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, 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 November 1, 1997
Common Stock, $.01 par value 18,193,512 shares
Class B Outstanding at November 1, 1997
Common Stock, $.01 par value 26,131,211 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 Condensed Statements of
Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Part II Other Information 31
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1997 1996
ASSETS (Unaudited)
Cash $ 109,787 $ 165,875
Federal funds sold and interest-bearing
deposits with banks 1,406,688 885,709
Investments available for sale 1,399,007 785,600
Loan and lease receivables, net:
Available for sale 1,040,028 1,476,146
Other loan and lease receivables, net 1,599,045 1,136,857
Total loan and lease receivables, net 2,639,073 2,613,003
Premises and equipment, net 136,636 108,130
Amounts due from credit card
securitizations 286,680 399,359
Other assets 724,796 626,283
Total assets $6,702,667 $5,583,959
LIABILITIES
Deposits $2,942,115 $1,860,058
Debt and other borrowings 2,517,552 2,462,084
Other liabilities 262,813 309,781
Total liabilities 5,722,480 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 -- 18,180,612 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 -- 26,482,135 shares in 1997,
and 25,592,764 in 1996 264 256
Additional paid-in capital, net 342,806 309,250
Retained earnings, net 548,638 541,383
Less: Treasury stock at cost,
357,784 Class B common shares in 1997,
1,231 Class B common shares in 1996 (12,713) (42)
Total stockholders' equity 880,187 852,036
Total liabilities and stockholders'
equity $6,702,667 $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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
Interest income:
Loans and leases $ 95,410 $ 75,449 $224,994 $200,844
Investments 38,231 25,669 107,051 56,367
Total interest income 133,641 101,118 332,045 257,211
Interest expense:
Deposits 44,147 28,142 105,342 83,975
Other debt 44,267 49,555 134,331 116,989
Total interest expense 88,414 77,697 239,673 200,964
Net interest income 45,227 23,421 92,372 56,247
Provision for credit losses 48,243 24,230 158,886 66,963
Net interest income after
provision for credit losses (3,016) (809) (66,514) (10,716)
Noninterest revenues:
Gain on sale of credit
cards 0 0 0 33,820
Other noninterest revenues 209,080 209,338 560,547 553,880
Total noninterest revenues 209,080 209,338 560,547 587,700
Operating expenses:
Amortization of credit card
deferred origination
costs, net 14,395 22,690 47,916 67,670
Other operating expenses 134,509 118,619 408,363 311,579
Total operating expenses 148,904 141,309 456,279 379,249
Income before income taxes 57,160 67,220 37,754 197,735
Provision for income taxes 14,748 22,864 9,741 67,229
Net income $ 42,412 $ 44,356 $ 28,013 $130,506
Earnings per common share $ .92 $ .98 $ .60 $ 2.89
Weighted average common
shares outstanding 46,115 45,181 46,108 45,097
Cash dividends declared:
Class A $ .110 $ .090 $ .330 $ .270
Class B $ .132 $ .108 $ .396 $ .324
See Notes to Consolidated Condensed Financial Statements
<PAGE>
<TABLE>
Consolidated Condensed Statements of Changes in Stockholders' Equity
<CAPTION>
($ in thousands)
Class A Class B Class A Class B Additional Retained Total
Preferred Preferred Common Common Paid-In Earnings, Treasury Stockholders'
Stock Stock Stock Stock Capital net Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31,1995 $1,010 $0 $175 $240 $280,294 $391,245 $ 0 $672,964
Change in unrealized
appreciation of
investments (338) (338)
Preferred and common
cash dividends declared (24,588) (24,588)
Exercise of stock options 4 7 7,503 7,514
Issuance of stock
Benefit plans 9 2,185 2,228 4,422
Amortization of deferred
compensation 11,960 11,960
Termination/tax benefit
benefit plans 7,308 (2,270) 5,038
Foreign currency
translation adjustment (593) (593)
Net Income 175,657 175,657
Balance at Dec. 31, 1996 1,010 0 179 256 309,250 541,383 (42) 852,036
Change in unrealized
appreciation of
investments 232 232
Preferred and common
cash dividends declared (21,247) (21,247)
Exercise of stock options 3 5 7,289 7,297
Issuance of stock:
Benefit plans 3 2,521 1,297 3,821
Dividend reinvestment
plan 788 788
Amortization of deferred
compensation 8,995 8,995
Termination/tax benefit-
benefit plans 13,963 (13,968) (5)
Foreign currency
translation adjustment 257 257
Net Income 28,013 28,013
Balance at
September 30, 1997 $1,010 $0 $182 $264 $342,806 $548,638 $(12,713) $880,187
<FN>
See Notes to Consolidated Condensed Financial Statements
</TABLE>
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
1997 1996
OPERATING ACTIVITIES (Unaudited)
Net income $ 28,013 $ 130,506
Adjustments to reconcile net income to net
cash provided by operating activities:
Sales/valuation adjustments-equity securities 10,113 (10,978)
Depreciation and amortization of intangibles 25,243 12,628
Provision for credit losses 158,886 66,963
Change in other assets and amounts due from
credit card securitizations (37,767) (244,655)
Change in other liabilities (36,823) 146,469
Gain on securitization of receivables (67,592) (65,334)
Net cash provided by operating activities 80,073 35,599
INVESTING ACTIVITIES
Purchase of investments available for sale (33,475,817) (25,716,757)
Proceeds from sales of investments available
for sale 1,057,644 846,689
Proceeds from maturing investments available
for sale 31,800,974 24,583,740
Change in fed funds sold and interest-bearing
deposits (557,198) (1,323)
Change in credit card receivables, excluding
sales 369,906 (3,342,542)
Proceeds from sales/securitizations of
receivables 2,705,381 4,319,128
Purchase of personal finance loan/lease
portfolios (136,887) (107,995)
Principal collected on personal finance loans 85,324 33,386
Personal finance loans made to customers (2,531,997) (841,943)
Purchases of premises and equipment (53,709) (49,078)
Proceeds from sale of premises and equipment 226 675
Excess of cash collections over income
recognized on direct financing leases 28,520 65,992
Equipment purchased for direct financing leases (242,624) (249,644)
Change in business card receivables,excluding
sales (314,126) (187,960)
Net change in other loans (36,178) (17,519)
Net cash used by investing activities (1,300,561) (665,151)
FINANCING ACTIVITIES
Change in demand and savings deposits 180,973 (14,705)
Proceeds from sales of time deposits 1,621,209 1,280,478
Payments for maturing time deposits (720,125) (1,351,480)
Change in repurchase agreements and term
fed funds (10,000) (373,000)
Proceeds from issuance of subordinated/senior
debt 11,784 26,359
Payments on redemption of subordinated/senior
debt (73,714) (27,709)
Proceeds from issuance of medium-term notes 436,333 605,625
Payments on maturity of medium-term notes (203,235) (247,900)
Change in notes payable (69,481) 830,942
Proceeds from issuance of stock 11,903 6,466
Cash dividends paid (21,247) (17,686)
Net cash provided by financing activities 1,164,400 717,390
Net (decrease) increase in cash (56,088) 87,838
Cash at beginning of period 165,875 45,714
Cash at end of period $ 109,787 $ 133,552
See Notes to Consolidated Condensed Financial Statements
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
September 30, 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.
