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, 1997 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)
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, 1997
Common Stock, $.01 par value 18,180,246 shares
Class B Outstanding at May 1, 1997
Common Stock, $.01 par value 25,843,707 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 23
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1997 1996
ASSETS (Unaudited)
Cash $ 147,175 $ 165,875
Federal funds sold and interest-bearing
deposits with banks 1,615,028 885,709
Investments available for sale 857,889 785,600
Loan and lease receivables, net:
Available for sale 1,571,155 1,476,146
Other loan and lease receivables, net 905,692 1,136,857
Total loan and lease receivables, net 2,476,847 2,613,003
Premises and equipment, net 131,999 108,130
Amounts due from credit card
securitizations 386,971 399,359
Other assets 628,357 626,283
Total assets $6,244,266 $5,583,959
LIABILITIES
Deposits $1,958,791 $1,860,058
Debt and other borrowings 3,048,182 2,462,084
Other liabilities 300,482 309,781
Total liabilities 5,307,455 4,631,923
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debentures
of the Company 100,000 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par
value: authorized, issued and
outstanding -- 1,010 shares in 1997
and 1996 1,010 1,010
Class B preferred stock, $.01 par
value: authorized -- 1,000,000 shares
in 1997 and 1996; issued -- 25,000
shares in 1997 and 1996 0 0
Class A common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 18,157,262 shares in 1997,
and 17,945,471 shares in 1996 182 179
Class B common stock, $.01 par value:
authorized -- 200,000,000 shares;
issued -- 26,045,299 shares in 1997,
and 25,592,764 in 1996 260 256
Additional paid-in capital, net 320,123 309,250
Retained earnings, net 515,236 541,383
Less: Treasury stock at cost
1,231 Class B common shares in 1996 0 (42)
Total stockholders' equity 836,811 852,036
Total liabilities and stockholders'
equity $6,244,266 $5,583,959
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)
1997 1996
Interest income:
Loans and leases $ 66,022 $ 58,502
Investments 31,052 14,144
Total interest income 97,074 72,646
Interest expense:
Deposits 27,096 27,746
Other debt 44,366 28,189
Total interest expense 71,462 55,935
Net interest income 25,612 16,711
Provision for credit losses 60,364 15,082
Net interest income after
provision for credit losses (34,752) 1,629
Noninterest revenues 156,854 171,029
Operating expenses:
Amortization of credit card
deferred origination costs, net 18,063 20,493
Other operating expenses 130,748 90,002
Total operating expenses 148,811 110,495
Income (loss) before income taxes (26,709) 62,163
Provision (benefit) for income
taxes (6,891) 21,133
Net income (loss) $(19,818) $ 41,030
Earnings (loss) per common share $ (.43) $ .91
Weighted average common
shares outstanding 46,153 44,875
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,
1997 1996
OPERATING ACTIVITIES (Unaudited)
Net income (loss) $ (19,818) $ 41,030
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Sales/valuation adjustments - equity securities 4,670 (1,858)
Depreciation and amortization of intangibles 7,997 3,527
Provision for credit losses 60,364 15,082
Change in other assets and amounts due from
credit card securitizations 8,597 (97,207)
Change in other liabilities 22,765 36,653
Gain on securitization of receivables (23,929) (20,718)
Net cash provided/(used) by operating activities 60,646 (23,491)
INVESTING ACTIVITIES
Purchase of investments available for sale (7,442,421) (2,468,573)
Proceeds from sales of investments available for
sale 66,142 369,776
Proceeds from maturing investments available
for sale 7,296,061 2,149,348
Change in fed funds sold and interest-bearing
deposits (729,229) 69,614
Change in credit card receivables, excluding sales 237,929 (1,851,356)
Proceeds from sales/securitizations of receivables 711,515 1,906,167
Purchase of personal finance loan/lease portfolios (63,952) (13,727)
Principal collected on personal finance loans 36,583 7,728
Personal finance loans made to customers (658,569) (235,599)
Purchases of premises and equipment (31,992) (16,387)
Proceeds from sale of premises and equipment 186 43
Excess of cash collections over income
recognized on direct financing leases 11,333 17,534
Equipment purchased for direct financing leases (82,435) (74,573)
Change in business card receivables,excluding (104,891) (33,650)
sales
Net change in other loans (11,046) (998)
Net cash (used) by investing activities (764,786) (174,653)
FINANCING ACTIVITIES
