Form 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31, 1994 or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
______ to _______
Commission File Number 0-14120
ADVANTA Corp.
(Exact name of registrant as specified in its charter)
Delaware 23-1462070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Brandywine Corporate Center, 650 Naamans Rd., Claymont, DE 19703
(Address of Principal Executive Offices) (Zip Code)
(302) 791-4400
(Registrant's telephone number, including area code)
____________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes __X__ No ____
* Applicable only to issuers involved in bankruptcy proceedings
during the preceding five years:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes ____ No ____
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class A Outstanding at May 2, 1994
Common Stock, $.01 par value 17,296,634 shares
Class B Outstanding at May 2, 1994
Common Stock, $.01 par value 23,015,020 shares
<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 13
Part II - Other Information 22
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1994 1993
ASSETS (Unaudited)
Cash $ 29,227 $ 31,162
Federal funds sold and interest-bearing
deposits with banks 214,040 234,196
Investments available for sale 344,582 308,026
Loan and lease receivables, net:
Available for sale 891,897 667,774
Other loan and lease receivables, net 521,688 614,879
Total loan and lease receivables, net 1,413,585 1,282,653
Premises and equipment, net 19,148 17,045
Amounts due from credit card
securitizations 119,542 117,764
Other assets 185,017 149,349
Total assets $2,325,141 $2,140,195
LIABILITIES
Deposits $1,144,399 $1,254,881
Debt and other borrowings 732,970 473,699
Other liabilities 83,369 68,874
Total liabilities 1,960,738 1,797,454
STOCKHOLDERS' EQUITY (See Notes 10 & 11)
Class A preferred stock, $1,000 par
value: authorized, issued and
outstanding -- 1,010 shares in 1994
and 1993 1,010 1,010
Class B preferred stock, $.01 par
value: authorized -- 1,000,000 shares
in 1994 and 1993; none issued
Class A common stock, $.01 par value:
authorized -- 30,000,000 shares;
issued -- 17,274,289 shares in 1994
and 17,240,064 in 1993 173 172
Class B common stock, $.01 par value:
authorized -- 30,000,000 shares;
issued -- 22,934,955 in 1994 and
22,603,088 in 1993 229 226
Additional paid in capital, net 168,825 166,646
Retained earnings, net 194,166 174,687
Total stockholders' equity 364,403 342,741
Total liabilities and stockholders'
equity $2,325,141 $2,140,195
See Notes to Consolidated Condensed Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(In thousands, except per share data)
Three Months Ended
March 31,
(Unaudited)
1994 1993
Interest income:
Loans and leases $29,209 $29,913
Investments 6,026 6,079
Total interest income 35,235 35,992
Interest expense:
Deposits 12,435 13,355
Other debt 8,320 6,874
Total interest expense 20,755 20,229
Net interest income 14,480 15,763
Provision for credit
losses 6,829 7,181
Net interest income
after provision for
credit losses 7,651 8,582
Noninterest revenues 79,780 57,051
Operating expenses 48,365 40,008
Income before income
taxes 39,066 25,625
Provision for income
taxes 14,142 9,481
Net income $24,924 $16,144
Earnings per common share (A) $ .61 $ .45
Weighted average common
shares outstanding (A) 40,941 35,829
(A) All share and per share amounts have been adjusted to
reflect the three-for-two stock split effective October 15,
1993. See Note 10 of Notes to Consolidated Condensed
Financial Statements.
