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, 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.)
Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code)
(215) 657-4000
(Registrant's telephone number, including area code)
Five Horsham Business Center, 300 Welsh Road, Horsham, PA 19044
(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 November 1, 1996
Common Stock, $.01 par value 17,637,388 shares
Class B Outstanding at November 1, 1996
Common Stock, $.01 par value 24,893,934 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 24
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1996 1995
ASSETS (Unaudited)
Cash $ 133,552 $ 45,714
Federal funds sold and interest-bearing
deposits with banks 616,415 557,084
Investments available for sale 813,750 532,963
Loan and lease receivables, net:
Available for sale 1,863,230 1,079,478
Other loan and lease receivables, net 1,160,260 1,699,771
Total loan and lease receivables, net 3,023,490 2,779,249
Premises and equipment, net 79,528 43,453
Amounts due from credit card
securitizations 367,083 190,819
Other assets 572,858 374,977
Total assets $5,606,676 $4,524,259
LIABILITIES
Deposits $1,820,894 $1,906,601
Debt and other borrowings 2,676,328 1,804,004
Other liabilities 311,059 140,690
Total liabilities 4,808,281 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 -- 17,637,388 shares in 1996
and 17,481,022 shares in 1995 176 175
Class B common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 24,854,456 shares in 1996 and
24,007,352 shares in 1995 249 240
Additional paid-in capital, net 294,345 280,294
Retained earnings, net 503,089 391,245
Less: Treasury stock at cost, 11,421
Class B common shares in 1996 (474) 0
Total stockholders' equity 798,395 672,964
Total liabilities and stockholders'
equity $5,606,676 $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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Interest income:
Loans and leases $ 75,449 $ 44,218 $200,844 $130,787
Investments 25,669 12,264 56,367 33,658
Total interest income 101,118 56,482 257,211 164,445
Interest expense:
Deposits 28,142 18,731 83,975 48,037
Other debt 49,555 22,791 116,989 67,166
Total interest expense 77,697 41,522 200,964 115,203
Net interest income 23,421 14,960 56,247 49,242
Provision for credit losses 24,230 10,603 66,963 28,111
Net interest income after
provision for credit losses (809) 4,357 (10,716) 21,131
Noninterest revenues:
Gain on sale of credit 0 0 33,820 0
cards
Other noninterest revenues 209,338 136,221 553,880 381,293
Total noninterest revenues 209,338 136,221 587,700 381,293
Operating expenses:
Amortization of credit card
deferred origination
costs, net 22,690 19,283 67,670 51,401
Other operating expenses 118,619 67,013 311,579 196,907
Total operating expenses 141,309 86,296 379,249 248,308
Income before income taxes 67,220 54,282 197,735 154,116
Provision for income taxes 22,864 19,368 67,229 55,019
Net income $ 44,356 $ 34,914 $130,506 $ 99,097
Earnings per common share $ .98 $ .81 $ 2.89 $ 2.35
Weighted average common
shares outstanding 45,181 43,133 45,097 42,125
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,
1996 1995
OPERATING ACTIVITIES (Unaudited)
Net income $ 130,506 $ 99,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of intangibles 12,628 7,665
Provision for credit losses 66,963 28,111
Change in other assets and amounts due from
credit card securitizations (253,185) (83,429)
Change in other liabilities 146,469 53,963
Gain on securitization of mortgages/business loans (65,334) (28,821)
Net cash provided by operating activities 38,047 76,586
INVESTING ACTIVITIES
Purchase of investments available for sale (25,716,757) (1,771,828)
Proceeds from sales of investments available for
sale 846,689 1,217,497
Proceeds from maturing investments available for
sale 24,581,292 435,495
Change in fed funds sold and interest-bearing
deposits (1,323) (224,864)
Change in credit card receivables, excluding
sales (3,342,542) (2,203,125)
Proceeds from sales/securitizations of receivables 4,319,128 3,129,521
Purchase of mortgage/business loan portfolios (107,995) (202,014)
Principal collected on mortgages 33,386 21,240
Mortgages made to customers (841,943) (385,497)
Purchases of premises and equipment (49,078) (10,995)
Proceeds from sale of premises and equipment 675 20
Excess of cash collections over income
recognized on direct financing leases 65,992 18,432
Equipment purchased for direct financing leases (249,644) (170,247)
Change in business card receivables,excluding
sales (187,960) (25,639)
Net change in other loans (17,519) (1,825)
Net cash used by investing activities (667,599) (173,829)
FINANCING ACTIVITIES
Change in demand and savings deposits (14,705) (39,428)
Proceeds from deposits sold 0 30,018