Change in demand and savings deposits 26,489 73,593
Proceeds from sales of time deposits 339,971 359,901
Payments for maturing time deposits (267,727) (296,792)
Change in repurchase agreements and term fed funds 204,130 (378,000)
Proceeds from issuance of subordinated/senior debt 6,880 12,782
Payments on redemption of subordinated/senior debt (18,570) (9,358)
Proceeds from issuance of medium-term notes 285,500 305,333
Payments on maturity of medium-term notes (45,000) (52,500)
Change in notes payable 153,068 215,832
Proceeds from issuance of stock 7,881 2,252
Cash dividends paid (7,182) (5,927)
Net cash provided by financing activities 685,440 227,116
Net (decrease) increase in cash (18,700) 28,972
Cash at beginning of period 165,875 45,714
Cash at end of period 147,175 74,686
See Notes to Consolidated Condensed Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
March 31, 1997
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, 1997 and December
31, 1996, the results of their operations for the three month
periods ended March 31, 1997 and 1996, and their cash flows for
the three month periods ended March 31, 1997 and 1996. The
results of operations for the three month period ended March 31,
1997 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 under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS
115, 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. The fair value of publicly traded investments takes into
account their quoted market prices with adjustments made for
liquidity or sale restrictions. For investments that are not
publicly traded, estimates of fair value have been made by
management that consider several factors including the investees'
financial results, conditions and prospects, and the values of
comparable public companies. Because of the nature of these
investments, the equity method of accounting is not used in
situations where the Company has a greater than 20 percent
ownership interest.
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.
<PAGE>
5) Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
March 31, December 31,
1997 1996
Gross loan and lease receivables $2,535,217 $2,656,641
Add: Deferred origination costs,
net of deferred fees 47,007 45,546
Less: Reserve for credit losses (105,377) (89,184)
Loan and lease receivables, net $2,476,847 $2,613,003
Number of Accounts:
Credit cards 740,530 510,392
Other loans and leases 67,468 39,275
Total 807,998 549,667
Receivables and accounts serviced for others consisted of the
following:
March 31, December 31,
1997 1996
Receivables:
Credit cards $10,418,110 $10,646,177
Personal finance loans* 2,872,106 2,377,430
Business loans and leases 625,612 608,945
Total $13,915,828 $13,632,552
Number of Accounts:
Credit cards 5,407,813 5,185,624
Personal finance loans* 56,825 41,103
Business loans and leases 133,156 141,673
Total 5,597,794 5,368,400
* Excludes personal finance loans which were never owned by the
Company, but which the Company services for a fee ("contract
servicing"). Contract servicing receivables were $5.6 million
and $3.7 million at March 31, 1997 and December 31, 1996,
respectively. The related number of accounts serviced at March
31, 1997 and December 31, 1996 were 83,682 and 59,681,
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. 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 approximated $16.4 million for the first
three months of 1997, compared to $26.5 million for the same
period of 1996.
<PAGE>
The Company amortizes deferred credit card origination costs
following the consensus reached at the May 20, 1993 meeting of the
Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") regarding the acquisition of individual
credit card accounts from independent third parties (EITF Issue
93-1). Under this consensus amounts paid to third parties are deferred
and amortized on a straight-line basis over one year. Costs
incurred for originations which were initiated prior to May 20,
1993 continue to be amortized over a 60 month period as was the
practice prior to the EITF Issue 93-1 consensus.
The Company adopted SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125") effective January 1, 1997. Under SFAS 125, a
transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent
that consideration other than beneficial interests in the
transferred assets is received in exchange. SFAS 125 requires
that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any,
based on their relative fair values at the date of the transfer.
The adoption of SFAS 125 did not have a material effect on the
Company's financial statements.