See Notes to Consolidated Condensed Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
1994 1993
OPERATING ACTIVITIES (Unaudited)
Net income $ 24,924 $ 16,144
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
intangibles 1,628 1,151
Provision for credit losses 6,829 7,181
Change in other assets and amounts due
from credit card securitizations 1,554 2,587
Change in other liabilities 17,015 17,611
Gain on securitization of mortgages
and leases (7,715) (5,020)
Net cash provided by operating activities 44,235 39,654
INVESTING ACTIVITIES
Purchase of investments (426,185) (96,884)
Proceeds from sales of investments 358,015 50,642
Proceeds from maturing investments 26,815 23,294
Change in fed funds sold and interest-
bearing deposits 20,156 (77,596)
Change in credit card receivables,
excluding sales (121,415) (58,035)
Proceeds from sales/securitizations of
receivables 109,962 185,121
Purchase of mortgage/lease portfolios (18,897) (2,251)
Principal collected on mortgages/loans 3,215 3,800
Mortgages/loans made to customers (119,069) (93,876)
Change in premises and equipment (3,543) (1,153)
Excess of cash collections over income
recognized on direct financing leases 6,920 2,988
Equipment purchased for direct financing
lease contracts (29,950) (19,131)
Net cash used by investing
activities (193,976) (83,081)
FINANCING ACTIVITIES
Increase in demand and savings
deposits 22,742 7,825
Proceeds from sales of time deposits 104,013 130,812
Payments for maturing time deposits (237,237) (193,918)
Change in repurchase agreements 195,000 0
Proceeds from issuance of subordinated debt 13,619 29,127
Payments on redemption of subordinated debt (16,874) (31,117)
Proceeds from issuance of notes payable to
banks 2,300 31,359
Proceeds from issuance of medium-term notes 75,013 0
Repayment of notes payable to banks (9,787) (23,203)
Proceeds from issuance of stock 1,381 78,369
Cash dividends paid (2,364) (1,403)
Net cash provided by financing
activities 147,806 27,851
Net decrease in cash (1,935) (15,576)
Cash at beginning of period 31,162 35,753
Cash at end of period $ 29,227 $ 20,177
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
March 31, 1994
1) In the opinion of management, the accompanying audited and
unaudited consolidated condensed financial statements contain all
adjustments necessary to present fairly the financial position of
ADVANTA Corp. and Subsidiaries as of March 31, 1994 and December
31, 1993, and the results of their operations and the statements of
cash flows for the three month periods ended March 31, 1994 and
1993. The results of operations for the three month period ended
March 31, 1994 are not necessarily indicative of the results to be
expected for the full year. Certain prior period amounts have been
reclassified to conform with current year classifications.
2) Investments available for sale include securities that the Company
sells from time to time to provide liquidity and in response to
changes in the market. In 1993, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). This statement requires that debt and
equity securities classified as available for sale be reported at
market value. This statement is effective for fiscal years
beginning after December 15, 1993, although a company may elect
earlier adoption as of the end of a fiscal year for which annual
statements have not been previously issued. The Company elected to
adopt this statement as of December 31, 1993, and as such, these
securities are recorded at market value. Unrealized holding gains
and losses on these securities are reported as a separate component
of stockholder's equity and included in retained earnings.
3) Loan and lease receivables available for sale represent receivables
that the Company generally intends to sell or securitize within the
next six months. These receivables are reported at the lower of
book or fair market value.
4) Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
March 31, December 31,
1994 1993
Gross loan and lease receivables $1,405,070 $1,277,305
Add: Deferred origination costs,
net of deferred fees 42,689 36,575
Less: Reserve for credit losses (34,174) (31,227)
Loan and lease receivables, net $1,413,585 $1,282,653
Number of Accounts:
Credit cards 528,604 514,334
Other loans and leases 8,211 8,035
Total 536,815 522,369
<PAGE>
Receivables and accounts serviced for others consisted of the
following:
March December
31, 31,
1994 1993
Receivables:
Credit cards $2,789,298 $2,790,719
Mortgage loans 1,076,027 1,058,524
Leases 140,549 119,613
Total $4,005,874 $3,968,856
Number of Accounts:
Credit cards 2,322,098 2,183,024
Mortgage loans 23,588 23,925
Leases 30,167 27,566
Total 2,375,853 2,234,515
5) The Company accounts for credit card origination costs under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases" ("SFAS 91"). This accounting
standard requires certain loan and lease origination fees and costs to
be deferred and amortized over the life of a loan or lease as an
adjustment to interest income. Origination costs are defined under
this standard to include costs of loan origination associated with
transactions with independent third parties and certain costs relating
to underwriting activities and preparing and processing loan
documents. The Company engages third parties to solicit and originate
credit card account relationships. Amounts deferred under these
arrangements were $11.1 million and $6.0 million in the first quarters
of 1994 and 1993, respectively. For credit card receivables, deferred
origination costs have been amortized over 60 months.
At the May 20, 1993 meeting of the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board, the task
force reached a consensus regarding the acquisition of individual credit
card accounts from independent third parties (EITF Issue 93-1). The
consensus was that credit card accounts acquired individually
should be accounted for as originations under SFAS 91 and EITF
Issue 92-5. Amounts paid to a third party to acquire individual
credit card accounts should be deferred and netted against the
related credit card fee, if any, and the net amount should be
amortized on a straight line basis over the privilege period. If a
significant fee is charged, the privilege period is the period that
the fee entitles the cardholder to use the card. If there is no
significant fee, the privilege period should be one year.