("the Company") and subsidiaries as of September 30, 1997 and December
31, 1996, the results of their operations for the three and nine month
periods ended September 30, 1997 and 1996, their changes in
stockholders' equity for the nine months ended September 30, 1997 and
for the twelve months ended December 31, 1996, and their cash flows for
the nine month periods ended September 30, 1997 and 1996. The results
of operations for the three and nine month periods ended September 30,
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 aggregate cost or fair market value.
<PAGE>
5) Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
September 30, December 31,
1997 1996
Credit cards $ 1,651,977 $ 2,045,219
Personal finance loans 581,883 376,260
Business loans and leases 390,813 214,327
Other loans 57,009 20,835
Gross loan and lease receivables 2,681,682 2,656,641
Add: Deferred origination costs,
net of deferred fees 84,002 45,546
Less: Reserve for credit losses:
Credit cards (110,084) (76,084)
Personal finance loans (5,554) (8,785)
Business loans and leases (10,741) (4,241)
Other loans (232) (74)
Total (126,611) (89,184)
Net loan and lease receivables $ 2,639,073 $ 2,613,003
Receivables and accounts serviced for others consisted of the
following:
September 30, December 31,
1977 1996
Receivables:
Credit cards $ 8,895,450 $10,646,177
Personal finance loans* 4,000,250 2,377,430
Business loans and leases 809,935 608,945
Total $13,705,635 $13,632,552
Number of Accounts:
Credit cards 4,920,805 5,185,624
Personal finance loans* 70,586 41,103
Business loans and leases 199,964 141,673
Total 5,191,355 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 $8.9 billion and $3.7 billion at
September 30, 1997 and December 31, 1996, September 30, 1997 and
December 31, 1996, respectively. The related number of accounts
serviced at September 30, 1997 and December 31, 1996 were 130,615
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 $39.0 million for the first nine months
of 1997, compared to $43.9 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 retained interest-only strip, 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
<PAGE>
adoption in that 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:
Nine Months Ended Year Ended
September 30, December 31,
1997 1996
Balance, beginning of period $ 89,184 $53,494
Current provision 158,886 96,862
Transfer of recourse
reserves to on-balance
sheet reserves 1,417 3,000
Reserves on receivables
(sold)/purchased, net (6,405) 6,404
Net charge-offs (116,471) (70,576)
Balance, end of period $126,611 $89,184
8) At September 30, 1997 and December 31, 1996, the Company had
$286.7 million and $399.4 million, respectively, of amounts due from
credit card securitizations. These amounts include the income on 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.
<PAGE>
9) Selected Balance Sheet Information
Other Assets
September 30, December 31,
1997 1996
Retained interest only strip -
personal finance loans $198,976 $149,418
Prepaid assets 158,215 117,934
Accrued interest receivable 88,220 101,021
Investment in affordable housing 66,493 48,059
Servicing advances-mortgage 65,576 34,503
Deferred costs 48,142 42,252
Investments in operating leases 13,702 17,276
Due from trustees - business
loans and leases 9,149 19,531
Retained interest only strip -
business loans and leases 2,884 14,205
Current and deferred federal
income taxes 0 28,169
Goodwill 5,224 5,795
Other real estate owned 486 2,513
Other 67,729 45,607
Total other assets $724,796 $626,283
Other Liabilities
September 30, December 31,
1997 1996
Accounts payable and accrued
expenses $ 56,800 $ 59,432
Accrued interest payable 94,902 55,320
Deferred fees and other reserves 22,733 86,877
Current and deferred income taxes 48,453 10,300
Other 39,925 97,852
Total other liabilities $262,813 $309,781
<PAGE>
10)Income tax expense reflects an effective tax rate of approximately
25.8%, for both the three and nine month periods ended September 30,
1997, compared to a 34% tax rate for both of the comparable 1996
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,
1997 1996 1997 1996
Current:
Federal $(1,079) $29,065 $14,732 $57,482
State 4,232 276 3,893 4,542
Total current 3,153 29,341 18,625 62,024
Deferred:
Federal 12,742 (6,667) (7,115) 5,372
State (1,147) 190 (1,769) (167)
Total deferred 11,595 (6,477) (8,884) 5,205
Total tax expense $14,748 $22,864 $ 9,741 $67,229
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,
1997 1996 1997 1996
Statutory federal
income tax $19,983 $23,536 $13,142 $69,207
State income taxes 2,006 303 1,380 2,844
Insurance income (2,981) 0 (5,177) 0
Tax credits (1,346) (667) (4,075) (1,250)
APB 28 adjustment (3,960) 0 3,617 0
Other 1,046 (308) 854 (3,572)
Consolidated tax
expense $14,748 $22,864 $ 9,741 $67,229
The net deferred tax asset/(liability) is comprised of the
following:
September 30, December 30,
1997 1996
Deferred taxes:
Gross assets $75,619 $112,861
Gross liabilities (78,177) (83,226)
Total deferred taxes $(2,558) $ 29,635
<PAGE>
The Company did not record any valuation allowances against deferred
tax assets at September 30, 1997 and December 31, 1996.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
September 30, December 31,
1997 1996
SFAS 91 $(16,227) $(17,870)
Loan losses 42,723 26,851
Income from personal finance
activities 1,548 6,623
Securitization income (31,938) (35,415)
Business loan and lease income (8,068) 56,447
Other 9,404 (7,001)
Net deferred tax assets
(liabilities) $ (2,558) $ 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 September 30, 1997, a total of
1,386,690 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 $29.5 million and $41.2 million related to
these shares of restricted stock is reflected as a reduction of equity
at September 30, 1997 and December 31, 1996, respectively.