Proceeds from sales of time deposits 1,280,478 798,227
Payments for maturing time deposits (1,351,480) (487,139)
Change in repurchase agreements and term fed funds (373,000) (330,455)
Proceeds from issuance of subordinated/senior debt 26,359 35,206
Payments on redemption of subordinated/senior debt (27,709) (43,098)
Proceeds from issuance of medium-term notes 605,625 185,039
Payments on maturity of medium-term notes (247,900) (20,000)
Change in notes payable 830,942 (114,977)
Proceeds from issuance of stock 6,466 93,228
Cash dividends paid (17,686) (9,361)
Net cash provided by financing activities 717,390 97,260
Net increase in cash 87,838 17
Cash at beginning of period 45,714 43,706
Cash at end of period $ 133,552 $ 43,723
See Notes to Consolidated Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
September 30, 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 September 30, 1996 and December 31, 1995, the results
of their operations for the three and nine month periods ended September
30, 1996 and 1995, and their cash flows for the nine month periods ended
September 30, 1996 and 1995. The results of operations for the three and
nine month periods ended September 30, 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.
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:
September 30, December 31,
1996 1995
Gross loan and lease receivables $3,047,412 $2,762,927
Add: Deferred origination costs,
net of deferred fees 53,669 69,816
Less: Reserve for credit losses (77,591) (53,494)
Loan and lease receivables, net $3,023,490 $2,779,249
Number of Accounts:
Credit cards 676,931 500,729
Other loans and leases 56,458 12,662
Total 733,389 513,391
<PAGE>
Receivables and accounts serviced for others consisted of the
following:
September 30, December 31,
1996 1995
Receivables:
Credit cards $10,149,470 $7,692,463
Mortgage loans* 2,130,137 1,475,871
Business loans 470,339 284,094
Total $12,749,946 $9,452,428
Number of accounts:
Credit cards 4,919,156 4,366,362
Mortgage loans* 36,487 27,731
Business loans 100,229 59,511
Total 5,055,872 4,453,604
* Excludes mortgage loans which were not originated by the Company,
but which the Company services for a fee ("contract servicing").
Contract servicing receivables were $2.1 billion and $.6 billion
at September 30, 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 $44.1 million and $49.4 million in the first nine 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. Credit
card securitization activities were affected by the adoption in the third
quarter of 1996 of a new charge-off methodology relating to bankruptcies
(see Note 7), the upward repricing of interest rates and fees, increases
in charge-offs and the related impact on reserves, all of which had an
approximate $24 million positive impact for the quarter, as well as a
58% increase in average securitized receivables.
7) The following table shows the changes in the reserve for credit
losses for the periods presented:
Nine Months Ended Year Ended
September 30, December 31,
1996 1995
Balance, beginning of period $ 53,494 $ 41,617
Current provision 66,963 53,326
Transfer of recourse
reserves to on-balance
sheet reserves 3,045 1,100
Net charge-offs (45,911) (42,549)
Balance, end of period $ 77,591 $ 53,494
In the third quarter of 1996, the Company adopted a new charge-off
methodology related to bankrupt credit card accounts, providing for
up to a 90-day (rather than up to a 30-day) investigative period following
notification of the bankruptcy petition, prior to charge-off.
8) At September 30, 1996 and December 31, 1995, the Company had
$367.1 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
September 30, December 31,
1996 1995
Excess mortgage servicing rights $141,525 $ 96,194
Prepaid assets 113,992 69,170
Accrued interest receivable 83,952 67,681
Deferred costs 36,162 20,670
Current and deferred federal
income taxes 22,386 15,823
Investments in operating leases 18,288 11,928
Due from trustees-mortgage loans 11,824 8,095
Excess servicing-business loans 10,232 11,813
Goodwill 4,744 4,983
Other real estate owned 2,779 3,333
Due from trustees-business loans 2,380 2,941
Other 124,594 62,346
Total other assets $572,858 $374,977
Other Liabilities
September 30, December 31,
1996 1995
Deferred fees and other reserves $ 89,367 $ 46,058
Accrued interest payable 78,078 29,012
Accounts payable and accrued
expenses 48,581 32,831
Current and deferred state income
taxes 10,596 9,026
Other 84,437 23,763
Total other liabilities $311,059 $140,690
10) Income tax expense reflects an effective tax rate of approximately
34% for both the three and nine month periods ended September 30,
1996, compared to 36% for both of the comparable 1995 periods. The
Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109").