<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:
Three Months Ended Year Ended
March 31, December 31,
1994 1993
Balance, beginning of period $31,227 $ 40,228
Current provision 6,829 29,802
Transfer of reserves to
recourse reserves (318) (12,027)
Transfer of recourse
reserves to mortgage
reserves 2,264 0
Net charge-offs (5,828) (26,776)
Balance, end of period $34,174 $ 31,227
7) At March 31, 1994 and December 31, 1993, the Company had $119.5
million and $117.8 million, respectively, of amounts due from
credit card securitizations. These amounts include excess
servicing, accrued interest receivable and other amounts related
to these securitizations and are net of recourse reserves
established. A portion of these amounts are subject to liens held
by the providers of credit enhancement facilities for the
respective securitizations.
8) Selected Balance Sheet Information
Other Assets
March 31, December 31,
1994 1993
Excess mortgage servicing rights $ 62,894 $ 57,017
Prepaid assets 27,298 16,307
Accrued interest receivable 26,665 25,735
Deferred costs 6,898 5,583
Due from trustees - mortgage 5,735 6,040
Goodwill 5,565 5,648
Trust receivable - leasing 4,090 2,584
Other real estate owned 1,784 1,447
Other 44,088 28,988
Total other assets $185,017 $149,349
Other Liabilities
March 31, December 31,
1994 1993
Current and deferred income taxes $43,621 $37,844
Accounts payable and accrued expenses 16,345 15,139
Accrued interest payable 14,409 8,387
Other 8,994 7,504
Total other liabilities $83,369 $68,874
<PAGE>
9) Income tax expense for the three month period ended March 31, 1994
was at an effective tax rate of approximately 36.2%, compared to
37.0% for the comparable 1993 period. Effective January 1, 1993,
the Company implemented the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") with no material effect on the financial statements. SFAS
109 utilizes the liability method and deferred taxes are determined
based on the estimated future tax effects of differences between
the financial statement and the tax bases of assets and liabilities
given the provisions of the enacted tax laws. Prior to the
implementation of SFAS 109, the Company accounted for income taxes
using Accounting Principles Board Opinion No. 11.
Income tax expense consisted of the following components:
Three Months Ended
March 31,
1994 1993
Current:
Federal $12,264 $4,059
State 2,272 1,718
Total current 14,536 5,777
Deferred:
Federal (1,019) 3,874
State 625 (170)
Total deferred (394) 3,704
Total tax expense $14,142 $9,481
The reconciliation of the statutory federal income tax to the
consolidated tax expense is as follows:
Three Months Ended
March 31,
1994 1993
Statutory federal
income tax $13,673 $8,713
State income taxes 1,884 1,022
Other (1,415) (254)
Consolidated tax expense $14,142 $9,481
<PAGE>
The net deferred tax liability is comprised of the following:
March 31, December 31,
1994 1993
Deferred taxes:
Gross assets $ 25,882 $ 25,755
Gross liabilities (44,563) (43,815)
Total deferred taxes $(18,681) $(18,060)
The Company did not record any valuation allowances against
deferred tax assets at March 31, 1994 and December 31, 1993.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
March 31, December 31,
1994 1993
SFAS 91 $(15,435) $(13,344)
Loan losses 23,117 23,631
Mortgage banking income (728) (2,395)
Securitization income (25,889) (25,817)
Insurance underwriting (2,258) (2,258)
Deferred compensation 942 592
Other 1,570 1,531
Net deferred tax liabilities $(18,681) $(18,060)
10) On September 23, 1993, the Board of Directors approved a three-for
two stock split effected in the form of a 50% stock dividend on both
the Class A and Class B Common Stock to shareholders of record as of
October 4, 1993, which dividend was paid on October 15, 1993. All
share and per share amounts reflect the three-fortwo stock split as
a result of the stock dividend. Earnings per share for the three
month period ended March 31, 1993 have been adjusted to reflect the
impact of this dividend, as if it had already occurred at the
beginning of the period.
11) On March 24, 1993, in a public offering, the Company sold 2,575,000
shares (pre-split) of Class B Common Stock. Proceeds from the
offering, net of the underwriting discount, were $77.5 million. On
April 21, 1993, the underwriters of the offering purchased an
additional 450,000 shares (pre-split) of Class B Common Stock,
pursuant to the overallotment option granted to them by the Company.
This brought the Company's total proceeds of the offering, net of
related expenses, to approximately $90 million. The Company used the
proceeds of the offering for general corporate purposes, including
to finance the growth of its subsidiaries.
<PAGE>
12) In 1991, the Company adopted the Advanta Management Incentive Plan
with Stock Election II ("AMIPWISE II"), and approved a substantially
similar plan in 1993 ("AMIPWISE III"). In 1992, the Company
implemented a plan similar to AMIPWISE II, for key employees below
the senior management level. Under these stockbased bonus programs,
certain employees have received awards in the form of restricted
shares of common stock which are subject to forfeiture should the
employee terminate employment with the Company prior to vesting.
