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, 1996 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.)
Five Horsham Business Center, 300 Welsh Road, Horsham, PA 19044
(Address of Principal Executive Offices) (Zip Code)
(215) 657-4000
(Registrant's telephone number, including area code)
Brandywine Corporate Center, 650 Naamans Road, Claymont, DE 19703
(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 1, 1996
Common Stock, $.01 par value 17,593,270 shares
Class B Outstanding at May 1, 1996
Common Stock, $.01 par value 24,206,620 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 12
Part II - Other Information 23
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1996 1995
ASSETS (Unaudited)
Cash $ 74,686 $ 45,714
Federal funds sold and interest-bearing
deposits with banks 586,236 557,084
Investments available for sale 468,090 532,963
Loan and lease receivables, net:
Available for sale 1,921,019 1,079,478
Other loan and lease receivables, net 1,114,403 1,699,771
Total loan and lease receivables, net 3,035,422 2,779,249
Premises and equipment, net 56,370 43,453
Amounts due from credit card
securitizations 255,411 190,819
Other assets 508,701 374,977
Total assets $4,984,916 $4,524,259
LIABILITIES
Deposits $2,043,303 $1,906,601
Debt and other borrowings 1,996,858 1,804,004
Other liabilities 234,261 140,690
Total liabilities $4,274,422 $3,851,295
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par
value: authorized, issued and
outstanding -- 1,010 shares in 1996
and 1995 1,010 1,010
Class B preferred stock, $.01 par
value: authorized -- 1,000,000 shares
in 1996 and 1995; issued -- 25,000
shares in 1996 and 1995 0 0
Class A common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 17,566,020 shares in 1996
and 17,481,022 in 1995 176 175
Class B common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 24,165,877 in 1996 and
24,007,352 in 1995 242 240
Additional paid-in capital, net 283,471 280,294
Retained earnings, net 425,595 391,245
Total stockholders' equity 710,494 672,964
Total liabilities and stockholders'
equity $4,984,916 $4,524,259
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)
1996 1995
Interest income:
Loans and leases $ 58,502 $ 48,525
Investments 14,144 10,881
Total interest income 72,646 59,406
Interest expense:
Deposits 27,746 14,656
Other debt 28,189 23,454
Total interest expense 55,935 38,110
Net interest income 16,711 21,296
Provision for credit losses 15,082 8,925
Net interest income after
provision for credit losses 1,629 12,371
Noninterest revenues 171,029 114,223
Operating expenses:
Amortization of credit card
deferred origination costs, net 20,493 15,401
Other operating expenses 90,002 62,740
Total operating expenses 110,495 78,141
Income before income taxes 62,163 48,453
Provision for income taxes 21,133 17,670
Net income $ 41,030 $ 30,783
Earnings per common share $ .91 $ .74
Weighted average common
shares outstanding 44,875 41,438
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,
1996 1995
OPERATING ACTIVITIES (Unaudited)
Net income $ 41,030 $ 30,783
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity securities gains (1,858) 0
Depreciation and amortization of intangibles 3,527 2,387
Provision for credit losses 15,082 8,925
Change in other assets and amounts due from
credit card securitizations (97,207) (10,984)
Change in other liabilities 36,653 3,372
Gain on securitization of mortgages and business
loans (20,718) (7,456)
Net cash (used)/provided by operating activities (23,491) 27,027
INVESTING ACTIVITIES
Purchase of investments available for sale (2,468,573) (118,556)
Proceeds from sales of investments available for
sale 369,776 90,236
Proceeds from maturing investments available
for sale 2,149,348 25,639
Change in fed funds sold and interest-bearing
deposits 69,614 (28,368)
Change in credit card receivables, excluding
sales (1,851,356) (483,478)
Proceeds from sales/securitizations of
receivables 1,906,167 970,503
Purchase of mortgage/business loan portfolios (13,727) (41,605)
Principal collected on mortgages 7,728 7,481
Mortgages made to customers (235,599) (76,923)
Purchases of premises and equipment (16,387) (2,837)
Proceeds from sale of premises and equipment 43 26
Excess of cash collections over income
recognized on direct financing leases 17,534 3,465
Equipment purchased for direct financing leases (74,573) (50,695)
Change in business card receivables,excluding sales (33,650) (2,741)
Net change in other loans (998) 186
Net cash (used)/provided by investing activities (174,653) 292,333
FINANCING ACTIVITIES
Change in demand and savings deposits 73,593 (63,863)
Proceeds from sales of time deposits 359,901 90,073
Payments for maturing time deposits (296,792) (180,842)
Change in repurchase agreements and term fed funds (378,000) (330,455)
Proceeds from issuance of subordinated/senior debt 12,782 13,414
Payments on redemption of subordinated/senior debt (9,358) (14,020)
Proceeds from issuance of medium-term notes 305,333 155,013
Payments on maturity of medium-term notes (52,500) 0
Change in notes payable 215,832 15,014
Proceeds from issuance of stock 2,252 1,581
Cash dividends paid (5,927) (3,181)
Net cash provided/(used) by financing activities 227,116 (317,266)
Net increase in cash 28,972 2,094
Cash at beginning of period 45,714 43,706
Cash at end of period $ 74,686 $ 45,800
See Notes to Consolidated Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
March 31, 1996
1) In the opinion of management, the accompanying unaudited and audited
consolidated condensed financial statements contain all adjustments
necessary to present fairly the financial position of Advanta Corp. and
subsidiaries as of March 31, 1996 and December 31, 1995, the results of
their operations for the three month periods ended March 31, 1996 and
1995, and their cash flows for the three month periods ended March 31,
1996 and 1995. The results of operations for the three month period
ended March 31, 1996 are not necessarily indicative of the results to
be expected for the full year. Certain prior period amounts have been
reclassified to conform with current year classifications.