12)In December 1996, Advanta Capital Trust I, a newly formed statutory
business trust established by and wholly-owned by the Company (the
"Trust"), issued in a private offering $100 million of capital
securities, representing preferred beneficial interests in the assets
of the Trust (the "Capital Securities"). The Company used the proceeds
from the sale for general corporate purposes. 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 circumstances, including at any time on or
after December 17, 2006 upon the optional prepayment by the Company
of the Junior Subordinated Debentures. The obligations of the Company
with respect to the Junior Subordinated Debentures, when considered
together with the obligations of the Company under the Indenture
relating to the Junior Subordinated Debentures, the Amended and
Restated Declaration of Trust relating to the Capital Securities and
the Capital Securities Guarantee issued by the Company with respect to
the Capital Securities will provide, in the aggregate, a full and
unconditional guarantee of payments of distributions and other amounts
<PAGE>
due on the Capital Securities. In July, 1997, the Company and the
Trust exchanged the outstanding Capital Securities and Junior
Subordinated Debentures for substantially identical securities which
were registered under the Securities Act of 1933, as amended
(the "Act"). The Company also exchanged the Capital Securities
Guarantee for a substantially identical guarantee which was also
registered under the Act. The Trust has no operations or assets
separate from its investment in the Junior Subordinated Debentures.
Separate financial statements of the Trust are not presented
because management has determined that they would not be material
to investors.
13)The following table shows the calculation of earnings per common share:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Net income $42,412 $44,356 $28,013 $130,506
less: preferred
dividends 0 0 (141) (141)
Net income
available
to common shares $42,412 $44,356 $27,872 $130,365
Average common
shares outstanding 42,875 40,818 42,750 40,679
Common stock
equivalents 3,240 4,363 3,358 4,418
Weighted average
common shares
outstanding
(in thousands) 46,115 45,181 46,108 45,097
Earnings per common
share $ .92 $ .98 $ .60 $ 2.89
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The new standard simplifies the computation of earnings per share
(EPS) and increases comparability to international standards. Under SFAS
No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
"Diluted" EPS, which is computed similarly to fully diluted EPS, reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
The Company is required to adopt the new standard in its year-end 1997
financial statements. All prior-period EPS information (including interim
EPS) is required to be restated at that time. Early adoption is not
permitted. The Company believes that the adoption of SFAS 128 will not
have a material effect on EPS.
<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, 1997 was $42.4 million
or $.92 per share compared to $44.4 million or $.98 per share for the third
quarter of 1996. For the nine months ended September 30, 1997 the Company
reported net income of $28.0 million or $.60 per share compared to net
income of $130.5 million or $2.89 per share for the same period last year.
The net income for the third quarter of 1997 reflects a substantial
increase in the managed net interest margin, which increased to 8.01% from
6.19% in the same period of 1996, and includes a $10 million cash rebate
received as a result of prior periods' credit card processing performance.
Offsetting these increases were increases in operating expenses, a $6
million addition to mortgage contingency reserves and a $10 million
addition to credit card loan loss reserves, as a result of increased charge-
offs and delinquency rates. The managed charge-off rate increased to 5.4%
for the third quarter of 1997 from 3.2% for the same period in 1996. The
managed delinquency rate was 5.7% for the third quarter of 1997 compared to
4.2% for the third quarter of 1996. The 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.
In the third quarter of 1997, operating expenses increased to $148.9
million compared to $141.3 million for the same period of 1996.
The operating expense ratio increased to 3.3% in the third quarter of 1997
from 3.0% for the third quarter of 1996. The increase was due, in part, to
increased collection efforts related to the credit card portfolio and to
additional costs associated with the substantial growth in personal finance
loans including the contract servicing portfolio. That portfolio, which is
not a component of managed receivables, grew from an average of $1.8
billion in the third quarter of 1996 to $8.1 billion in the third quarter
of 1997.
On October 28, 1997, the Company announced that it had reached a definitive
agreement under which Fleet Financial Group ("Fleet") would acquire the
Company's consumer credit card business and would combine it with Fleet's
consumer credit card business. The Company will continue to operate its
mortgage and business services companies.