Under SFAS 125, the Company records a gain on the securitization
of credit card receivables sold based on the estimated fair value
of assets obtained and liabilities incurred in the sale. The gain
recognized at the time of the sale, which principally represents
the estimated fair value of the interest-only strip retained, is
substantially offset by the estimated fair value of the Company's
recourse obligation for anticipated charge-offs. As these
estimates are influenced by factors outside the Company's control,
there is uncertainty inherent in these estimates, making it
reasonably possible that they could change in the near term.
During the "revolving period" of each trust, securitization income
is recorded representing gains on the sale of new receivables
which are sold to the trusts on a continuous basis to replenish
the investors' interest in trust receivables which have been
repaid by the credit cardholders.
Prior to January 1, 1997 the Company recorded excess servicing
income on credit card securitizations representing additional cash
flow from the receivables initially sold based on estimates of the
repayment term, including prepayments. As the estimates used to
record excess servicing income were influenced by factors outside
the Company's control, there was uncertainty inherent in these
estimates, making it reasonably possible that they could change in
the near term. Excess servicing income recorded at the time of
each transaction was substantially offset by the establishment of
recourse reserves for anticipated charge-offs. During the
"revolving period" of each trust, income was recorded based on
additional cash flows from the new receivables which were sold to
the trusts on a continual basis to replenish the investors'
interest in trust receivables which had been repaid by the credit
cardholders. Beginning in the third quarter of 1996 credit card
securitization activities were affected by the adoption in that
<PAGE>
quarter 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.
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,
1997 1996
Balance, beginning of period $ 89,184 $53,494
Current provision 60,364 96,862
Transfer of recourse
reserves to on-balance
sheet reserves --- 3,000
Reserves on receivables
purchased (6,406) 6,404
Net charge-offs (37,765) (70,576)
Balance, end of period $105,377 $89,184
8) At March 31, 1997 and December 31, 1996, the Company had
$387.0 million and $399.4 million, respectively, of amounts due
from credit card securitizations. These amounts include the
retained interest-only strip, 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.
9) Selected Balance Sheet Information
Other Assets
March 31, December 31,
1997 1996
Retained interest-only strip -
personal finance loans $157,957 $149,418
Prepaid assets 100,707 117,934
Accrued interest receivable 93,391 101,021
Deferred costs 45,971 42,252
Due from trustees - mortgage 19,284 14,298
Investments in operating leases 16,264 17,276
Retained interest-only strip -
business loans and leases 9,793 14,205
Due from trustees - business
loans and leases 6,028 5,326
Current and deferred federal
income taxes --- 28,169
Goodwill 5,419 5,795
Other real estate owned 2,229 2,513
Other 171,314 128,076
Total other assets $628,357 $626,283
<PAGE>
Other Liabilities
March 31, December 31,
1997 1996
Deferred fees and other reserves $ 17,916 $ 86,877
Accounts payable and accrued
expenses 61,044 59,432
Accrued interest payable 72,120 55,320
Current and deferred state income
taxes 33,800 10,300
Other 115,602 97,852
Total other liabilities $300,482 $309,781
10) Income tax expense reflects an effective tax benefit of
approximately 25.8%, for the three month period ended March 31,
1997, compared to a 34.0% tax expense for the comparable 1996
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,
1997 1996
Current:
Federal $(6,649) $ 970
State (574) 3,077
Total current (7,223) 4,047
Deferred:
Federal 287 17,711
State 45 (625)
Total deferred 332 17,086
Total tax expense (benefit) $(6,891) $21,133
The reconciliation of the statutory federal income tax to the
consolidated tax expense (benefit) is as follows:
Three Months Ended
March 31,
1997 1996
Statutory federal income tax $(9,356) $21,757
State income taxes (344) 1,593
Insurance income (1,442) (1,701)
Tax credits (1,335) (224)
APB 28 adjustment 5,255 ---
Other 331 (292)
Consolidated tax expense (benefit) $(6,891) $21,133
<PAGE>
The net deferred tax asset/(liability) is comprised of the
following:
March 31, December 31,
1997 1996
Deferred taxes:
Gross assets $ 78,015 $112,861
Gross liabilities (85,352) (83,226)
Total deferred taxes $ (7,337) $ 29,635
The Company did not record any valuation allowances against
deferred tax assets at March 31, 1997 and December 31, 1996.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
March 31, December 31,
1997 1996
SFAS 91 $(17,279) $(17,870)
Loan losses 34,861 26,851
Mortgage banking income 6,010 6,623
Securitization income (33,370) (35,415)
Leasing income 3,808 56,447
Other (1,367) (7,001)
Net deferred tax assets $ (7,337) $ 29,635
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, 1997, a total of 1,521,510 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 $38.0 million and $41.2 million related
to these shares of restricted stock is reflected as a reduction
of equity at March 31, 1997 and December 31, 1996, respectively.