2) The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
3) Investments available for sale include securities that the Company
sells from time to time to provide liquidity and in response to changes
in the market. Debt and equity securities classified as available for
sale are reported at market value. Unrealized gains and losses on
these securities (except those held by the Company's venture capital
unit, Advanta Partners LP) are reported as a separate component of
stockholders' equity and included in retained earnings. Changes in the
fair value of Advanta Partners LP investments are reported in
noninterest revenues as equity securities gains or losses.
4) Loan and lease receivables available for sale represent receivables
currently on the balance sheet that the Company generally intends to
sell or securitize within the next six months. These receivables are
reported at the lower of book or fair market value.
5) Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
March 31, December 31,
1996 1995
Gross loan and lease receivables $3,011,843 $2,762,927
Add: Deferred origination costs,
net of deferred fees 80,254 69,816
Less: Reserve for credit losses (56,675) (53,494)
Loan and lease receivables, net $3,035,422 $2,779,249
Number of Accounts:
Credit cards 521,645 500,729
Other loans and leases 45,858 12,662
Total 567,503 513,391
<PAGE>
Receivables and accounts serviced for others consisted of the
following:
March 31, December 31,
1996 1995
Receivables:
Credit cards $ 9,099,786 $7,692,463
Mortgage loans* 1,674,932 1,475,871
Business loans 304,568 284,094
Total $11,079,286 $9,452,428
Number of Accounts:
Credit cards 4,973,192 4,366,362
Mortgage loans* 30,258 27,731
Business loans 61,964 59,511
Total 5,065,414 4,453,604
* Excludes mortgage loans which were never owned by the Company,
but which the Company services for a fee ("contract servicing").
Contract servicing receivables were $928 million and $623
million at March 31, 1996 and December 31, 1995, respectively.
6) The Company accounts for credit card origination costs under
Statement of Financial Accounting Standards No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91").
This accounting standard requires certain loan and lease
origination fees and costs to be deferred and amortized over the
life of a loan or lease 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 $26.5 million and $13.7 million in
the first three months of 1996 and 1995, respectively.
The Company amortizes deferred credit card origination costs under
Issue 93-1 of the Emerging Issues Task Force ("EITF Issue 93-1")
of the Financial Accounting Standards Board regarding the
acquisition of individual credit card accounts from independent
third parties. EITF Issue 93-1 stated 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. Direct origination costs
incurred related to credit card account originations initiated
after EITF Issue 93-1 are deferred and amortized over 12 months.
Costs incurred for originations which were initiated prior to
EITF Issue 93-1 will continue to be amortized over a 60 month
period as was the practice prior to the EITF 93-1 consensus.
<PAGE>
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 trusts on a continual basis to replenish the
investors' interest in trust receivables which have been repaid
by the credit cardholders.
7) The following table shows the changes in the reserve for credit
losses for the periods presented:
Three Months Ended Year Ended
March 31, December 31,
1996 1995
Balance, beginning of period $ 53,494 $ 41,617
Current provision 15,082 53,326
Transfer of recourse
reserves to on-balance
sheet reserves 3,001 1,100
Net charge-offs (14,902) (42,549)
Balance, end of period $ 56,675 $ 53,494
8) At March 31, 1996 and December 31, 1995, the Company had $255.4
million and $190.8 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 is subject to liens held
by the providers of credit enhancement facilities for the
respective securitizations.