The Company intends to seek shareholder approval and the transaction is
subject to regulatory approval. The transaction, which is expected to
close by late 1997 or early 1998, is anticipated to have a total value to
the Company of approximately $1.3 billion, including an after-tax gain of
approximately $500 million.
The Company also announced that it intends to make a tender offer to
repurchase between $750 and $850 million of the Company's common stock in
1998, following the closing of the transaction. The Company presently
expects the tender offer to be at a price between $40 and $45 per share.
<PAGE>
The Company also announced that Dennis Alter would resume his long-held
position as Chief Executive Officer of Advanta. Alex W. "Pete" Hart,
former Chief Executive Officer, and Jim Allhusen, Group Executive of
Advanta Personal Payment Services, are leaving to pursue other interests.
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 of debt of the Company and its subsidiaries. The
transaction described above also may be affected by factors which include
the timing of closing as well as contingencies. The proposed tender offer
also may be affected by factors which include the closing of the
transaction and the price at which the Company's stock is trading at the
time of the proposed tender offer. 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.
NET INTEREST INCOME
Net interest income for the third quarter of 1997 increased $21.8 million
or 93.1% to $45.2 million from $23.4 million for the same period of 1996.
This resulted from an increase in the owned net interest margin to 3.34%
for the third quarter of 1997, from 1.87% for the third quarter of 1996.
The increase in the net interest margin was negatively impacted by a change
in the mix of earning assets. For the third quarter of 1997, the
investment portfolio, which generally has lower yields than the loan and
lease portfolio, comprised 48.9% of owned interest earning assets versus
35.8% in the comparable 1996 period. The year to date period of 1997 was
also impacted by this change in earning asset composition. For the nine
months ended September 30, 1997 net interest income rose to $92.4 million,
a 64.2% increase over the $56.2 million reported for the same period of
1996. The owned net interest margin rose to 2.51% for the first nine
months of 1997 from 1.71% in the same period of 1996.
Throughout 1997, the Company continued to realize improved managed net
interest margins over 1996 levels. The managed net interest margin climbed
to 7.55% during the nine months ended September 30, 1997 compared to 6.08%
reported for the same period of 1996. This increase reflects the continued
repricing of credit card receivables under the Company's account management
initiatives and the contractual repricing of introductory rate receivables
throughout the first nine months of 1997. Average managed receivables
increased to $16.2 billion for the first nine months of 1997 from $14.5
billion in the same period of 1996.
<PAGE>
The following tables provide an analysis of both owned and managed interest
income and expense data, average balance sheet data, net interest spread
(the difference between the yield on interest earning assets and the
average rate paid on interest-bearing liabilities), and net interest margin
(the difference between the yield on interest earning assets and the
average rate paid to fund interest earning assets) for the three and nine
month periods ended September 30, 1997 and 1996. Average owned loan and
lease receivables and the related interest revenues include certain loan
fees.
<PAGE>
<TABLE>
INTEREST RATE ANALYSIS
<CAPTION>
(Dollars in thousands)
Three Months Ended September 30,
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 $ 1,711,826 $ 68,981 15.99% $ 2,774,292 $ 62,353 8.94%
Personal finance loans 711,034 16,000 8.93 291,575 7,756 10.58
Business loans 345,420 10,378 11.95 195,613 5,742 11.68
Other loans 54,583 1,320 9.60 12,326 548 17.69
Gross receivables(2) 2,822,863 96,679 13.59 3,273,806 76,399 9.28
Investments(2) 2,697,379 38,256 5.63 1,822,774 25,696 5.51
Total interest earning
assets $ 5,520,242 $134,935 9.70% $ 5,096,580 $102,095 7.93%
Interest-bearing
liabilities $ 5,528,703 $ 88,414 6.35% $ 5,133,987 $ 77,697 5.99%
Net interest spread 3.35% 1.94%
Net interest margin 3.34% 1.87%
Off-balance sheet
Credit cards $9,190,092 $10,143,760
Personal finance loans 3,522,496 1,916,299
Business loans 790,383 462,496
Total average
securitized receivables $13,502,971 $12,522,555
Total average managed
receivables $16,325,834 $15,796,361
Managed credit cards $10,901,918 $466,792 16.99% $12,918,052 $424,820 13.08%
Managed net interest
spread (3) 8.02% 6.22%
Managed net interest
margin (3) 8.01% 6.19%
<FN>
(1)Includes assets held and available for sale and nonaccrual loans and leases.
(2)Interest and average rate for tax-free securities, loans and leases Computed
on a tax equivalent basis using a statutory rate of 35%.
(3)Includes owned interest earning assets/owned interest-bearing liabilities
and securitized credit card assets/liabilities.
</TABLE>
<PAGE>
<TABLE>
INTEREST RATE ANALYSIS
<CAPTION>
(Dollars in thousands)
Nine Months Ended September 30,
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 $ 1,684,932 $ 154,490 12.26% $ 2,695,338 $ 167,326 8.29%
Personal finance loans 567,086 41,300 9.74 235,668 18,276 10.36
Business loans 325,470 30,213 12.40 187,328 16,865 12.01
Other loans 37,570 2,561 9.11 10,436 936 11.98
Gross receivables (2) 2,615,058 228,564 11.68 3,128,770 203,403 8.68
Investments (2) 2,508,087 107,124 5.69 1,338,713 56,516 5.49
Total interest earning
assets $ 5,123,145 $ 335,688 8.75% $ 4,467,483 $ 259,919 7.72%
Interest-bearing
liabilities $ 5,124,867 $ 239,673 6.23% $ 4,389,218 $ 200,964 6.06%
Net interest spread 2.52% 1.66%
Net interest margin 2.51% 1.71%
Off-balance sheet
Credit cards $ 9,918,540 $ 9,272,172
Personal finance loans 3,022,539 1,785,072
Business loans 683,030 362,158
Total average
securitized receivables $13,624,109 $11,419,402
Total average managed
receivables $16,239,167 $14,548,172
Managed credit cards $11,603,472 $1,353,459 15.60% $11,967,510 $1,139,601 12.72%
Managed net interest
spread (3) 7.55% 6.07%
Managed net interest
margin (3) 7.55% 6.08%
<FN>
(1)Includes assets held and available for sale and nonaccrual loans and leases.