12) On December 17, 1996, Advanta Capital Trust I, a newly formed
statutory business trust established by the Company (the "Trust"),
issued in a private offering to two institutional investors $100
million of capital securities, representing preferred beneficial
interests in the assets of the Trust (the "Capital Securities").
The sole assets of the Trust consist of $100 million of 8.99%
<PAGE>
junior subordinated debentures issued by the Company due December
17, 2026 (the "Junior Subordinated Debentures"). The Capital
Securities will be subject to mandatory redemption under certain
circumstances, including at any time on or after December 17, 2006
upon the optional prepayment by the Company of the Junior Subordinated
Debentures. The Company has guaranteed the obligations of the Trust.
The Company used the proceeds from the sale for general corporate
purposes.
13) The following table shows the calculation of earnings per common
share:
Three Months Ended
March 31,
1997 1996
Net income (loss) $(19,818) $41,030
less: Class A preferred dividends (141) (141)
Net income (loss) available to
common shares $(19,959) $40,889
Average common stock outstanding 42,520 40,492
Common stock equivalents 3,633 4,383
Weighted average common shares
outstanding (in thousands) 46,153 44,875
Earnings (loss) per common share $ (.43) $ .91
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
OVERVIEW
For the three months ended March 31, 1997, the Company reported a net
loss of $19.8 million or $.43 per share, compared to net income of
$41.0 million or $.91 per share for the same period of 1996.
The first quarter loss was the result of several factors, including
continuing increases in consumer bankruptcies and charge-offs and
lower receivable balances than originally anticipated in the consumer
credit card business. The consolidated charge-off rate increased to
5.3% of managed receivables for the first quarter of 1997 from 2.8%
for the first quarter of 1996. The managed delinquency rate was 5.5%
at March 31, 1997 compared to 3.2% reported last year. The first
quarter of 1997 charge-off and delinquency rates reflect the adoption
of a new methodology related to credit card bankruptcies in August
1996 (see Asset Quality). This methodology is consistent with that
used by others in the credit card industry. The deterioration in the
credit quality was confined to the credit card business. Average
managed receivables increased $3.3 billion or 25.8% to $16.2 billion
from $12.9 billion at March 31, 1996. The managed net interest margin
rose to 7.05% for the first quarter up from 6.24% reported in the year
ago quarter. The margin improvement reflects a January and March
contractual repricing of consumer credit card receivables. The net
interest margin is expected to continue to improve as the Company
continues to reprice introductory rate receivables and as the Company
reprices approximately two-thirds of its consumer credit card
receivables by an average of over 200 basis points during the
remainder of the year. The operating expense ratio increased to 3.2%
for the first quarter of 1997, up from 2.8% reported last year.
This Report contains forward-looking statements, including but not
limited to projections of future earnings, that are subject to certain
risks and uncertainties that could cause actual results to differ
materially from those projected. Significant risks and uncertainties
include: the Company's managed net interest margin, which in turn is
affected by the Company's success in originating new credit card
accounts, the receivables volume and initial pricing of new accounts,
the impact of repricing existing accounts and account attrition, the
mix of account types and interest rate fluctuations; the level of
delinquencies, customer bankruptcies, and charge-offs; and the amount
and rate of growth in the Company's expenses. Earnings also may be
significantly affected by factors that affect consumer debt,
competitive pressures from other providers of financial services, the
effects of governmental regulation, the amount and cost of financing
available to the Company and its subsidiaries, the difficulty or
inability to securitize the Company's receivables and the impact of
the ratings on debt of the Company and its subsidiaries. Additional
risks that may affect the Company's future performance are set forth
elsewhere in this Quarterly Report on Form 10-Q and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
other filings with the Securities and Exchange Commission.