<PAGE>
9) Selected Balance Sheet Information
Other Assets
March 31, December 31,
1996 1995
Excess mortgage servicing rights $114,852 $ 96,194
Accrued interest receivable 65,410 67,681
Prepaid assets 59,675 69,170
Investments in operating leases 20,335 11,928
Deferred costs 25,550 20,670
Excess servicing - leasing 12,025 11,813
Due from trustees - mortgage 9,860 8,095
Current and deferred federal
income taxes 49,095 15,823
Goodwill 4,903 4,983
Other real estate owned 3,815 3,333
Due from trustees - leasing 2,498 2,941
Other 140,683 62,346
Total other assets $508,701 $374,977
Other Liabilities
March 31, December 31,
1996 1995
Deferred fees and other reserves $ 94,499 $ 46,058
Accounts payable and accrued
expenses 28,235 32,831
Accrued interest payable 38,192 29,012
Current and deferred state income
taxes 14,781 9,026
Other 58,554 23,763
Total other liabilities $234,261 $140,690
10) Income tax expense reflects an effective tax rate of approximately
34.0%, for the three month period ended March 31, 1996, compared
to 36.5% for the comparable 1995 period. The Company accounts
for income taxes under the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Income tax expense consisted of the following components:
Three Months Ended
March 31,
1996 1995
Current:
Federal $ 970 $14,569
State 3,077 3,126
Total current 4,047 17,695
Deferred:
Federal 17,711 94
State (625) (119)
Total deferred 17,086 (25)
Total tax expense $21,133 $17,670
<PAGE>
The reconciliation of the statutory federal income tax to the
consolidated tax expense is as follows:
Three Months Ended
March 31,
1996 1995
Statutory federal income tax $21,757 $16,959
State income taxes 1,593 1,954
Other (2,217) (1,243)
Consolidated tax expense $21,133 $17,670
The net deferred tax asset is comprised of the following:
March 31, December 31,
1996 1995
Deferred taxes:
Gross assets $129,211 $75,851
Gross liabilities (80,116) (59,445)
Total deferred taxes $ 49,095 $16,406
The Company did not record any valuation allowances against deferred
tax assets at March 31, 1996 and December 31, 1995.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
March 31, December 31,
1996 1995
SFAS 91 $(29,429) $(23,899)
Loan losses 21,277 20,197
Mortgage banking income 15,234 9,767
Securitization income (37,143) (35,546)
Leasing income 81,942 41,901
Other (2,786) 3,986
Net deferred tax asset $ 49,095 $ 16,406
<PAGE>
11) The Company has adopted several management incentive plans
designed to provide incentives to participating employees to
remain in the employ of the Company and devote themselves to
its success. Under these plans, certain eligible employees
were required and others were given the opportunity to elect
to take portions of their anticipated or "target" bonus
payments for future years in the form of restricted shares of
common stock. The restricted shares are subject to forfeiture
should the employee terminate employment with the Company prior
to vesting. The shares become unrestricted over time if certain
performance criteria are met. At March 31, 1996, a total of
1,010,045 shares issued under these plans were subject to
restrictions and were included in the number of shares outstanding.
These shares are considered common stock equivalents in the
calculation of earnings per common share.
Deferred compensation of $20.8 million and $21.6 million related to
these shares of restricted stock is reflected as a reduction of
equity at March 31, 1996 and December 31, 1995, respectively.
12) On August 21, 1995, in a public offering, the Company sold
2,500,000 depositary shares each representing a one-hundredth
interest in a share of Stock Appreciation Income Linked
Securities ("SAILS"). The SAILS constitute a series of the
Company's Class B Preferred Stock, designated as 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (SAILS). On
September 15, 1999, unless either previously redeemed by the
Company or converted at the option of the holder, each share of
the SAILS will automatically convert into 100 shares of Class B
Common Stock. Proceeds from the offering, net of underwriting
discount, were approximately $90 million. The Company used the
proceeds of the offering for general corporate purposes,
including financing the growth of its subsidiaries.
13) The following table shows the calculation of earnings per common
share:
Three Months Ended
March 31,
1996 1995
Net income $41,030 $30,783
less: Class A preferred dividends (141) (141)
Net income available to common
shares $40,889 $30,642
Average common stock outstanding 40,492 39,462
Common stock equivalents 4,383 1,976
Weighted average common shares
outstanding (in thousands) 44,875 41,438
Earnings per common share $ .91 $ .74
<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, 1996 was $41.0
million, a $10.2 million or 33% increase from the $30.8 million
reported for the first quarter of 1995. Earnings per share for the
first quarter of 1996 were $.91, a 23% increase from $.74 per share
for the same period last year.
Earnings increased in the first quarter of 1996 primarily as a
result of a 54% increase in average managed receivables. 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 54% increase
in average managed receivables resulted in a $56.8 million or 50%
rise in noninterest revenues to $171.0 million in 1996, from $114.2
million in 1995. The operating expense ratio improved to 2.8% of average
managed receivables in the first quarter of 1996, compared to 3.0%
in the first quarter of 1995. Earnings also reflected an increase
in the managed charge-off rate from 2.1% for the first quarter of
1995 to 2.8% for the first quarter of 1996.