(2)Interest and average rate for tax-free securities, loans and leases computed
on a tax equivalent basis using a statutory rate of 35%.
(3)Includes owned interest earning assets/owned interest-bearing liabilities
and securitized credit card assets/liabilities.
</TABLE>
<PAGE>
MANAGED PORTFOLIO DATA
The Company analyzes its financial results on a managed assets basis in
addition to analyzing data as reported under generally accepted
accounting principles.
The following table provides selected information on a managed basis
(excluding mortgage contract servicing assets), as well as a summary of
the effects of credit card securitizations on selected line items of the
Company's consolidated condensed income statements as of and for the
nine months ended September 30, 1997 and 1996.
Nine Months Ended
September 30,
1997 1996
Balance sheet data: ($ in thousands)
Average managed receivables $16,239,167 $14,548,172
Managed receivables 16,387,317 15,797,358
Total managed assets 20,795,966 18,356,622
Managed net interest margin
(on a fully tax equivalent basis) 7.55% 6.08%
As a percentage of gross managed
receivables:
Total loans 30 days or more
delinquent
New methodology (1) 5.7% 4.2%
Prior methodology 4.0%
Net charge-offs
New methodology (1) 5.4% 3.0%
Prior methodology 3.3%
Managed Income Statement:
Net interest income $ 860,004 $ 625,081
Provision for credit losses 666,760 331,385
Noninterest revenues 300,789 283,288
Operating expenses 456,279 379,249
Income before income taxes $ 37,754 $ 197,735
(1)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 credit card
receivables remained as owned and the provision for securitized credit
card losses been equal to actual reported charge-offs (see Asset
Quality). Noninterest revenues on the Managed Income Statement 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 third quarter of 1997 was
$48.2 million compared to $24.2 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 $40.0 million
for the third quarter of 1997 from $17.6 million for the third quarter
of 1996.
<PAGE>
For the first nine months of 1997 the provision for credit losses
increased to $158.9 million from $67.0 million for the same period of
1996, resulting from an increase in charge-offs on owned receivables
to $116.5 million in the first nine months of 1997 from $45.9 million
during the same period of 1996 as well as increases in impaired assets
and delinquency levels.
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 $126.6
million or 4.7% of receivables at September 30, 1997 compared to $89.2
million or 3.4% of receivables at December 31, 1996 and $77.6 million
or 2.6% of receivables at September 30, 1996.
On the total managed portfolio, impaired assets were $456.6 million or
2.8% of receivables at September 30, 1997, up from $420.5 million or
2.6% of receivables at December 31, 1996 and $307.1 million or 1.9% of
receivables at September 30, 1996. On the total owned portfolio,
impaired assets were $74.2 million or 2.8% of receivables at September
30, 1997, compared to $70.4 million or 2.7% of receivables at December
31, 1996, and $54.9 million or 1.8% of receivables at September 30,
1996. The 30 day and over delinquency rate on managed credit cards rose
to 5.2% at September 30, 1997 up from 3.9% a year ago. The 30-day and
over delinquency rate on owned credit cards rose to 6.5% at September
30, 1997, from 3.5% at September 30, 1996. The credit risk associated
with both the owned and managed portfolios are very similar; impaired
asset, delinquency and charge-off ratios on the owned portfolio, which
is largely comprised of retained interests in credit card trusts, are
affected by the amount and timing of securitizations. Additionally, the
ratios are affected by the lower level of owned credit card receivables
in 1997.
The total managed charge-off rate for the first nine months of 1997 was
5.4%, up from 3.2% for the full year of 1996 and 3.0% for the first nine
months of 1996. The charge-off rate on managed credit cards was 7.1% for
the first nine months of 1997, up from 3.7% for the full year of 1996 and
3.4% for the comparable 1996 period. The charge-off rate on managed
personal finance loans was .7% for the first nine months of 1997, equal
to the rate for both the full year of 1996 and the comparable 1996
period. The charge-off rate on managed business loans and leases was
3.0% for the first nine months of 1997, up from 2.3% for the full year of
1996 and 2.2% for the first nine months of 1996. The total owned charge-
<PAGE>
off rate rose to 5.9% for the nine months ended September 30, 1997 up
from 2.3% for the full year of 1996 and 2.0% for the comparable period in
1996. The charge-off rate on owned credit cards was 8.5% for the first
nine months of 1997, up from 2.5% for the full year of 1996 and 2.1% for
the first nine months of 1996. The charge-off rate for owned personal
finance loans was .8% for the nine months ended September 30, 1997, down
from 1.3% for the full year of 1996 and 1.4% for the first nine months of
1996. The charge-off rate on owned business loans rose to 2.4% for the
nine months ended September 30, 1997 compared to 1.5% for the full year
of 1996 and the first nine months of 1996.
<PAGE>
The following tables provide a summary of impaired assets, delinquencies
and charge-offs, as of and for the year-to-date periods indicated.