<PAGE>
NET INTEREST INCOME
Net interest income for the first quarter of 1997 increased $8.9
million or 53.3% to $25.6 million from $16.7 million for the same
period of 1996. This resulted from an increase in the owned net
interest margin to 2.22% for the first quarter of 1997, from 1.77% for
the first quarter of 1996, as well as an $854 million increase in
average interest earning 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, 1997 and 1996.
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,
1997 1996
Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate
<S> <C> <C> <C> <C> <C> <C>
On-balance sheet
Credit cards $ 1,815,920 $ 46,628 10.41% $2,411,626 $ 48,668 8.12%
Personal finance loans 430,948 11,850 11.15 224,024 5,633 10.11
Business loans and
leases 256,234 8,122 12.78 151,732 4,758 12.60
Other loans 25,165 543 8.75 9,351 185 7.96
Gross receivables 2,528,267 67,143 10.76 2,796,733 59,244 8.52
Investments (2) 2,198,599 31,076 5.57 1,076,602 14,253 5.15
Total interest earning
assets $ 4,726,866 $ 98,219 8.35% $3,873,335 $ 73,497 7.58%
Interest-bearing
liabilities $ 4,724,566 $ 71,642 6.05% $3,666,393 $ 55,935 6.07%
Net interest spread 2.30% 1.51%
Net interest margin 2.22% 1.77%
Off-balance sheet
Credit cards $10,506,076 $8,145,795
Personal finance loans 2,532,504 1,626,741
Business loans and leases 617,073 293,335
Total average
securitized receivables $13,655,653 $10,065,871
Total average managed
receivables $16,183,920 $12,862,604
Managed credit cards $12,321,996 $435,160 14.32% $10,557,421 $336,275 12.81%
Managed Net Interest
Analysis (3):
Interest earning assets $15,232,942 $486,751 12.94% $12,019,130 $361,104 12.07%
Interest-bearing
liabilities $15,230,642 $221,202 5.86% $11,812,188 $174,346 5.92%
Net interest spread 7.08% 6.15%
Net interest margin 7.05% 6.24%
<FN>
(1)Includes assets held and available for sale and nonaccrual loans and
leases.
(2)Interest and average rate for tax-free securities computed on a tax
equivalent basis using a statutory rate of 35%.
(3)Combination of owned interest earning assets/owned interest-bearing
liabilities and securitized credit card assets/liabilities.
</TABLE>
<PAGE>
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, 1997 and 1996.
Three Months Ended
March 31,
1997 1996
Balance sheet data:
Average managed receivables $16,183,920 $12,862,604
Managed receivables 16,451,045 14,091,129
Total managed assets 20,160,094 16,064,202
Managed net interest margin
(on a fully tax equivalent basis) 7.05% 6.24%
As a percentage of gross managed
receivables:
Total loans 30 days or more
delinquent 5.5% (1) 3.2%
Net charge-offs 5.3% (1) 2.8%
Managed Income Statement:
Net interest income 264,404 185,907
Provision for credit losses 228,370 85,575
Noninterest revenues 86,068 72,326
Operating expenses 148,811 110,495
Income (loss) before income taxes (26,709) 62,163
(1) The 1997 figures reflect the adoption of a new charge-off methodology
in August 1996 relating to credit card bankruptcies (see Asset Quality).
With respect to the Managed Income Statement, net interest income includes
owned net interest income and securitized net interest income. In the
Consolidated Income Statements, securitized net interest income is reported
as noninterest revenues. In addition, the provision for credit losses
includes 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 card losses been equal to actual reported
charge-offs (see Asset Quality). Noninterest revenues exclude the net
interest income and credit losses associated with the securitized credit
card receivables.