NET INTEREST INCOME
Net interest income for the first quarter of 1996 decreased $4.6
million to $16.7 million from $21.3 million for the same period of
1995. This resulted from a decline in the owned net interest margin
to 1.77% for the first quarter of 1996, from 3.46% for the first
quarter of 1995, partially offset by a $1.4 billion increase in
average interest earning assets. The lower owned net interest
margin resulted from the significant growth in new lower-yielding
credit card receivables combined with the Company's ongoing
securitization activity which reduces the level of higher-yielding
receivables on the balance sheet while proportionately increasing
the balance sheet levels of new lower yielding receivables and money
market assets.
The following table provides an analysis of both owned and managed
interest income and expense data, average balance sheet data, net
interest spread (the difference between the yield on interest
earning assets and the average rate paid on interest-bearing
liabilities),and net interest margin (the difference between the
yield on interest earning assets and the average rate paid to fund
interest earning assets) for the three month periods ended March 31,
1996 and 1995. Average owned loan and lease receivables and the
related interest revenues include certain loan fees.
<PAGE>
<TABLE>
INTEREST RATE ANALYSIS
<CAPTION> Three Months Ended March
31,
1996 1995
Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate
<S> <C> <C> <C> <C> <C> <C>
On-balance sheet
Credit cards $2,411,626 $48,668 8.12% $1,518,052 $ 42,889 11.30%
Mortgage loans 224,024 5,633 10.11 136,240 2,921 8.70
Business loans (2) 151,377 4,758 12.60 86,867 3,069 14.13
Other loans 9,706 185 7.67 5,133 88 6.95
Gross receivables 2,796,733 59,244 8.52 1,746,292 48,967 11.23
Investments (3) 1,076,602 14,253 5.15 769,936 11,289 5.91
Total interest earning
assets $3,873,335 $73,497 7.58% $2,516,228 $ 60,256 9.60%
Interest-bearing
liabilities $3,666,393 $55,935 6.07% $2,434,768 $ 38,110 6.26%
Net interest spread 1.51% 3.34%
Net interest margin 1.77% 3.46%
Off-balance sheet
Credit cards $8,145,795 $5,180,935
Mortgage loans 1,626,741 1,220,589
Business loans 293,335 189,570
Total average
securitized receivables $10,065,871 $6,591,094
Total average managed
receivables $12,862,604 $8,337,386
Managed Net Interest
Analysis (4):
Interest earning assets $12,019,130 $361,104 12.07% $7,697,163 $238,553 12.41%
Interest-bearing
liabilities $11,812,188 $174,346 5.92% $7,615,703 $123,955 6.51%
Net interest spread 6.15% 5.90%
Net interest margin 6.24% 5.94%
<FN>
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Includes leases and business credit cards beginning in 1996.
(3) Interest and average rate for tax-free securities computed on a tax
equivalent basis using a statutory rate of 35%.
(4) Combination of owned interest earning assets/owned interest-bearing
liabilities and securitized credit card assets/liabilities.
</TABLE>
<PAGE>
MANAGED PORTFOLIO DATA
The Company analyzes its financial results on a managed assets basis in
addition to analyzing data as reported under generally accepted
accounting principles.
The following table provides selected information on a managed basis
(excluding mortgage contract servicing assets), as well as a summary of
the effects of credit card securitizations on selected line items of the
Company's condensed consolidated income statements as of and for the
three months ended March 31, 1996 and 1995.
Three Months Ended
March 31,
1996 1995
Balance sheet data:
Average managed receivables $12,862,604 $8,337,386
Managed receivables 14,091,129 8,610,345
Total managed assets 16,064,202 9,833,890
Managed net interest margin
(on a fully tax equivalent basis) 6.24% 5.94%
As a percentage of gross managed
receivables:
Total loans 30 days or more
delinquent 3.2% 2.8%
Net charge-offs 2.8% 2.1%
Effects of credit card
securitizations on:
Net interest income $ (169,196) $ (92,452)
Provision for credit losses 70,493 29,392
With respect to the above information on the effects of credit card
securitizations, net interest income represents the amount by which net
interest income would have been higher had the securitized receivables
remained on the balance sheet. In addition, the provision for credit
losses represents the amount by which the provision for credit losses
would have been higher had the securitized receivables remained as owned
and the provision for credit losses been equal to charge-offs. Both net
interest income and the provision for credit losses described above are
netted and included in other noninterest revenues in the Consolidated
Condensed Income Statements.
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the first quarter of 1996 was $15.1
million compared to $8.9 million for the comparable period of 1995. This
increase was primarily due to the replenishment of reserves for the
higher level of owned charge-offs. Charge-offs on owned receivables
increased to $14.9 million for the first quarter of 1996 from $10.8
million for the first quarter of 1995.