The shares become unrestricted over time if certain performance
criteria are met. At March 31, 1994, a total of 1,264,210 shares
issued under these plans and under the predecessor plan to AMIPWISE
II were subject to restriction and were included in the number of
shares outstanding. These shares are considered common stock
equivalents in the calculation of earnings per common share.
In January 1994, the Company hired a new senior executive and agreed
to the following compensation arrangement. In addition to a base
salary, the executive received 200,000 restricted shares of Class B
common stock and an option to purchase 100,000 shares of Class B
common stock at $27.75 per share. The restricted shares, which as
of the date of the grant had a market value of $5.6 million, will
vest at the rate of 25% per annum for four years, and the options
will become exercisable at the same rate. Should the executive
leave the Company's employ before four years have passed, these
benefits will vest upon the departure, except in certain limited
circumstances. The executive is also to receive a
guaranteed one-time bonus of $525, other annual benefits and
perquisites estimated at $250, and will also be eligible to
receive annual bonuses under AMIPWISE II and AMIPWISE III.
Deferred compensation of $16.9 million and $11.0 million related
to these plans is reflected as a reduction of equity at March 31, 1994
and December 31, 1993, respectively.
13) The following table shows the calculation of earnings per common share
reflecting the effect of the three-for-two stock split described above:
Three Months Ended
March 31,
1994 1993
Net income $24,924 $16,144
less: preferred dividends (141) (141)
Net income available to
common shares $24,783 $16,003
Average common stock
outstanding 38,650 33,407
Common stock equivalents 2,291 2,422
Weighted average
shares outstanding
(in thousands) 40,941 35,829
Earnings per common share $ .61 $ .45
<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 March 31, 1994 was $24.9
million, a 54% increase from the $16.1 million reported for the
first quarter of 1993. Earnings per share in the first quarter of
1994 were $.61, a 36% increase from $.45 for the same period last
year. Earnings per share for the first quarter of 1993 have been
adjusted to reflect an effective three-for-two stock split as a
result of the October 15, 1993 stock dividend.
Earnings increased in the first quarter of 1994 primarily as a
result of a 42% increase in average managed receivables, continued
improvement in credit quality with the total managed charge-off rate
decreasing to 2.5% in the first quarter of 1994 from 3.2% in the
first quarter of 1993, and controlled growth in operating expenses.
The Company continues to securitize a majority of the growth in its
receivables and report the performance of the securitized
receivables as noninterest revenues. Consequently, the 42% increase
in average managed receivables resulted in a $22.7 million, or 40%
rise in noninterest revenues to $79.8 million in 1994, from $57.1
million in 1993. As a result of improved credit quality, the
provision for credit losses in the first quarter of 1994 fell to
$6.8 million from $7.2 million in the first quarter of 1993.
Disciplined cost management resulted in operating expenses
increasing only 21%, while average managed receivables grew 42% and
the operating expense ratio decreased to 3.7% of average managed
receivables in the first quarter of 1994, compared to 4.3% in the
first quarter of 1993.
NET INTEREST INCOME
Net interest income for the first quarter of 1994 decreased to $14.5
million from $15.8 million for the same period of 1993. This
decrease was due to an increase in the amortization of deferred
origination costs due to the change in the policy and amortization
period for these costs (see Note 5). Also affecting net interest
income was a drop in the owned net interest margin to 4.31% from
4.43% for the first quarter of 1993, offset by an increase in
average interest earning assets of $385 million. The Company is
executing a strategy to market a "risk-adjusted" credit card product
in which credit cards are issued with lower rates to customers whose
credit quality is expected to result in a lower rate of credit
losses (the "risk-adjusted" pricing strategy). This strategy
resulted in a drop in credit card yields thereby lowering the owned
net interest margin.
The following table provides an analysis of both owned and managed
interest income and expense data, average balance sheet data, net
interest spread (the difference between the yield on interest
earning assets and the average rate paid on interest-bearing
liabilities), and net interest margin (the difference between the
yield on interest earning assets and the average rate paid to fund
interest earning assets) for the three month periods ended March 31,
1994 and 1993. Average owned loan and lease receivables and the
related interest revenues exclude deferred origination costs and
deferred fees and the amortization thereof (see Notes to
Consolidated Condensed Financial Statements) and include certain
loan fees.