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the first quarter of 1997 was
$60.4 million compared to $15.1 million for the comparable period of
1996. This increase was primarily due to higher charge-offs on owned
receivables as well as an increase in impaired assets and delinquency
levels. Charge-offs on owned receivables increased to $37.8 million for
the first quarter of 1997 from $14.9 million for the first quarter of
1996.
<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, the fair
value of 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 the methodology used by others in the
credit card industry.
The reserve for credit losses on a consolidated owned basis was $105.4
million or 4.2% of receivables at March 31, 1997 compared to $89.2
million or 3.4% of receivables at December 31, 1996 and $56.7 million or
1.9% of receivables at March 31, 1996.
On the total managed portfolio, impaired assets were $470.2 million or
2.9% of receivables at March 31, 1997, compared to $420.5 million or
2.6% of receivables at December 31, 1996 and $202.9 million or 1.4% of
receivables at March 31, 1996. The 30 day and over delinquency rate on
managed credit cards rose to 5.2% at March 31, 1997 up from 2.7% a year
ago.
The total managed charge-off rate for the first three months of 1997 was
5.3%, up from 3.2% for the full year of 1996 and 2.8% for the first three
months of 1996. The charge-off rate on managed credit cards was
6.6% for the first three months of 1997, up from 3.7% for the full year of
1996 and 3.2% for the comparable 1996 period. The charge-off rate on
managed personal finance loans was .6% for the first three months of 1997,
down from .7% for both the full year of 1996 and the comparable 1996
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 1997 1996 1996
Nonperforming assets $237,333 $191,668 $ 97,962
Accruing loans past due 90 days or more 232,879 228,845 104,953
Impaired assets 470,212 420,513 202,915
Total loans 30 days or more delinquent 903,262 886,717 456,397
As a percentage of gross receivables:
Nonperforming assets 1.4% 1.2% .7%
Accruing loans past due 90 days or more 1.4 1.4 .7
Impaired assets 2.9 2.6 1.4
Total loans 30 days or more delinquent:
New methodology(1) 5.5 5.4
Prior methodology 5.2(2) 3.2
Net charge-offs:
Amount $212,710 $479,992 $ 89,843
As a percentage of average gross
receivables(annualized)
New methodology(1) 5.3% 3.2%
Prior methodology 3.5(2) 2.8%
CREDIT CARDS - MANAGED
Nonperforming assets $109,674 $ 89,064 $ 29,136
Accruing loans past due 90 days or more 232,857 228,822 104,584
Impaired assets 342,531 317,886 133,720
Total loans 30 days or more delinquent 628,676 632,083 311,484
As a percentage of gross receivables:
Nonperforming assets .9% .7% .2%
Accruing loans past due 90 days or more 1.9 1.8 .9
Impaired assets 2.8 2.5 1.1
Total loans 30 days or more delinquent
New methodology(1) 5.2 5.0
Prior methodology 4.6(2) 2.7
Net charge-offs:
Amount $203,654 $451,239 $ 83,971
As a percentage of average gross
receivables(annualized)
New methodology(1) 6.6% 3.7%
Prior methodology 4.1(2) 3.2%
PERSONAL FINANCE LOANS - MANAGED
Nonperforming assets $111,555 $ 93,101 $ 63,618
Total loans 30 days or more delinquent 208,018 194,412 105,308
As a percentage of gross receivables:
Nonperforming assets 3.4% 3.4% 3.3%
Total loans 30 days or more delinquent 6.3 7.1 5.5
Net charge-offs:
Amount $ 4,416 $ 14,981 $ 3,299
As a percentage of average gross
receivables(annualized) .6% .7% .7%
BUSINESS LOANS AND LEASES - MANAGED
Nonperforming assets $ 16,019 $ 9,503 $ 5,208
Total loans 30 days or more delinquent 66,285 59,880 39,416
As a percentage of receivables:
Nonperforming assets 1.7% 1.2% 1.1%
Total loans 30 days or more deliquent 6.9 7.3 8.1
Net charge-offs:
Amount $ 4,641 $ 13,777 $ 2,575
As a percentage of average
receivables(annualized) 2.1% 2.3% 2.3%
(1) The 1997 and December 31, 1996 figures reflect the adoption of a new
charge-off methodology in August 1996 relating to credit card
bankruptcies (see Asset Quality).