($ in thousands) September 30, December 31, September 30,
CONSOLIDATED - MANAGED 1997 1996 1996
Nonperforming assets $272,946 $191,668 $152,723
Accruing loans past due 90 days or
more 183,651 228,845 154,340
Impaired assets 456,597 420,513 307,063
Total loans 30 days or more delinquent 940,595 886,717 668,718
As a percentage of gross receivables:
Nonperforming assets 1.7% 1.2% 1.0%
Accruing loans past due 90 days or more 1.1 1.4 1.0
Impaired assets 2.8 2.6 1.9
Total loans 30 days or more delinquent:
New methodology(1) 5.7 5.4 4.2
Prior methodology(2) 5.2 4.0
Net charge-offs:
Amount(1) $656,920 $479,992 $325,422
As a percentage of average gross
receivables(annualized)
New methodology(1) 5.4% 3.2% 3.0%
Prior methodology(2) 3.5 3.3
CREDIT CARDS - MANAGED
Nonperforming assets $ 98,781 $ 89,064 $ 69,702
Accruing loans past due 90 days or
more 183,574 228,822 154,321
Impaired assets 282,355 317,886 224,023
Total loans 30 days or more delinquent 548,298 632,083 494,308
As a percentage of gross receivables:
Nonperforming assets .9% .7% .6%
Accruing loans past due 90 days or more 1.7 1.8 1.2
Impaired assets 2.7 2.5 1.8
Total loans 30 days or more delinquent
New methodology(1) 5.2 5.0 3.9
Prior methodology(2) 4.6 3.7
Net charge-offs:
Amount(1) $615,105 $451,239 $305,795
As a percentage of average gross
receivables(annualized)
New methodology(1) 7.1% 3.7% 3.4%
Prior methodology(2) 4.1 3.7
PERSONAL FINANCE LOANS - MANAGED
Nonperforming assets $152,887 $ 93,101 $ 75,611
Total loans 30 days or more delinquent 322,860 194,412 125,989
As a percentage of gross receivables:
Nonperforming assets 3.3% 3.4% 3.2%
Total loans 30 days or more delinquent 7.1 7.1 5.4
Net charge-offs:
Amount $ 19,075 $ 14,981 $ 10,762
As a percentage of average gross
receivables(annualized) .7% .7% .7%
BUSINESS LOANS AND LEASES - MANAGED
Nonperforming assets $ 21,123 $ 9,503 $ 7,402
Impaired assets 21,195 9,503 7,402
Total loans 30 days or more delinquent 68,502 59,880 48,361
As a percentage of receivables:
Nonperforming assets 1.8% 1.2% 1.0%
Impaired assets 1.8 1.2 1.0
Total loans 30 days or more delinquent 5.7 7.3 6.7
Net charge-offs:
Amount $ 22,737 $ 13,777 $ 8,872
As a percentage of average
receivables(annualized) 3.0% 2.3% 2.2%
(1) 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>
September December September
30, 31, 30,
CONSOLIDATED - OWNED 1997 1996 1996
Nonperforming assets $ 37,079 $ 29,822 $ 27,612
Accruing loans past due 90 days or more 37,116 40,597 27,251
Impaired assets 74,195 70,419 54,863
Total loans 30 days or more delinquent 159,244 145,613 109,654
As a percentage of gross receivables:
Nonperforming assets 1.4% 1.1% .9%
Accruing loans past due 90 days or more 1.4 1.5 .9
Impaired assets 2.8 2.7 1.8
Total loans 30 days or more deliquent:
New methodology(1) 5.9 5.5 3.6
Prior methodology(2) 5.3 3.5
Net charge-offs:
Amount(1) $116,471 $ 70,576 $ 45,911
As a percentage of average gross
receivables(annualized)
New methodology(1) 5.9% 2.3% 2.0%
Prior methodology(2) 2.5 2.1
CREDIT CARDS - OWNED
Nonperforming assets $ 19,149 $ 13,890 $ 12,079
Accruing loans past due 90 days or more 37,039 40,574 27,232
Impaired assets 56,188 54,464 39,311
Total loans 30 days or more delinquent 107,661 107,263 88,525
As a percentage of gross receivables:
Nonperforming assets 1.2% .7% .5%
Accruing loans past due 90 days or more 2.2 2.0 1.1
Impaired assets 3.4 2.7 1.5
Total loans 30 days or more delinquent
New methodology(1) 6.5 5.2 3.5
Prior methodology(2) 5.0 3.3
Net charge-offs:
Amount(1) $107,232 $ 64,520 $ 41,373
As a percentage of average gross
receivables(annualized)
New methodology(1) 8.5% 2.5% 2.1%
Prior methodology(2) 2.7 2.2
PERSONAL FINANCE LOANS - OWNED
Nonperforming assets $ 11,279 $ 13,005 $ 13,265
Total loans 30 days or more delinquent 33,862 28,546 14,463
As a percentage of gross receivables:
Nonperforming assets 1.9% 3.5% 6.2%
Total loans 30 days or more deliquent 5.8 7.6 6.7
Net charge-offs:
Amount $ 3,442 $ 3,060 $ 2,428
As a percentage of average gross
receivables (annualized) .8% 1.3% 1.4%
BUSINESS LOANS AND LEASES - OWNED
Nonperforming assets $ 6,496 $ 2,927 $ 2,260
Impaired assets 6,568 2,927 2,260
Total loans 30 days or more delinquent 17,416 9,462 6,606
As a percentage of receivables:
Nonperforming assets 1.7 % 1.4% .9%
Impaired assets 1.7 1.4 .9
Total loans 30 days or more delinquent 4.5 4.4 2.6
Net charge-offs:
Amount $ 5,794 $ 3,001 $ 2,117
As a percentage of average
receivables (annualized) 2.4% 1.5% 1.5%
(1) 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
($ in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Gain on sale of credit cards $ 0 $ 0 $ 0 $ 33,820
Other noninterest revenues:
Credit card securitization
income 58,445 65,592 133,906 183,192
Credit card servicing income
income 43,169 46,365 136,152 128,977
Credit card interchange
income 21,035 26,682 63,222 75,881
Income from personal
finance activities 43,260 30,350 116,430 76,477
Business loan and lease
other revenues 21,924 13,974 54,293 38,735
Insurance revenues, net 8,260 13,886 28,605 28,198
Other 12,987 12,489 27,939 22,420
Total other noninterest
revenues $209,080 $209,338 $560,547 $553,880
Total noninterest revenues $209,080 $209,338 $560,547 $587,700
Total noninterest revenues for the third quarter of 1997 were $209.1
million, level with the $209.3 million reported for the same period of
1996. For the nine month period ended September 30, 1997 total
noninterest revenues were $560.5 million, down from $587.7 reported for
the same period of 1996. The 1996 year-to-date amount includes a $33.8
million gain on the sale of credit card customer relationships.