Income tax expense consisted of the following components:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Current:
Federal $29,065 $10,210 $57,482 $42,298
State 276 1,329 4,542 4,847
Total current 29,341 11,539 62,024 47,145
Deferred:
Federal (6,667) 7,667 5,372 7,138
State 190 162 (167) 736
Total deferred (6,477) 7,829 5,205 7,874
Total tax expense $22,864 $19,368 $67,229 $55,019
<PAGE>
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,
1996 1995 1996 1995
Statutory federal
income tax $23,536 $19,014 $69,207 $53,956
State income taxes 303 969 2,844 3,629
Tax-free income (106) (227) (329) (821)
Other (869) (388) (4,493) (1,745)
Consolidated tax
expense $22,864 $19,368 $67,229 $55,019
The net deferred tax asset is comprised of the following:
September 30, December 31,
1996 1995
Deferred taxes:
Gross assets $119,577 $75,851
Gross liabilities (76,771) (59,445)
Total deferred taxes $ 42,806 $16,406
The Company did not record any valuation allowances against
deferred tax assets at September 30, 1996 and December 31, 1995.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
September 30, December 31,
1996 1995
SFAS 91 $(29,570) $(23,899)
Loan losses 22,761 20,197
Mortgage banking income 13,286 9,767
Securitization income (29,533) (35,546)
Business loan income 67,802 41,901
Other (1,940) 3,986
Net deferred tax asset $ 42,806 $ 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 September 30, 1996, a total of 1,532,397
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 $36.4 million and $21.6 million related to
these shares of restricted stock is reflected as a reduction of equity
at September 30, 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) In June 1996, the Company, through its subsidiary Advanta National
Bank USA, sold certain credit card customer relationships and the
related receivables balance to another domestic bank. The
receivables associated with these relationships represented less
than 2% of the Company's managed credit card portfolio as of June
30, 1996. The Company recorded a $33.8 million net gain related
to this transaction.
<PAGE>
14) The following table shows the calculation of earnings per common
share:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Net income $44,356 $34,914 $130,506 $99,097
less: preferred
dividends 0 0 (141) (141)
Net income available
to common shares $44,356 $34,914 $130,365 $98,956
Average common
shares outstanding 40,818 39,811 40,679 39,669
Common stock
equivalents 4,363 3,322 4,418 2,456
Weighted average
common shares
outstanding
(in thousands) 45,181 43,133 45,097 42,125
Earnings per common
share $ .98 $ .81 $ 2.89 $ 2.35
<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, 1996 was $44.4
million, a $9.5 million or 27% increase from the $34.9 million
reported for the third quarter of 1995. Earnings per share for the
third quarter of 1996 were $.98, a 21% increase from $.81 per share
for the same period last year.
Earnings in the third quarter of 1996 reflected a 60% increase in
average managed receivables, and a $73.1 million or 54% rise in
noninterest revenues derived principally from securitized receivables.
Credit card securitization activities were affected by the adoption in
the third quarter of 1996 of a new charge-off methodology relating to
bankruptcies (see Asset Quality), the upward repricing of interest
rates and fees, increases in charge-offs and the related impact on
reserves, all of which had an approximate $24 million positive impact
for the quarter, as well as a 58% increase in average securitized
receivables. The operating expense ratio increased to 3.0% of average
managed receivables in the third quarter of 1996, compared to 2.7% in
the third quarter of 1995, as a result of increased spending on new
technology, research and personnel to support future growth and
develop new opportunities.
For the nine months ended September 30, 1996, net income was $130.5
million, a 32% increase over the $99.1 million for the comparable year
earlier period. Earnings per share increased 23% to $2.89 in 1996
compared to $2.35 in 1995.
NET INTEREST INCOME
Net interest income for the third quarter of 1996 increased 56% to
$23.4 million from $15.0 million for the same period of 1995. This
increase resulted from a $2.4 billion growth in average interest
earning assets, partially offset by a 48 basis point decline in the
owned net interest margin. The lower owned net interest margin
resulted from the continued growth in lower-yielding introductory rate
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 lower-yielding introductory rate receivables
and money market assets.