<PAGE>
<TABLE>
INTEREST RATE ANALYSIS
<CAPTION>
Three Months Ended March 31,
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 $1,131,473 $ 30,204 10.68% $ 719,950 $ 23,003 12.78%
Mortgage loans 118,962 2,811 9.58 208,502 5,442 10.59
Leases 46,011 1,744 15.16 53,388 2,392 17.92
Other loans 3,642 67 7.46 1,747 41 9.52
Gross receivables 1,300,088 34,826 10.73 983,587 30,878 12.59
Investments (2) 583,837 6,449 4.44 515,193 6,096 4.75
Total interest earning
assets $1,883,925 $ 41,275 8.78% $1,498,780 $ 36,974 9.90%
Interest-bearing
liabilities $1,748,448 $ 20,755 4.78% $1,463,762 $ 20,229 5.59%
Net interest spread 4.00% 4.31%
Net interest margin 4.31% 4.43%
Off-balance sheet
Credit cards $2,790,233 $1,883,695
Mortgage loans 1,041,319 745,026
Leases 123,278 83,798
Total average
securitized receivables $3,954,830 $2,712,519
Total average managed
receivables $5,254,918 $3,696,106
Managed Net Interest
Analysis (3):
Interest earning assets $4,674,158 $141,437 12.11% $3,382,475 $111,006 13.14%
Interest-bearing
liabilities $4,538,681 $ 54,985 4.86% $3,347,457 $ 45,353 5.45%
Net interest spread 7.25% 7.69%
Net interest margin 7.38% 7.74%
<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
March 31,
1994 1993
Net interest income before
amortization of deferred
origination costs and fees
and including tax
equivalent interest $20,520 $16,745
Amortization of deferred
origination costs, net of
deferred fees (5,611) (965)
Tax equivalent interest (429) (17)
Net interest income $14,480 $15,763
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the first quarter of 1994 was $6.8
million compared to $7.2 million for the comparable period of 1993. This
decrease is attributable, in part, to lower charge-offs on owned
receivables, which on a consolidated basis were 1.8% of average
receivables for the first three months of 1994 versus 3.2% a year ago. The
owned impaired asset level was $28.6 million or 2.0% of receivables at
March 31, 1994 compared to $26.3 million or 2.7% of receivables a year
ago. In the first quarter of 1994, the Company initiated a program for
repurchasing nonperforming mortgage loans from the securitization trusts, in
order to lower net funding costs on these managed assets. The Company
repurchased $10 million of such mortgages in the first quarter
of 1994 and transferred $2.9 million of off-balance sheet recourse
reserves to on-balance sheet reserves as a result of this transaction.
This repurchase increased the owned impaired asset level while having no
impact on the level of managed impaired assets nor the provision for
credit losses. Due to the marked improvement in owned credit card charge-
offs, which dropped to 1.8% of average gross receivables at March 31, 1994
from 4.1% a year ago, the first quarter 1994 provision was added primarily
to the general reserve. The general reserve is established to further
strengthen the balance sheet and to provide for additional needs that may
arise in the future. At March 31, 1994, the general reserve was $5.7 million.
(See also Asset Quality below).
ASSET QUALITY
The reserve for credit losses is maintained for on-balance sheet
receivables. The reserve is intended to cover credit losses inherent in
the owned loan portfolio. With regard to securitized assets, anticipated
losses and related recourse reserves are reflected in the calculations of
securitization income, amounts due from credit card securitizations and
other assets. Recourse reserves are intended to cover all probable credit
losses over the life of the receivables securitized.
<PAGE>
The reserve for credit losses on a consolidated owned basis was $34.2
million or 2.4% of receivables at March 31, 1994 compared to $31.2 million
or 2.4% of receivables at December 31, 1993 and $39.0 million or 4.0% of
receivables at March 31, 1993. Due to the increase in the proportion of
owned impaired mortgages, which have a lower level of reserve coverage,
the consolidated coverage of impaired assets dropped to 119.7% at March
31, 1994 from 138.6% at year end 1993 and 148.5% at March 31, 1993.
On the total managed portfolio, impaired assets were $96.7 million or 1.8%
of receivables at March 31, 1994, $95.1 million or 1.8% of receivables at
December 31, 1993 and $92.4 million or 2.4% of receivables at March 31,
1993. A key credit quality statistic, the 30+ day delinquency rate on
managed credit cards, dropped to 2.3% at March 31, 1994 from 3.5% a year
ago and is at its lowest level in four years. The Company believes that
charge-offs on mortgages will remain at approximately the current levels
throughout 1994.
On the total owned portfolio, impaired assets were $28.6 million or 2.0%
of receivables at March 31, 1994, compared to $22.5 million or 1.8% of
receivables and $26.3 million or 2.7% of receivables at December 31, 1993
and March 31, 1993, respectively.