Although total other noninterest revenues were flat in the third quarter
of 1997 compared to the same period of 1996, revenues from credit card
securitization activities have decreased while revenues from personal
finance activities and business loan and lease revenues have increased.
Income from personal finance activities totalled $43.3 million for the
third quarter of 1997, up more than 42.5% from the $30.4 million
reported for the third quarter of 1996. This increase resulted from a
$1.3 billion increase in personal finance loans securitized year over
year, an increase in contract servicing fees, and is net of a $6 million
addition to contingency reserves. Business loan and lease revenues rose
almost 57% to $21.9 million for the third quarter of 1997 from $14.0
million for the same period last year. Credit card securitization
income declined to $58.4 million for the three months ended September
30, 1997 from $65.6 million reported for the same period last year and
credit card servicing income decreased by $3.2 million or 6.9% partially
due to lower securitized balances for the quarter. Credit card
interchange income decreased by 21.2% during the third quarter of 1997
to $21.0 million from $26.7 million for the same period of 1996.
Insurance revenues of $8.3 million in the third quarter of 1997 were
down from the $13.9 million reported for the third quarter in 1996, due,
in part, to the decrease in credit card receivables.
During the nine month period ended September 30, 1997, total other
noninterest revenues increased to $560.5 million from $553.9 reported
for the same period of 1996. This increase is attributable primarily to
higher personal finance and business loan noninterest revenues, and
other credit card revenues included in other noninterest revenues,
offset by decreases in credit card securitization income and credit card
interchange income.
<PAGE>
OPERATING EXPENSES
($ in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Amortization of credit card
deferred origination costs,
net $ 14,395 $ 22,690 $ 47,916 $ 67,670
Other operating expenses:
Salaries and employee
benefits 63,964 50,893 178,594 132,081
Marketing 14,277 7,902 37,928 24,371
Professional fees 13,533 10,349 29,638 26,723
Equipment expense 8,491 6,051 26,759 15,229
Postage 6,489 6,214 21,232 18,893
Telephone expense 5,450 4,979 15,667 13,599
Occupancy expense 5,369 3,817 16,765 9,846
Credit and collection
expense 5,121 3,969 15,155 9,594
Credit card fraud losses 4,554 8,220 17,730 16,982
External processing 4,126 11,043 29,572 30,848
Other 3,135 5,182 19,323 13,413
Total other operating
expenses $134,509 $118,619 $408,363 $311,579
Total operating expenses $148,904 $141,309 $456,279 $379,249
Total operating expenses of $148.9 million for the quarter ended
September 30, 1997 increased 5.4% from $141.3 million in the same period
of 1996. The amortization of credit card deferred origination costs,
net, decreased from $22.7 million for the three months ended September
30, 1996 to $14.4 million for the comparable period of 1997. Total
other operating expenses as a percentage of average managed receivables
were 3.3% for the third quarter of 1997, up from 3.0% in the comparable
period in 1996. The increase in operating expenses is attributable in
part to an increase in the number of employees from 3,084 at September
30, 1996 to 4,168 at September 30, 1997 primarily in the credit card
collection area and to support the growth in loan production and
serviced receivables in the personal finance area. Marketing expenses
increased 80.7% as a result of increased new business advertising of the
Company's personal finance and business card products, and increased
advertising of the credit card products with the primary purpose of
retaining current customer relationships. Professional fees increased
to $13.5 million in the third quarter of 1997 from $10.3 million in the
third quarter of 1996 primarily as a result of consulting fees in the
credit card area as well as new corporate initiatives. Other expenses
including equipment and occupancy expense showed increases consistent
with the current and projected increase in the number of employees and
serviced customer accounts and the addition of space and new technology
required to support this growth. External processing declined to $4.1
million in the third quarter of 1997 from $11.0 million in the same
quarter of 1996 as a result of a $10.0 million cash rebate for prior
periods' credit card processing performance. Without the rebate,
external processing costs would have increased by $3.1 million primarily
as a result of customer retention and relationship management programs
in our credit card area.
<PAGE>
Total operating expenses for the first nine months of 1997 increased
20.3% to $456.3 million from $379.2 during the same period in 1996. The
operating expense ratio increased to 3.4% from 2.9% reported in 1996.
The increase in expenses is consistent with an increase in headcount and
accounts and customers serviced throughout the organization.