(2) Pro forma calculation reflecting charge-off of all credit card
bankruptcies within 30 days of notification.
<PAGE>
NONINTEREST REVENUES
Three Months Ended
March 31,
1997 1996
Credit card servicing income $ 47,311 $ 39,028
Income from personal finance
activities 32,584 21,995
Credit card securitization income 27,061 65,865
Credit card interchange income 20,213 21,962
Business loan and lease other
revenues 15,458 10,875
Insurance revenues, net 10,359 6,519
Other 3,868 4,785
Total noninterest revenues $156,854 $171,029
For the first quarter of 1997, noninterest revenues declined 8% to
$156.9 million from $171.0 million for the same period of 1996. Credit
card securitization income decreased $38.8 million or 59% to $27.1
million as a result of lower spreads due to significantly higher charge-
offs, and a higher level of introductory rate credit cards in the trusts.
Credit card servicing income increased $8.3 million due to higher
securitized balances. Income from personal finance activities increased
$10.6 million or 48% primarily due to the gain on sale from a $550 million
REMIC transaction in the first quarter of 1997. Business loan and lease
other revenues increased to $15.5 million in the first quarter of 1997, a
42% increase over the first quarter of 1996, primarily due to the 110%
growth in average securitized receivables. Insurance revenues, net
increased $3.8 million from the first quarter of 1996 to $10.4 million due
to the successful marketing of insurance products in the credit card,
personal finance and business loan and lease areas.
OPERATING EXPENSES
Three Months Ended
March 31,
1997 1996
Amortization of credit card
deferred origination costs, net $ 18,063 $ 20,493
Other operating expenses:
Salaries and employee benefits 54,661 37,419
External processing 11,989 9,833
Marketing expense 11,129 11,122
Equipment expense 8,559 4,336
Professional fees 8,295 6,830
Postage expense 7,120 5,806
Credit card fraud losses 6,477 2,349
Occupancy expense 5,291 2,576
Telephone expense 4,907 3,967
Credit and collection expense 4,356 2,585
Other 7,964 3,179
Total other operating expenses $130,748 $ 90,002
Total operating expenses $148,811 $110,495
<PAGE>
The amortization of credit card deferred origination costs, net, decreased
from $20.5 million for the first three months of 1996 to $18.1 million
for the first three months of 1997. Total other operating expenses of
$130.7 million for the three months ended March 31, 1997 increased 45.3%
from $90.0 million for the same period of 1996. Other operating expenses
as a percentage of average managed receivables were 3.2% for the first
quarter of 1997, up from 2.8% in the comparable 1996 period. The increase
in total other operating expenses is attributable, in part, to a 43%
increase in the number of employees from 2,624 at March 31, 1996 to 3,751
at March 31, 1997, including the addition of senior management throughout
1996 to assist in the strategic growth and development of the Company.
Other expenses, including equipment expense, external processing, postage
and occupancy expense showed increases consistent with the increase in the
number of managed customer accounts and the addition of space and new
technology to support this growth.
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 1997, the Company, through
its subsidiaries, securitized $654.0 million of personal finance loans and
$57.4 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, personal finance and business
loan receivable growth. At March 31, 1997, the Company had approximately
$1.6 billion of loan and lease receivables and $.9 billion of investments
available for sale which could be sold to generate additional liquidity.
Funding diversification is an essential component of the Company's
liquidity management. The debt securities of Advanta Corp., Advanta
National Bank USA ("AUS"), and Advanta National Bank ("ANB") had investment-
grade ratings from the nationally recognized rating agencies throughout
1996. These ratings had allowed the Company to further diversify its
funding sources. Beginning March 1997, the various rating agencies lowered
their ratings on the debt securities of each of Advanta Corp., AUS and ANB
by one or two grades. As of May 12, 1997, debt of the two banks, AUS and
ANB, was rated at or above the lowest level of investment grade by
each agency except Standard & Poors which rated it one level below
investment grade; debt of the parent company, Advanta Corp., maintained
investment grade ratings (at or above the lowest investment grade level)
from three of the rating agencies, but was rated two levels below
investment grade by Standard & Poors and by Moody's Investors Service.