<PAGE>
ASSET QUALITY
The reserve for credit losses is maintained for on-balance sheet
receivables. This reserve is intended to cover credit losses inherent in
the owned loan portfolio. With regard to securitized assets,
anticipated losses and related recourse reserves are reflected in the
calculations of securitization income, amounts due from credit card
securitizations and other assets. Recourse reserves are intended to
cover all probable credit losses over the life of the securitized
receivables. The Company periodically evaluates its on-balance sheet
and recourse reserve requirements and, as appropriate, effects
transfers between these accounts.
The reserve for credit losses on a consolidated owned basis was $56.7
million or 1.9% of receivables at March 31, 1996 compared to $53.5
million or 1.9% of receivables at December 31, 1995 and $39.7 million
or 2.4% of receivables at March 31, 1995. The consolidated reserve
coverage of impaired assets was 153.9% at March 31, 1996 compared to
136.3% at year end 1995 and 106.0% at March 31, 1995.
On the total owned portfolio, impaired assets were $36.8 million or 1.2%
of receivables at March 31, 1996, down from $39.2 million or1.4% of
receivables and $37.5 million or 2.3% of receivables at December 31, 1995
and March 31, 1995, respectively.
On the total managed portfolio, impaired assets were $202.9 million or
1.4% of receivables at March 31, 1996, compared to $167.1 million or
1.4% of receivables at December 31, 1995 and $105.0 million or 1.2% of
receivables at March 31, 1995. The 30 day and over delinquency rate on
managed credit cards rose to 2.7% at March 31, 1996 from 2.1% a year ago.
The total managed charge-off rate for the first three months of 1996 was
2.8%, up from 2.2% for the full year of 1995 and 2.1% for the first three
months of 1995. The charge-off rate on managed credit cards was
3.2% for the first three months of 1996, up from 2.5% for the full year
of 1995 and 2.2% for the comparable 1995 period. The charge-off rate on
managed mortgage loans was .7% for the first three months of 1996, down
from .9% for the full year of 1995 and 1.2% for the comparable 1995
period.
The charge-off rate on consolidated owned receivables was 2.1% of average
receivables for the first three months of 1996, compared to 2.3% for the
full year of 1995 and 2.5% a year ago. The charge-off rate on owned
credit cards was 2.2% for the first three months of 1996, level with both
the full year of 1995 and the comparable 1995 period.
<PAGE>
The following tables provide a summary of impaired assets, delinquencies
and charge-offs, as of and for the year-to-date periods indicated.
March December March
31, 31, 31,
CONSOLIDATED - MANAGED 1996 1995 1995
Nonperforming assets $ 97,962 $ 82,171 $61,627
Accruing loans past due 90 days or
more 104,953 84,892 43,401
Impaired assets 202,915 167,063 105,028
Total loans 30 days or more
delinquent 456,397 404,072 236,972
As a percentage of gross receivables:
Nonperforming assets .7% .7% .7%
Accruing loans past due 90 days or more .7 .7 .5
Impaired assets 1.4 1.4 1.2
Total loans 30 days or more delinquent 3.2 3.3 2.8
Net charge-offs:
Amount $ 89,842 $212,865 $43,087
As a percentage of average gross
receivables(annualized) 2.8% 2.2% 2.1%
CREDIT CARDS - MANAGED
Nonperforming assets $ 29,136 $ 20,516 $15,843
Accruing loans past due 90 days or
more 104,584 84,878 43,274
Impaired assets 133,720 105,394 59,117
Total loans 30 days or more
delinquent 311,484 262,299 147,550
As a percentage of gross receivables:
Nonperforming assets .2% .2% .2%
Accruing loans past due 90 days or more .9 .8 .6
Impaired assets 1.1 1.1 .9
Total loans 30 days or more delinquent 2.7 2.6 2.1
Net charge-offs:
Amount $ 83,970 $193,160 $ 37,620
As a percentage of average gross
receivables(annualized) 3.2% 2.5% 2.2%
MORTGAGE LOANS - MANAGED
Nonperforming assets $ 63,618 $ 56,743 $ 42,892
Total loans 30 days or more
delinquent 105,308 106,223 65,572
As a percentage of gross receivables:
Nonperforming assets 3.3% 3.2% 3.1%
Total loans 30 days or more
delinquent 5.5 5.9 4.7
Net charge-offs:
Amount $ 3,299 $ 13,836 $ 4,165
As a percentage of average gross
receivables(annualized) .7% .9% 1.2%
BUSINESS LOANS - MANAGED
Nonperforming assets $ 5,208 $ 4,912 $ 2,892
Total loans 30 days or more
delinquent 39,416 35,274 23,461
As a percentage of receivables:
Nonperforming assets 1.1% 1.3% 1.0%