The total managed charge-off rate for the first three months of 1994 was
2.5%, down from 2.9% for the full year of 1993 and 3.2% for the first
three months of 1993. The charge-off rate on managed credit cards was
2.7% for the first three months of 1994, down from 3.5% for the full
year 1993 and 4.1% for the comparable 1993 period.
The following tables provide a summary of impaired assets, delinquencies
and charge-offs, as of and for the year-to-date periods indicated.
<PAGE>
March December March
31, 31, 31,
CONSOLIDATED - MANAGED 1994 1993 1993
Nonperforming assets $ 65,742 $ 63,589 $ 60,550
Accruing loans past due 90 days or more 30,908 31,514 31,816
Impaired assets 96,650 95,103 92,366
Total loans 30 days or more delinquent 176,206 186,297 177,265
As a percentage of gross receivables:
Nonperforming assets 1.2% 1.2% 1.6%
Accruing loans past due 90 days or more .6 .6 .8
Impaired assets 1.8 1.8 2.4
Total loans 30 days or more delinquent 3.3 3.6 4.7
Net charge-offs:
Amount $ 32,624 $122,715 $ 29,720
As a percentage of average gross
receivables(annualized) 2.5% 2.9% 3.2%
CREDIT CARDS - MANAGED
Nonperforming assets $ 12,983 $ 10,881 $ 8,136
Accruing loans past due 90 days or more 30,905 31,489 31,781
Impaired assets 43,888 42,370 39,917
Total loans 30 days or more delinquent 91,723 94,035 92,657
As a percentage of gross receivables:
Nonperforming assets .3% .3% .3%
Accruing loans past due 90 days or more .8 .8 1.2
Impaired assets 1.1 1.1 1.5
Total loans 30 days or more delinquent 2.3 2.4 3.5
Net charge-offs:
Amount $ 26,858 $105,966 $ 27,009
As a percentage of average gross
receivables(annualized) 2.7% 3.5% 4.1%
MORTGAGE LOANS - MANAGED
Nonperforming assets $ 50,689 $ 50,418 $ 49,776
Total loans 30 days or more delinquent 69,639 75,747 71,028
As a percentage of gross receivables:
Nonperforming assets 4.3% 4.4% 5.1%
Total loans 30 days or more delinquent 5.9 6.6 7.2
Net charge-offs:
Amount (1) $ 4,964 $ 13,991 $ 2,166
As a percentage of average gross
receivables(annualized) (1) 1.7% 1.3% .9%
LEASES - MANAGED
Nonperforming assets $ 2,070 $ 2,290 $ 2,620
Total loans 30 days or more delinquent 14,776 16,476 13,477
As a percentage of receivables:
Nonperforming assets 1.1% 1.3% 1.9%
Total loans 30 days or more delinquent 7.9 9.7 9.9
Net charge-offs:
Amount $ 804 $ 2,759 $ 572
As a percentage of average receivables
(annualized) 1.9% 1.9% 1.7%
(1) Restated, where necessary, to exclude interest advances on the serviced
portfolio to be consistent with presentation of owned portfolio.
<PAGE>
March December March
31, 31, 31,
CONSOLIDATED - OWNED 1994 1993 1993
Reserve for credit losses $34,174 $31,227 $39,017
Nonperforming assets 19,808 11,487 13,795
Accruing loans past due 90 days or more 8,749 11,038 12,487
Impaired assets 28,557 22,525 26,282
Reserve as a percentage of impaired assets 119.7% 138.6% 148.5%
As a percentage of gross receivables:
Reserve 2.4% 2.4% 4.0%
Nonperforming assets 1.4 .9 1.4
Accruing loans past due 90 days or more .6 .9 1.3
Impaired assets 2.0 1.8 2.7
Net charge-offs:
Amount $ 5,828 $26,776 $ 7,989
As a percentage of average gross
receivables(annualized) 1.8% 2.4% 3.2%
CREDIT CARDS - OWNED
Reserve for credit losses $21,986 $25,859 $28,570
Nonperforming assets 3,078 3,062 2,523
Accruing loans past due 90 days or more 8,746 11,013 12,452
Impaired assets 11,824 14,075 14,975
Reserve as a percentage of impaired assets 185.9% 183.7% 190.8%
As a percentage of gross receivables:
Reserve 1.8% 2.3% 3.6%
Nonperforming assets .2 .3 .3
Accruing loans past due 90 days or more .7 1.0 1.6
Impaired assets 1.0 1.2 1.9
Net charge-offs:
Amount $ 5,108 $23,623 $ 7,319
As a percentage of average gross
receivables(annualized) 1.8% 2.6% 4.1%
MORTGAGE LOANS - OWNED (1)
Reserve for credit losses $ 4,914 $ 2,706 $ 3,046
Nonperforming assets 15,896 7,090 9,762
Reserve as a percentage of impaired assets 30.9% 38.2% 31.2%
As a percentage of gross receivables:
Reserve 4.4% 3.0% 2.4%
Nonperforming assets 14.1 7.8 7.8
Net charge-offs:
Amount $ 476 $ 2,207 $ 461
As a percentage of average gross
receivables(annualized) 1.6% 1.4% .9%
LEASES - OWNED
Reserve for credit losses $ 1,536 $ 1,826 $ 1,284
Nonperforming assets 834 1,335 1,492
Reserve as a percentage of impaired assets 184.2% 136.8% 86.1%
As a percentage of receivables:
Reserve 3.2% 3.6% 2.3%
Nonperforming assets 1.8 2.6 2.7
Net charge-offs:
Amount $ 246 $ 947 $ 236
As a percentage of average receivables
(annualized) 2.1% 1.6% 1.8%
(1) Beginning March 1994, the Company initiated a program for repurchasing
nonperforming assets from the securitized portfolios (see "Provision
for Credit Losses").