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, 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 September 30,
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 $ 2,774,292 $ 62,353 8.94% $1,526,171 $ 37,705 9.88%
Mortgage loans 286,718 7,756 10.76 193,336 4,706 9.66
Business loans (2) 195,613 5,742 11.68 77,295 2,116 10.95
Other loans 17,183 548 12.69 5,951 110 7.33
Gross receivables 3,273,806 76,399 9.28 1,802,753 44,637 9.89
Investments (3) 1,822,774 25,696 5.51 894,524 12,546 5.57
Total interest earning
assets $ 5,096,580 $102,095 7.93% $2,697,277 $ 57,183 8.46%
Interest-bearing
liabilities $ 5,133,987 $ 77,697 5.99% $2,532,780 $ 41,522 6.45%
Net interest spread 1.94% 2.01%
Net interest margin 1.87% 2.35%
Off-balance sheet
Credit cards $10,143,760 $6,430,565
Mortgage loans 1,916,299 1,384,683
Business loans 462,496 251,568
Total average
securitized receivables $12,522,555 $8,066,816
Total average managed
receivables $15,796,361 $9,869,569
Managed credit cards $12,918,052 $424,820 13.08% $7,956,736 $254,612 12.80%
Managed Net Interest
Analysis (4):
Interest earning assets $15,240,340 $464,562 12.11% $9,127,842 $274,090 12.00%
Interest-bearing
liabilities $15,277,747 $226,724 5.89% $8,963,345 $145,365 6.46%
Net interest spread 6.22% 5.54%
Net interest margin 6.19% 5.64%
<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>
<TABLE>
INTEREST RATE ANALYSIS
<CAPTION>
Nine Months Ended September 30,
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 $ 2,695,338 $ 167,326 8.29% $1,441,478 $111,840 10.34%
Mortgage loans 233,986 18,276 10.43 172,889 11,946 9.24
Business loans (2) 187,328 16,865 12.01 84,567 7,970 12.57
Other loans 12,118 936 10.32 5,396 290 7.19
Gross receivables 3,128,770 203,403 8.68 1,704,330 132,046 10.33
Investments (3) 1,338,713 56,516 5.49 802,324 34,752 5.77
Total interest earning
assets $ 4,467,483 $ 259,919 7.72% $2,506,654 $166,798 8.87%
Interest-bearing
liabilities $ 4,389,218 $ 200,964 6.06% $2,381,647 $115,203 6.40%
Net interest spread 1.66% 2.47%
Net interest margin 1.71% 2.73%
Off-balance sheet
Credit cards $ 9,272,172 $5,788,039
Mortgage loans 1,785,072 1,302,537
Business loans 362,158 218,204
Total average
securitized receivables $11,419,402 $7,308,780
Total average managed
receivables $14,548,172 $9,013,110
Managed credit cards $11,967,510 $1,139,601 12.72% $7,229,517 $708,691 13.07%
Managed Net Interest
Analysis (4):
Interest earning assets $13,739,655 $1,232,194 11.96% $8,294,693 $763,649 12.28%
Interest-bearing
liabilities $13,661,390 $ 604,405 5.89% $8,169,686 $400,044 6.51%
Net interest spread 6.07% 5.77%
Net interest margin 6.08% 5.85%
<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 Consolidated Condensed Income Statements as of and for the nine
months ended September 30, 1996 and 1995.
Nine Months Ended
September 30,
1996 1995
Balance sheet data:
Average managed receivables $14,548,172 $ 9,013,110
Managed receivables 15,797,358 10,310,682
Total managed assets 18,356,622 11,938,114
Managed net interest margin
(on a fully tax equivalent basis) 6.08% 5.85%
As a percentage of gross managed
receivables:
Total loans 30 days or more
delinquent
New methodology (see Asset Quality) 4.2%
Prior methodology (pro forma) 4.0% 3.0%
Net charge-offs
New methodology (see Asset Quality) 3.0%
Prior methodology (pro forma) 3.3% 2.2%
Effects of credit card
securitizations on:
Net interest income $ (568,834) $ (312,009)
Provision for credit losses 264,422 109,059
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 securitized 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 third quarter of 1996 was $24.2
million compared to $10.6 million for the comparable period of 1995. This
increase was primarily due to the strengthening of reserves on a larger
portfolio, and in response to the higher charge-off, impaired asset and
delinquency levels.