Total loans 30 days or more delinquent 8.1 9.3 8.0
Net charge-offs:
Amount $ 2,575 $ 5,846 $ 1,307
As a percentage of average
receivables(annualized) 2.3% 1.9% 1.9%
<PAGE>
March December March
31, 31, 31,
CONSOLIDATED - OWNED 1996 1995 1995
Reserve for credit losses $56,675 $53,494 $39,717
Nonperforming assets 23,563 21,856 27,610
Accruing loans past due 90 days or more 13,253 17,399 9,856
Impaired assets 36,816 39,255 37,466
Reserve as a percentage of impaired
assets 153.9% 136.3% 106.0%
As a percentage of gross receivables:
Reserve 1.9% 1.9% 2.4%
Nonperforming assets .8 .8 1.7
Accruing loans past due 90 days or more .4 .6 .6
Impaired assets 1.2 1.4 2.3
Net charge-offs:
Amount $14,902 $42,549 $10,825
As a percentage of average gross
receivables (annualized) 2.1% 2.3% 2.5%
CREDIT CARDS - OWNED
Reserve for credit losses $35,085 $36,889 $24,965
Nonperforming assets 5,736 2,466 3,736
Accruing loans past due 90 days or more 12,884 17,385 9,729
Impaired assets 18,620 19,851 13,465
Reserve as a percentage of impaired
assets 188.4% 185.8% 185.4%
As a percentage of gross receivables:
Reserve 1.4% 1.6% 1.8%
Nonperforming assets .2 .1 .3
Accruing loans past due 90 days or more .5 .7 .7
Impaired assets .7 .8 1.0
Net charge-offs:
Amount $13,477 $35,425 $ 8,228
As a percentage of average gross
receivables (annualized) 2.2% 2.2% 2.2%
MORTGAGE LOANS - OWNED
Reserve for credit losses $ 3,008 $ 3,360 $ 3,087
Nonperforming assets 16,767 18,676 22,784
Reserve as a percentage of impaired
assets 17.9% 18.0% 13.5%
As a percentage of gross receivables:
Reserve 1.2% 1.0% 2.5%
Nonperforming assets 6.7 5.8 18.2
Net charge-offs:
Amount $ 849 $ 5,962 $ 2,268
As a percentage of average gross
receivables (annualized) 1.5% 3.2% 6.7%
BUSINESS LOANS - OWNED
Reserve for credit losses $ 2,012 $ 977 $ 1,269
Nonperforming assets 1,060 714 1,090
Reserve as a percentage of impaired
assets 141.8% 136.8% 116.4%
As a percentage of receivables:
Reserve 1.1% 1.0% 1.5%
Nonperforming assets .6 .8 1.3
Net charge-offs:
Amount $ 578 $ 1,139 $ 334
As a percentage of average
receivables(annualized) 1.5% 1.4% 1.5%
<PAGE>
NONINTEREST REVENUES
Three Months Ended
March 31,
1996 1995
Credit card securitization income $ 65,865 $ 41,069
Credit card servicing income 39,028 24,872
Income from mortgage banking
activities 21,995 10,218
Credit card interchange income 21,962 19,498
Leasing revenues, net 10,351 9,594
Insurance revenues, net 5,912 6,158
Equity securities gains 3,073 0
Other 2,843 2,814
Total noninterest revenues $171,029 $114,223
For the first quarter of 1996, noninterest revenues increased 50%
to $171.0 million from $114.2 million for the same period of 1995.
Credit card securitization income increased $24.8 million or 60% to
$65.9 million as average securitized credit card receivables grew 57%
from the comparable quarter of 1995. Credit card servicing income
increased $14.2 million due to higher securitized balances. Income
from mortgage banking activities increased $11.8 million primarily due
to a gain on sale from a $300 million REMIC transaction in the first
quarter of 1996. Credit card interchange income, which represents
approximately 1.4% of credit card purchases, increased $2.5 million to
$22.0 million. Equity securities gains included both a $1.2 million
realized gain and a $1.9 million market valuation gain on an investment
held by the Company's venture capital unit.
OPERATING EXPENSES
Three Months Ended
March 31,
1996 1995
Amortization of credit card
deferred origination costs, net $ 20,493 $15,401
Other operating expenses:
Salaries and employee benefits 37,419 23,988
Marketing expense 11,122 7,618
External processing 9,833 5,727
Professional fees 6,830 2,272
Postage expense 5,806 4,391
Equipment expense 4,336 2,754
Telephone expense 3,967 2,855
Credit and collection expense 2,585 2,144
Occupancy expense 2,576 2,016
Credit card fraud losses 2,349 4,062
Other 3,179 4,913
Total other operating expenses $ 90,002 $62,740
Total operating expenses $110,495 $78,141
<PAGE>
The amortization of credit card deferred origination costs, net, increased
from $15.4 million for the first three months of 1995 to
$20.5 million for the first three months of 1996. This increase resulted
primarily from amortization related to the $95.4 million of credit card
origination costs that have been deferred since the first quarter of 1995.