<PAGE>
NONINTEREST REVENUES
Three Months Ended
March 31,
1994 1993
Credit card securitization
income $45,224 $29,455
Credit card servicing
income 13,800 9,293
Income from mortgage
banking activities 8,205 8,385
Leasing revenues, net 4,593 1,346
Other credit card revenues 3,248 2,297
Insurance revenues, net 2,910 2,083
Credit card interchange
income 1,456 2,822
Other 344 1,370
Total noninterest revenues $79,780 $57,051
For the first quarter of 1994, noninterest revenues increased 40% to $79.8
million from $57.1 million for the same period of 1993. Securitization
income increased $15.8 million or 54% as average securitized credit card
receivables grew 48% from the comparable quarter of 1993 and interchange
income paid to the credit card trusts (included in securitization income)
also increased. Securitization income as an annualized percentage of
average securitized credit card receivables was 6.5% for the first quarter
of 1994 versus 6.3% for the first quarter of 1993. Credit card servicing
income increased $4.5 million due to higher securitized balances. Leasing
revenues, net, increased $3.2 million as average securitized lease
receivables grew 47% from the comparable quarter of 1993. Credit card
interchange income represents approximately 1.4% of credit card purchases
less amounts paid to the securitization trusts, which amounts range from 1%
to 2% of securitized balances and are included in credit card
securitization income. Interchange income decreased $1.4 million due to a
higher level of interchange fees being included in credit card
securitization income, as well as an increase in the volume of balance
transfer activity which yields no interchange income. Other income
declined $1.0 million primarily due to $.9 million of securities gains
included in the first quarter of 1993.
<PAGE>
OPERATING EXPENSES
Three Months Ended
March 31,
1994 1993
Salaries and employee
benefits $20,563 $14,399
Marketing 6,384 4,391
External processing 4,657 3,586
Credit card fraud losses 3,507 3,305
Postage 2,701 2,258
Equipment expense 2,055 1,376
Telephone expense 1,793 1,170
Occupancy expense 1,787 1,524
Professional fees 1,752 2,696
Credit and collection expense 1,666 1,676
Other 1,500 3,627
Total operating expenses $48,365 $40,008
Operating expenses of $48.4 million for the three months ended March 31,
1994 increased 21% from $40.0 million for the same period of 1993, driven
by a 42% growth in average managed receivables. Operating expenses as a
percentage of average managed receivables were 3.7% for the first three
months of 1994, down from 4.3% for the comparable 1993 period. The
increase in operating expenses is attributable, in part, to a 21% increase
in the number of employees from 1,371 at March 31, 1993 to 1,659 at March
31, 1994 to effectively service the current and anticipated account growth.
Marketing, postage and telephone expense increased as the Company promoted
its financial products as well as enhanced its general public visibility.
The increase in external processing is also consistent with the increase in
the number of credit card accounts managed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, both
long- and short-term, through active management of both assets and
liabilities. During the first three months of 1994, the Company, through
its subsidiaries, securitized $105 million of mortgage loans and $27
million of equipment lease receivables. Cash generated from these
transactions was temporarily invested in short-term, high quality
investments at money market rates awaiting redeployment to pay down
deposits and to fund future credit card, mortgage and lease receivable
growth. At March 31, 1994, the Company had approximately $892 million of
loan and lease receivables and $345 million of investments available for
sale which could be sold to generate additional liquidity.