<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.
In the third quarter of 1996, the Company adopted a new charge-off methodology
related to bankrupt credit card accounts, providing for up to a 90-day rather
than up to a 30-day) investigative period following notification of the
bankruptcy petition, prior to charge-off. This new methodology is consistent
with others in the credit card industry. The 1996 credit statistics set forth
below reflect this change in methodology.
The reserve for credit losses on a consolidated owned basis increased to
$77.6 million or 2.6% of owned receivables at September 30, 1996 compared to
$53.5 million or 1.9% of owned receivables at December 31, 1995 and $40.3
million or 2.3% of owned receivables at September 30, 1995. Impaired assets
on the total managed portfolio were $307.1 million or 1.9% of managed
receivables at September 30, 1996, compared to $167.1 million or 1.4% of
managed receivables at December 31, 1995 and $127.6 million or 1.2% of managed
receivables at September 30, 1995. The charge-off rate on the total managed
portfolio was 3.2% for the third quarter, compared to 2.3% for the third
quarter of 1995.
The 30 day and over delinquency rate on managed credit cards rose to 3.9% at
September 30, 1996 from 2.3% a year ago. The managed credit card charge-off
rate was 3.7% for the third quarter of 1996, compared to 2.7% for the
comparable 1995 quarter.
The changes in the delinquency and charge-off rates from year to year, as set
forth in the following table, reflect the trend in unsecured consumer credit
quality which is being experienced throughout the industry.
The following table provides a summary of managed impaired assets,
delinquencies and charge-offs, as of and for the year-to-date periods
indicated.
<PAGE>
Sept. 30, Dec. 31, Sept. 30,
CONSOLIDATED 1996 1995 1995
Nonperforming assets $152,710 $ 82,171 $ 73,515
Accruing loans past due 90 days or more 154,353 84,892 54,120
Impaired assets 307,063 167,063 127,635
Total loans 30 days or more delinquent 668,718 404,072 305,118
As a percentage of gross receivables:
Nonperforming assets 1.0% .7% .7%
Accruing loans past due 90 days or more 1.0 .7 .5
Impaired assets 1.9 1.4 1.2
Total loans 30 days or more delinquent:
New methodology (A) 4.2
Prior methodology (B) 4.0 3.3% 3.0%
Net charge-offs:
Amount $325,139 $212,865 $148,445
As a percentage of average gross
receivables(annualized):
New methodology (A) 3.0%
Prior methodology (B) 3.3 2.2% 2.2%
CREDIT CARDS
Nonperforming assets $ 69,702 $ 20,516 $ 20,328
Accruing loans past due 90 days or more 154,321 84,878 53,893
Impaired assets 224,023 105,394 74,221
Total loans 30 days or more delinquent 494,308 262,299 194,457
As a percentage of gross receivables:
Nonperforming assets .5% .2% .2%
Accruing loans past due 90 days or more 1.2 .8 .7
Impaired assets 1.8 1.1 .9
Total loans 30 days or more delinquent:
New methodology (A) 3.9
Prior methodology (B) 3.7 2.6 2.3
Net charge-offs:
Amount $305,795 $193,160 $134,020
As a percentage of average gross
receivables(annualized):
New methodology (A) 3.4%
Prior methodology (B) 3.7 2.5% 2.5%
MORTGAGE LOANS
Nonperforming assets $ 75,598 $ 56,743 $ 50,050
Total loans 30 days or more delinquent 125,670 106,223 82,472
As a percentage of gross receivables:
Nonperforming assets 3.2% 3.2% 3.0%
Total loans 30 days or more delinquent 5.4 5.9 4.9
Net charge-offs:
Amount $ 10,762 $ 13,836 $ 10,385
As a percentage of average gross
receivables(annualized) .7% .9% .9%
BUSINESS LOANS
Nonperforming assets $ 7,402 $ 4,912 $ 3,137
Total loans 30 days or more delinquent 48,361 35,274 27,732
As a percentage of receivables:
Nonperforming assets 1.0% 1.3% .9%
Total loans 30 days or more delinquent 6.7 9.3 8.1
Net charge-offs:
Amount $ 8,589 $ 5,846 $ 4,053
As a percentage of average
receivables(annualized) 2.1% 1.9% 1.8%
(A) The 1996 figures reflect the adoption of a new charge-off methodology
relating to credit card bankruptcies (see Asset Quality).