Total other operating expenses of $90.0 million for the three months ended
March 31, 1996 increased 43% from $62.7 million for the same period of 1995.
Operating expenses as a percentage of average managed receivables were 2.8%
for the first quarter of 1996, down from 3.0% in the comparable 1995 period.
The increase in total other operating expenses is attributable, in part, to
a 39% increase in the number of employees from 1,891 at March 31, 1995 to
2,624 at March 31, 1996 to effectively service the current and anticipated
account growth. Other expenses, including marketing, external processing,
postage and telephone expense showed increases consistent with the increase
in the number of managed customer accounts.
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 1996, the Company, through its
subsidiaries, securitized $1.5 billion of credit card receivables, $300.0
million of mortgage loans and $56.2 million of business loan receivables.
Cash generated from these transactions was temporarily invested in short-
term, high quality investments at money market rates awaiting redeployment
to pay down borrowings and to fund future credit card, mortgage and business
loan receivable growth. At March 31, 1996, the Company had approximately
$1.9 billion of loan and lease receivables and $1.1 billion of investments
available for sale which could be sold to generate additional liquidity.
The Company's available funding sources include a $510 million revolving
credit facility from a consortium of banks and $255 million in money market
bid lines. The Company may also sell up to $125 million of medium-term
notes as needed.
In February 1995, the Company's wholly owned subsidiary, Advanta National
Bank ("Advanta National"), a Delaware based credit card bank, commenced
operations. The Company's initial capitalization of Advanta National was
$50 million, consisting of $25 million in common stock and $25 million of
additional paid in capital. Additional capital infusions totaling $39
million and $94 million took place during 1995, and the first quarter of
1996, respectively. As a credit card bank, Advanta National is limited to
one office, can engage only in consumer credit card operations and cannot
accept deposits other than savings and time deposits of $100,000 or more. It
is anticipated that Advanta National will continue to be the originator of a
substantial portion of the Company's credit cards. Advanta National had
total assets of $2.0 billion at March 31, 1996.
In August 1995, in a public offering, the Company sold 2,500,000 depositary
shares each representing a one-hundredth interest in a share of Stock
Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a
series of the Company's Class B Preferred Stock, designated as 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (SAILS). On September 15,
1999, unless either previously redeemed by the Company or converted at the
option of the holder, each share of the SAILS will automatically convert
into 100 shares of Class B Common Stock. Proceeds from the offering, net of
underwriting discount, were approximately $90 million. The Company used the
proceeds of the offering for general corporate purposes, including financing
the growth of its subsidiaries.
<PAGE>
In September 1995, Colonial National Bank USA and Advanta National
(the "Banks") established a $2.25 billion bank note program. These notes
may have maturities ranging from seven days to fifteen years from date of
issuance. At March 31, 1996 Advanta National had $809 million of senior
bank notes outstanding.
Subsequent to quarter end, the Company sold $200 million of 7% medium-term
notes due 2001.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to managed net interest income variability
resulting from mismatches between asset and liability indices (basis risk)
and the effects these changes in market interest rates have on asset and
liability repricing mismatches (gap risk).
The Company attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating
the risk inherent in its asset and liability structure, including
securitized assets. This risk arises from continuous changes in the
Company's asset/liability mix, market interest rates, the yield curve,
prepayment trends and the timing of cash flows. Computer simulations are
used to evaluate net interest income volatility under varying rate, spread
and volume projections over monthly time periods of up to two years.
In managing its interest rate sensitivity position, the Company periodically
securitizes receivables, sells and purchases assets, alters the mix and term
structure of its funding base, changes its investment portfolio and short-
term investment position, and uses derivative financial instruments.
Derivative financial instruments are used for the express purpose of
managing exposure to changes in interest rates and foreign exchange rates.