During 1993, the debt securities of ADVANTA Corp. achieved investment-grade
ratings from the nationally recognized rating agencies. These ratings have
allowed the Company to further diversify its funding sources. As a result,
in March 1994, the Company obtained a revolving credit facility totaling
$245 million from a consortium of banks. In November 1993, the Company
filed a shelf registration statement with the Securities and Exchange
Commission for $1 billion of debt securities, and subsequently sold $150
million of three-year notes in the fourth quarter of 1993 and has sold
$90 million of medium-term notes under this registration statement through
the first quarter of 1994. The Company anticipates selling up to an
additional $410 million of medium-term notes as needed.
<PAGE>
Subsequent to quarter-end, the Company, through its subsidiary, Colonial
National Bank USA, reached an agreement to sell certain credit card
customer relationships which currently represent approximately $150 million
of securitized credit card receivables (less than 4% of the Company's
managed credit card receivables as of March 31, 1994). The receivables
will continue to be serviced by Colonial National until the securitization
trust terminates. The Company anticipates this will occur in the second
quarter of 1995.
Due to the Company's continuing success in marketing credit cards, the
Company anticipates accelerating its marketing expenditures through 1994,
in order to sustain the rapid growth in managed credit card receivables.
While there can be no assurance that this strategy will in fact result in
continued rapid receivable growth, the Company believes that, in light of
current market conditions, the Company's credit card offers will continue
to appeal to consumers and will thus enable the Company to continue to
increase its share of the domestic bank credit card market.
ASSET/LIABILITY MANAGEMENT
The Company attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating
the risk inherent in its asset and liability structure, including
securitized assets. The risk arises from continuous changes in the
Company's asset/liability mix, market interest rates, the yield curve,
prepayment trends, and the timing of cash flows. Computer simulations are
used to evaluate net interest income volatility under varying rate, spread
and volume assumptions over monthly time periods of up to two years.
In managing its rate sensitivity position, the Company periodically
securitizes, sells and purchases assets, alters the mix and term structure
of its retail and institutional funding base, and complements its basic
business activities by changing the investment portfolio and short-term
asset positions. The Company has primarily utilized variable rate funding
in pricing its credit card securitization transactions in an attempt to
match the pricing dynamics of the underlying receivables sold to the
trusts. Although credit card receivables are priced at a spread over the
prime rate, they generally contain interest rate floors. These floors have
the impact of converting the credit card receivables to fixed rate
receivables in a low interest rate environment. In instances when a
significant portion of credit card receivables are at their floors, the
Company may convert part of the underlying funding to a fixed rate by using
interest rate hedges, swaps and fixed rate securitizations. In pricing
mortgage and lease securitizations, primarily fixed rate funding is used as
nearly all of the receivables sold to investors carry a fixed rate.
Interest rate fluctuations affect net interest income at virtually all
financial institutions. While interest rate volatility does have an effect
on net interest income, other factors also contribute significantly to
changes in net interest income. Specifically, within the credit card
portfolio, pricing decisions and customer behavior regarding convenience
usage impact the yield on the portfolio. These factors may counteract or
exacerbate income changes due to fluctuating interest rates. The Company
closely monitors interest rate movements, competitor pricing and consumer
behavioral changes in its ongoing analysis of net interest income
sensitivity.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders.
At the Company's Annual Meeting of Stockholders held on May 5,
1994, the following nominees for reelection as directors of the
Company were elected by the votes indicated below:
Director Votes For Votes Withheld
Richard A. Greenawalt 15,045,098 22,155
Alex W. "Pete" Hart 15,045,146 22,107
Warren Kantor 15,048,498 18,755
Ronald J. Naples 15,046,533 20,720
In addition, at the Annual Meeting the stockholders approved the
proposal to amend the Company's Restated Certificate of Incorporation
to increase the authorized number of shares of Common Stock from
60,000,000 to 400,000,000, consisting of 200,000,000 shares of Class A
Common Stock and 200,000,000 shares of Class B Common Stock by the
following vote: votes for - 11,930,592; votes against - 3,077,060;
and abstentions and broker non-votes - 59,601.
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are being filed with this Report.
(b) A report on Form 8-K, dated April 19, 1994, was filed
by the Company setting forth the financial highlights of
the Company's results of operations for the period ended
March 31, 1994.
<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)
May 12, 1994 By /s/Dennis Alter
Chairman of the Board and
Chief Executive Officer
May 12, 1994 By /s/Richard Greenawalt
President and Chief Operating
Officer
May 12, 1994 By /s/David Wesselink
Senior Vice President and
Chief Financial Officer
May 12, 1994 By /s/John J. Calamari
Vice President, Finance and
Principal Accounting Officer
<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 Inapplicable.
99 Inapplicable.