(B) Pro forma calculation reflecting charge-off of all credit card
bankruptcies within 30 days of notification.
<PAGE>
NONINTEREST REVENUES
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Gain on sale of credit cards $ 0 $ 0 $ 33,820 $ 0
Other noninterest revenues:
Credit card securitization
income 65,592 43,818 183,192 130,553
Credit card servicing
income 46,365 30,572 128,977 83,371
Income from mortgage
banking activities 30,350 15,886 76,477 38,033
Credit card interchange
income 26,682 23,258 75,881 64,808
Business loan other
revenues 13,974 9,733 38,735 27,628
Insurance revenues, net 13,886 7,903 28,198 21,449
Other 12,489 5,051 22,420 15,451
Total other noninterest
revenues $209,338 $136,221 $553,880 $381,293
Total noninterest revenues $209,338 $136,221 $587,700 $381,293
For the third quarter of 1996, noninterest revenues increased 54% to
$209.3 million from $136.2 million for the same period of 1995. Credit card
securitization income increased $21.8 million or 50% to $65.6 million.
Credit card securitization activities were affected by the adoption in the
third quarter of 1996 of a new charge-off methodology relating to
bankruptcies (see Asset Quality), the upward repricing of interest rates
and fees, increases in charge-offs and the related impact on reserves, all
of which had an approximate $24 million positive impact for the quarter,
as well as a 58% increase in average securitized receivables. Credit card
servicing income increased $15.8 million due to higher securitized balances.
Income from mortgage banking activities increased $14.5 million primarily due
to the gain on the sale of $408 million of mortgages in a REMIC transaction
during the third quarter of 1996. Credit card interchange income, which
represents approximately 1.4% of credit card purchases, increased
$3.4 million to $26.7 million. Business loan other revenues increased
$4.2 million to $14.0 million due to an 84% growth in average securitized
business loans from the comparable quarter of 1995.
For the nine month period ended September 30, 1996 total noninterest
revenues rose to $587.7 million from $381.3 million for the comparable
period of 1995, a 54% increase. This improvement resulted primarily from
the $33.8 million gain on the sale of credit card customer relationships in
June 1996, a 60% growth in average securitized credit card receivables and
higher mortgage income associated with a $300 million REMIC transaction in
each of the first and second quarters of 1996 as well as the $408 million
REMIC transaction in the third quarter of 1996.
<PAGE>
OPERATING EXPENSES
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Amortization of credit card
deferred origination
costs, net $ 22,690 $19,283 $ 67,670 $ 51,401
Other operating expenses:
Salaries and employee
benefits 50,893 29,124 132,081 80,186
External processing 11,043 7,739 30,848 20,018
Professional fees 10,349 4,248 26,723 9,813
Credit card fraud losses 8,220 3,957 16,982 12,483
Marketing 7,902 5,584 24,371 19,867
Postage 6,214 4,683 18,893 13,413
Equipment expense 6,051 3,244 15,229 8,951
Telephone expense 4,979 3,000 13,599 8,354
Credit and collection
expense 3,969 2,286 9,594 6,762
Occupancy expense 3,817 2,462 9,846 6,727
Other 5,182 686 13,413 10,333
Total other operating
expenses $118,619 $67,013 $311,579 $196,907
Total operating expenses $141,309 $86,296 $379,249 $248,308
The amortization of credit card deferred origination costs, net, increased
from $19.3 million for the three months ended September 30, 1995 to $22.7
million for the comparable period of 1996. Total other operating expenses
of $118.6 million for the three months ended September 30, 1996 increased
77% from $67.0 million for the same period of 1995. Operating expenses as a
percentage of average managed receivables were 3.0% for the third quarter of
1996, up from 2.7% in the comparable 1995 period. The increase in total
other operating expenses is attributable, in part, to a $21.8 million or 75%
increase in salaries and employee benefits as a result of an increase in the
number of employees from 2,226 at September 30, 1995 to 3,085 at September
30, 1996, including the addition of senior management to assist in the
strategic growth of the various business units. Professional fees also
increased as a result of corporate strategic initiatives. Other expenses,
including external processing, marketing, postage and telephone expense
showed increases consistent with the increase in the number of managed
customer accounts.