Derivative financial instruments, by policy, are not used for any
speculative purposes (see discussion under "Derivatives Activities"). The
Company has primarily utilized variable rate funding in pricing its credit
card securitization transactions in an attempt to match the variable rate
pricing dynamics of the underlying receivables sold to the trusts. Variable
rate funding is used on the balance sheet as well, in support of
unsecuritized receivables which carry variable rates. Although credit card
receivable rates are generally set at a spread over a floating rate index,
they often contain interest rate floors. These floors have the impact of
converting the credit card receivables to fixed rate receivables in a low
interest rate environment. In addition, the Company at times offers fixed
rate pricing to consumers for the introductory rate period of its credit
cards. In instances when a significant portion of credit card
receivables carry fixed rate introductory pricing or are at their floors,
<PAGE>
the Company may convert part of the underlying funding to a fixed rate by
using interest rate hedges and fixed rate securitizations. In pricing
mortgage and business loan securitizations, both fixed rate and variable
rate funding are used depending upon the characteristics of the underlying
receivables. Additionally, basis risk exists in on-balance sheet funding as
well as in securitizing credit card receivables at a spread over LIBOR when
the rate on the underlying assets is indexed to the prime rate. The Company
measures the basis risk resulting from potential variability in the spread
between prime and LIBOR and incorporates such risk into the asset and
liability management process. During the first quarter of 1996
substantially all new credit cards were issued using LIBOR as the repricing
index. The effect of this change will be the reduction of prime/LIBOR basis
risk over time. The Company continues to seek cost-effective alternatives
for minimizing this risk.
Interest rate fluctuations affect net interest income at virtually all
financial institutions. While interest rate volatility does have an effect
on net interest income, other factors also contribute significantly to
changes in net interest income. Specifically, within the credit card
portfolio, pricing decisions and customer behavior regarding convenience
usage affect the yield on the portfolio. These factors may counteract or
exacerbate income changes due to fluctuating interest rates. The Company
closely monitors interest rate movements, competitor pricing and consumer
behavioral changes in its ongoing analysis of net interest income
sensitivity.
DERIVATIVES ACTIVITIES
The Company utilizes derivative financial instruments for the purpose of
managing its exposure to interest rate and foreign currency risks. The
Company has a number of mechanisms in place that enable it to monitor and
control both market and credit risk from these derivatives activities. At
the broader level, all derivatives strategies are managed under a hedging
policy approved by the Board of Directors that details the use of such
derivatives and the individuals authorized to execute derivatives
transactions. All derivatives strategies must be approved by the Company's
senior management (Chief Executive Officer, President, Chief Financial
Officer and Treasurer).
As part of this approval process, a market risk analysis is completed to
determine the potential impact on the Company from severe negative
(stressed) movements in the market. By policy, derivatives transactions may
only be used to manage the Company's exposure to interest rate and foreign
currency risks or for cost reduction and may not be used for speculative
purposes. As such, the impact of any derivatives transaction is calculated
using the Company's asset/liability model to determine its suitability.
Procedures and processes are in place to provide reasonable assurance that
prior to and after the execution of any derivatives strategy, market, credit
and liquidity risks are fully analyzed and incorporated into the Company's
asset/liability and risk measurement models and the proper accounting
treatment for the transaction is identified and executed.
As of March 31, 1996 and December 31, 1995, all of the Company's derivatives
were designated as hedges or synthetic alterations and were accounted for as
such.
<PAGE>
The following table summarizes by notional amounts the Company's derivative
instruments:
March 31, December 31,
1996 1995
Interest rate swaps $ 754,741 $ 867,835
Interest rate options:
Caps written 1,380,000 1,360,000
Caps purchased 290,000 270,000
Corridors/Collars 1,075,000 575,000
Buy put options 18,000 0
Sell put options 18,000 0
Forward contracts 242,438 190,652
Total notional amount $3,778,179 $3,263,487
The notional amounts of derivatives do not represent amounts exchanged by
the counterparties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives
contracts.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibit is being filed with this
report on Form 10-Q:
Exhibit Number Description of Document
27 Financial data schedule incorporated by
reference to Exhibit 27 to the Company's
Current Report on Form 8-K dated April 18, 1996,
filed the same date.
(b) Reports on Form 8-K.
(b)(1) A Current Report on Form 8-K, dated April 18, 1996,
was filed by the Company setting forth the financial
highlights of the Company's results of operations for
the period ended March 31, 1996. A Financial Data
Schedule was included as an exhibit in this Form 8-K.
(b)(2) A Current Report on Form 8-K dated April 22, 1996 was
filed by the Company on April 23, 1996, setting forth
certain exhibits to the Company's Registration Statement
on Form S-3 (No. 33-50883) for the purpose of
incorporating such exhibits by reference into such
Registration Statement. No financial statements were
filed as an exhibit to this Form 8K.
<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 13, 1996 By /s/Gene S. Schneyer
Vice President,
Secretary & General Counsel
May 13, 1996 By /s/John J. Calamari
Vice President, Finance and
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Description
2 Inapplicable.
3 Inapplicable.
4 Inapplicable.
10 Inapplicable.
11 Inapplicable.
15 Inapplicable.
18 Inapplicable.
19 Inapplicable
22 Inapplicable.
23 Inapplicable.
24 Inapplicable.
27 Financial data schedule incorporated
by reference to Exhibit 27 to the
Company's Current Report on Form 8-K
dated April 18, 1996, filed the same
date.
99 Inapplicable.
