2.6% 2.9%
MORTGAGE LOANS - OWNED (1)
Reserve for credit losses $ 9,046 $ 2,706 $ 3,286
Nonperforming assets 34,930 7,090 8,555
Reserve as a percentage of impaired assets 25.9% 38.2% 38.4%
As a percentage of gross receivables:
Reserve 6.2% 3.0% 3.0%
Nonperforming assets 24.1 7.8 7.8
Net charge-offs:
Amount $ 7,580 $ 2,207 $ 1,231
As a percentage of average gross
receivables(annualized) 8.9% 1.4% .9%
LEASES - OWNED
Reserve for credit losses $ 1,278 $ 1,826 $ 1,574
Nonperforming assets 483 1,335 1,310
Reserve as a percentage of impaired assets 264.6% 136.8% 120.2%
As a percentage of receivables:
Reserve 1.9% 3.6% 1.8%
Nonperforming assets .7 2.6 1.5
Net charge-offs:
Amount $ 598 $ 947 $ 762
As a percentage of average receivables
(annualized) 1.5% 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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Gain on sale of credit
cards $ 0 $ 0 $ 18,352 $ 0
Other noninterest revenues:
Credit card securitization
income 54,448 35,884 149,496 93,278
Credit card servicing
income 18,554 10,317 47,690 29,007
Income from mortgage
banking activities 9,780 5,099 26,572 22,335
Leasing revenues, net 5,151 1,400 15,531 4,065
Other credit card revenues 3,636 3,447 10,137 8,255
Insurance revenues, net 3,149 2,335 9,115 6,476
Credit card interchange
income 1,871 5,296 6,319 13,099
Other 613 1,170 1,276 3,822
Total other noninterest
revenues $97,202 $64,948 $266,136 $180,337
Total noninterest revenues $97,202 $64,948 $284,488 $180,337
For the third quarter of 1994, noninterest revenues increased 50% to $97.2
million from $64.9 million for the same period of 1993. Credit card
securitization income increased $18.6 million or 52% to $54.4 million as
average securitized credit card receivables grew 75% from the comparable
quarter of 1993 and interchange income paid to the credit card trusts
(included in securitization income) also increased. Credit card servicing
income increased $8.2 million due to higher securitized balances. Income
from mortgage banking activities increased $4.7 million to $9.8 million in
the third quarter of 1994, principally as a result of a lower provision for
off-balance sheet recourse reserves. The third quarter of 1993 included a
strengthening of off-balance sheet recourse reserves. Leasing revenues,
net, increased $3.8 million to $5.2 million primarily due to a 100% growth
in average securitized lease receivables from the comparable quarter of
1993 and a third quarter 1994 securitization transaction. 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 $3.4 million due to a
higher level of interchange fees being included in credit card
securitization income, as well as an increase in the volume of balance
transfer activity which yields no interchange income. Other income
declined $.6 million primarily due to $.7 million of securities gains
included in the third quarter of 1993.
For the nine month period ended September 30, 1994, noninterest revenues
rose to $284.5 million from $180.3 million for the comparable 1993 period.
This improvement resulted from a 63% growth in average securitized credit
card receivables, from the gain on sale of credit cards (see Note 14 of
Notes to Consolidated Condensed Financial Statements), and a 72% growth in
average securitized lease receivables.
<PAGE>
OPERATING EXPENSES
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Salaries and employee
benefits $21,913 $16,835 $ 63,936 $ 46,905
External processing 6,133 4,459 16,139 11,873
Credit card fraud losses 4,306 3,397 12,550 10,184
Marketing 3,443 4,534 21,803 13,962
Postage 3,069 2,470 8,822 7,061
Professional fees 2,583 2,434 6,159 7,249
Telephone expense 2,413 1,452 6,010 3,910
Equipment expense 2,379 1,861 6,725 4,701
Credit and collection
expense 2,293 1,966 5,728 5,390
Occupancy expense 2,254 1,706 6,117 4,718
Other 2,527 3,605 7,711 10,424
Total operating expenses $53,313 $44,719 $161,700 $126,377
Operating expenses of $53.3 million for the three months ended September
30, 1994 increased 19% from $44.7 million for the same period of 1993.
Operating expenses as a percentage of average managed receivables were 3.4%
for the third quarter of 1994, down from 4.1% in the comparable 1993
period. The increase in operating expenses is attributable, in part, to a
16% increase in the number of employees from 1,501 at September 30, 1993 to
1,744 at September 30, 1994 to effectively service the current and
anticipated account growth. Other expenses, including external processing,
postage and telephone expense increased consistent with the increase in the
number of credit card accounts managed.
For the first nine months of 1994, operating expenses increased 28% to
$161.7 million from $126.4 million for the same 1993 period. Average
managed receivables grew 44% over the same period of time. Operating
expenses as a percentage of average managed receivables were 3.8% for the
nine months ended September 30, 1994, down from 4.2% for the nine months
ended September 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 nine months of 1994, the Company, through
its subsidiaries, securitized $1.2 billion of credit card receivables, $239
million of mortgage loans and $70 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 September 30, 1994, the Company had
approximately $1.2 billion 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 $233 million of
medium-term notes under this registration statement through the third
quarter of 1994. The Company anticipates selling up to an additional $267
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. 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 762,000
new credit card accounts during the first nine months of 1994, and now
manages over 3.2 million credit card accounts, a 31% increase from a year
ago. Credit card sales through September 30, 1994 were $5.8 billion, a 44%
increase over the $4.1 billion generated in the first nine months of 1993.
Subsequent to September 30, 1994, the Company securitized $1 billion of
credit card receivables, $250 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 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. Asset/liability computer simulations are performed at least
monthly 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, sells and purchases assets, alters the mix and
term structure of its funding base, changes its investment portfolio and
short-term asset positions and uses financial derivative instruments.
Financial derivative instruments are used for the express purpose of
reducing the Company's interest rate risk and by policy are not used for
any speculative purposes. 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
<PAGE>
significant portion of credit card receivables are at their floors,
the Company has converted part of the underlying funding to a fixed rate
by using interest rate hedges, swaps and fixed rate securitizations. In
pricing mortgage and lease securitizations, both fixed rate and variable rate
funding are used depending upon the characteristics of the underlying
receivables.
Interest rate fluctuations affect net interest income at virtually all
financial institutions. While interest rate volatility does have an effect
on net interest income, other factors also contribute significantly to
changes in net interest income. Specifically, within the credit card
portfolio, pricing decisions and customer behavior regarding convenience
usage impact the yield on the portfolio. These factors may counteract or
exacerbate income changes due to fluctuating interest rates. The Company
closely monitors interest rate movements, competitor pricing and consumer
behavioral changes in its ongoing analysis of net interest income
sensitivity.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are being filed with this Report.
(b) A report on Form 8-K, dated October 19, 1994, was filed
by the Company setting forth the financial highlights of
the Company's results of operations for the period ended
September 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)
November 11, 1994 By /s/David Wesselink
Senior Vice President and
Chief Financial Officer
November 11, 1994 By /s/John J. Calamari
Vice President, Finance and
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Description
2 Inapplicable.
4 Inapplicable.
10 Inapplicable.
11 Inapplicable.
15 Inapplicable.
18 Inapplicable.
19 Inapplicable
22 Inapplicable.
23 Inapplicable.
24 Inapplicable.
27 Incorporated by reference to Exhibit
27 to the Company's Report on Form
8-K filed October 19, 1994.
99 Inapplicable.
<PAGE>