For the first nine months of 1996, total operating expenses increased 53% to
$379.2 million from $248.3 million for the same 1995 period mainly due to
the reasons stated above. Average managed receivables grew 61% over the
same period of time. Other operating expenses as a percentage of average
managed receivables were 2.9% for both the nine months ended September 30,
1996 and the nine months ended September 30, 1995.
<PAGE>
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 1996, the Company, through
its subsidiaries, securitized $2.8 billion of credit card receivables,
$1.0 billion of mortgage loans and $169 million of business loans. 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 growth. At September 30, 1996, the Company had approximately $1.9
billion of loan and lease receivables and $.8 billion of investments
available for sale which could be sold to generate additional liquidity.
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 totaling $39 million and
$114 million was contributed to Advanta National during 1995 and the
first nine months of 1996, respectively, in order to maintain Advanta
National as a "well capitalized" bank under applicable regulations. 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. Advanta National had
total assets of $2.3 billion at September 30, 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.
In September 1995, Colonial National Bank USA (which in May 1996 changed
its name to Advanta National Bank USA) and Advanta National (together 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 September 30, 1996 Advanta National had $1.2 billion of
senior bank notes outstanding.
In July 1996, the Company replaced its existing $510 million revolving
credit facility with a new $1.0 billion facility and filed a shelf
registration statement with the Securities and Exchange Commission for
$1.6 billion of debt securities. The Company has subsequently issued
approximately $400 million of medium-term notes under the new shelf
registration statement.
On September 30, 1996, the provision of the federal Competitive Equality
Banking Act of 1987 ("CEBA") which required that Advanta National Bank
USA ("AUS") limit its growth to not more than 7% per annum was repealed.
Repeal of this provision creates substantial new flexibility with respect
to asset/liability management for AUS. The Company is currently
evaluating ways to take advantage of this new flexibility.
<PAGE>
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 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, 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 nine months 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
<PAGE>
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.
At September 30, 1996 and December 31, 1995, all of the Company's
derivatives were designated as hedges or synthetic alterations and were
accounted for as such.
The following table summarizes by notional amounts the Company's
derivative instruments:
September 30, December 31,
1996 1995
Interest rate swaps $1,288,443 $ 867,835
Interest rate options:
Caps written 1,455,000 1,360,000
Caps purchased 416,600 270,000
Corridors/Collars 750,000 575,000
Forward contracts 175,489 190,652
Total notional amount $4,085,532 $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 exhibits are being filed with this report
on Form 10-Q:
Exhibit Number Description of Document
12 Computation of Ratio of Earnings to
Fixed Charges.
27 Financial data schedule(incorporated
by reference to Exhibit 27 to the
Company's Current Report on Form 8-K
dated October 17, 1996, filed the
same date).
(b) Reports on Form 8-K
(i) A Current Report on Form 8-K, dated October 17, 1996,
was filed by the Company setting forth the financial
highlights of the Company's results of operations for
the period ended September 30, 1996. 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 12, 1996 By /s/Gene S. Schneyer
Vice President,
Secretary & General Counsel
November 12, 1996 By /s/John J. Calamari
Vice President, Finance and
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Description
2 Inapplicable.
3 Inapplicable.
4 Inapplicable.
11 Inapplicable.
12 Computation of Ratio of Earnings to
Fixed Charges.
15 Inapplicable.
18 Inapplicable.
19 Inapplicable
22 Inapplicable.
23 Inapplicable.
24 Inapplicable.
27 Financial data schedule
(incorporated by reference to
Exhibit 27 to the Company's Current
Report on Form 8-K dated October 17,
1996, filed the same date).
99 Inapplicable.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12
ADVANTA CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net earnings $ 44,356 $34,914 $130,506 $ 99,097
Federal and state
income taxes 22,864 19,368 67,229 55,019
Earnings before income
taxes 67,220 54,282 197,735 154,116
Fixed charges:
Interest 77,697 41,522 200,964 115,203
One-third of all rentals (F1) 781 428 1,947 1,169
Total fixed charges 78,478 41,950 202,911 116,372
Earnings before income
taxes and fixed charges $145,698 $96,232 $400,646 $270,488
Ratio of earnings to fixed
charges (F1) 1.86x 2.29x 1.97x 2.32x
<FN>
(F1) For purposes of computing these ratios, "earnings" represent income
before income taxes plus fixed charges, and "fixed charges" consist of
interest expense and one-third (the proportion deemed representative of
the interest factor) of rental expense on operating leases.
</TABLE>