Efforts continue to develop new sources of funding, both through previously
untapped customer segments and through developing new financing structures.
In that regard, on May 1, 1997, Advanta Mortgage Corp. USA and its
subsidiaries entered into a $500 million secured revolving credit facility.
On December 17, 1996, Advanta Capital Trust I, a newly formed statutory
business trust established by the Company (the "Trust"), issued in a
private offering to two institutional investors $100 million of capital
securities, representing preferred beneficial interests in the assets of
the Trust (the "Capital Securities"). The sole assets of the Trust consist
of $100 million of 8.99% junior subordinated debentures issued by the
Company due December 17, 2026 (the "Junior Subordinated Debentures"). The
Capital Securities will be subject to mandatory redemption under certain
<PAGE>
circumstances, including at any time on or after December 17, 2006 upon the
optional prepayment by the Company of the Junior Subordinated Debentures.
The Company has guaranteed the obligations of the Trust. The Company used
the proceeds from the sale for general corporate purposes.
In September 1995, AUS and ANB (the "Banks") established a $2.25 billion
bank note program. Under this program, the Banks may issue an aggregate of
$2.0 billion of senior bank notes and $250 million of subordinated bank
notes. These notes may have maturities ranging from seven days to fifteen
years from date of issuance. Advanta Corp. and the Banks, collectively,
have a $1 billion revolving credit facility, of which $1 billion is
available to each of the Banks and up to a maximum of $500 million is
available to Advanta Corp., provided that no more than $1 billion may be
outstanding at any time. The Company also filed a shelf registration
statement in 1996 with the Securities and Exchange Commission which allows
the Company to sell up to $1.6 billion of debt securities.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to net interest income variability
resulting from mismatches between asset and liability indices (basis risk)
and the effects which 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 to manage exposures
to changes in interest rates and foreign exchange rates and create match
funding of assets and liabilities. 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,
swaps and fixed rate securitizations. In pricing mortgage and business loan
and lease securitizations, both fixed rate and variable rate funding are
used depending upon the characteristics of the underlying receivables and
the overall risk exposure to the Company.
<PAGE>
Additionally, basis risk exists in on-balance sheet funding as well as in
securitizing credit card receivables at a spread over the London Interbank
Offered Rate ("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. Substantially
all new credit cards have been issued using LIBOR as the repricing index.
This will have the effect of reducing 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, 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, 1997 and December 31, 1996, 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,
1997 1996
Interest rate swaps $1,795,591 $1,560,444
Swaptions 25,000 153,000
Interest rate options:
Caps written 1,279,170 1,413,222
Caps purchased 356,280 365,000
Corridors/Collars 500,000 500,000
Forward contracts 286,826 386,680
Total notional amount $4,242,867 $4,378,346
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 4. Submission of Matters to a Vote of Security holders.
At the Company's Annual Meeting of Stockholders held on May 8,
1997, the following nominees for reelection as directors of the
Company were elected by the votes indicated below:
Director Votes For Votes Withheld
Alex W. "Pete" Hart 15,994,658 87,989
Ronald J. Naples 15,994,658 87,989
William A. Rosoff 15,994,658 87,989
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 16, 1997 filed the same date.
(b) Reports on Form 8-K.
(b)(1) A Current Report on Form 8-K, dated March 17, 1997
was filed by the Company regarding certain Company
announcements relating to the retention of BT Wolfensohn,
certain management changes and 1997 earnings expectations,
as well as a shareholder rights plan and certain by-law
amendments.
(b)(2) A Current Report on Form 8-K, dated April 16, 1997
was filed by the Company setting forth the financial
highlights of the Company's results of operations for
the period ended March 31, 1997. 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)
May 14, 1997 By /s/David D. Wesselink
Senior Vice President, and
Chief Financial Officer
May 14, 1997 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 16, 1997 filed the same date.
99 Inapplicable.