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 1997, the Company, through
its subsidiaries, securitized $2.3 billion of personal finance loans and
$206.4 million of business loan receivables. In addition, funds were
raised during this same period through an increase in deposits at the
Banks (as defined below) and unsecured notes totalling approximately
$1 billion. 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. Cash and
equivalents exceeded amounts normally held to provide liquidity
protection subsequent to the Company's March 17, 1997 announcement
relating to expected 1997 financial results. At September 30, 1997, the
Company had approximately $1.0 billion of loan and lease receivables and
$1.4 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 (together with AUS,
the "Banks") 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. and the Banks by one or two grades. More
recently, on October 28, 1997, Moody's Investors Service ("Moody's")
again lowered its rating of the debt securities of each of Advanta Corp.
and ANB (as defined below). As of October 28, 1997, debt of ANB was
rated at or above the lowest level of investment grade by each agency
except Standard & Poors and Moody's, each of which rated it one level
below investment grade; senior 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 three levels
below investment grade by Moody's. Effective June 30, 1997, Advanta
National Bank was merged into AUS, and AUS was renamed Advanta National
Bank ("ANB"). The combined institution is larger, more effectively
capitalized, and more efficient to run than the two separate entities.
Efforts continue to develop new sources of funding, both through
previously untapped customer segments and through development of 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, $250 million of which is committed. Also,
deposit sources proved readily expandable as demonstrated in the growth
noted above.
In December 1996, Advanta Capital Trust I, a newly formed statutory
business trust established by and wholly-owned by the Company (the
"Trust"), issued in a private offering $100 million of capital
securities, representing preferred beneficial interests in the assets of
the Trust (the "Capital Securities"). The Company used the proceeds
<PAGE>
from the sale for general corporate purposes. 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 circumstances, including at any time on or
after December 17, 2006 upon the optional prepayment by the Company of
the Junior Subordinated Debentures. The obligations of the Company with
respect to the Junior Subordinated Debentures, when considered together
with the obligations of the Company under the Indenture relating to the
Junior Subordinated Debentures, the Amended and Restated Declaration of
Trust relating to the Capital Securities and the Capital Securities
Guarantee issued by the Company with respect to the Capital Securities
will provide, in the aggregate, a full and unconditional guarantee of
payments of distributions and other amounts due on the Capital
Securities. In July, 1997, the Company and the Trust exchanged the
outstanding Capital Securities and Junior Subordinated Debentures for
substantially identical securities which were registered under the
Securities Act of 1933, as amended (the "Act"). The Company also
exchanged the Capital Securities Guarantee for a substantially identical
guarantee which was also registered under the Act. The Trust has no
operations or assets separate from its investment in the Junior
Subordinated Debentures. Separate financial statements of the Trust are
not presented because management has determined that they would not be
material to investors.
Advanta Corp. and ANB together have a $1 billion revolving credit
facility, of which $1 billion is available to ANB and up to a maximum of
$500 million is available to Advanta Corp., subject to the terms and
conditions of the facility, including 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.
Approximately $600 million of this shelf is still available to the
Company.
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 matched funding of assets and liabilities. Derivative
financial instruments, by policy, are not used for any speculative
purposes (see discussion under "Derivatives Activities"). The Company
<PAGE>
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 personal
finance 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.
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.
<PAGE>
As of September 30, 1997 and December 31, 1996, 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:
($ in thousands) Estimated Fair Value
September 30, December 31, September 30, 1997
1997 1996 Asset/(Liability)
Interest rate swaps $2,393,756 $1,560,444 $22,096
Swaptions 0 153,000 0
Interest rate options:
Caps written 1,011,195 1,413,222 (443)
Caps purchased 321,195 365,000 443
Corridors/Collars 0 500,000 0
Forward contracts 478,548 386,680 (1,436)
Total notional amount $4,204,694 $4,378,346 $20,660
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.
The fair value of interest rate swaps, options and forward contracts is
the estimated amount that the Company would pay or receive to terminate
the agreement at the reporting date, taking into account current
interest and foreign exchange rates and the current creditworthiness of
the counterparty.
The Company's credit exposure to derivatives, with the exception of caps
written, is represented by contracts with a positive fair value without
giving consideration to the value of any collateral exchanged. For caps
written, credit exposure does not exist since the counterparty has
performed its obligation to pay the Company a premium payment.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On June 30, 1997, purported shareholders of the Company who
are represented by a group of law firms filed a putative
class action complaint against the Company and several of
its current and former officers and directors in the United
States District Court for the Eastern District of
Pennsylvania. A second, similar complaint was filed in the
same court a few days later by a different group of
purported Company shareholders and a different group of law
firms. Both complaints allege that the Company made
misrepresentations in certain of its public filings and
statements in violation of the Securities Exchange Act of
1934. The complaints seek damages of an unspecified
amount. The Company believes that the complaints are
without merit and will vigorously defend itself against the
actions.
On August 25, 1997, a cardholder of the Company instituted a
putative class action complaint against the Company and certain
other subsidiaries in Delaware Superior Court for New Castle
County. Subsequently, on September 8, 10, and 12 and on
October 2, 1997, similar actions were filed in Orange County
California Superior Court, the United States District Court for
the Eastern District of Tennessee, Delaware Superior Court and
the Circuit Court of Covington County, Alabama, respectively.
The complaints allege that cardholder accounts in the specific
program were improperly repriced to a higher percentage rate of
interest. The complaints assert various violations of federal
and state law with regard to such repricings, and each seeks
damages of an unspecified amount. The program at issue
comprises a very small portion of the Company's consumer credit
card receivables. The Company believes that the complaints are
without merit and will vigorously defend itself against the
actions.
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 15, 1997 filed the same
date.
<PAGE>
(b) Reports on Form 8-K.
(b)(1) A current Report on Form 8-K, dated July 14, 1997 was
filed by the Company describing certain shareholders'
litigation.
(b)(2) A current Report on Form 8-K, dated July 16, 1997 was
filed by the Company setting forth the financial
highlights of the Company's results of operations for
the period ended June 30, 1997.
(b)(3) A Current Report on Form 8-K, dated July 28, 1997 was
filed by the Company incorporating the calculation of the
Earnings to Fixed Charges Ratio as of March 31, 1997 into
Registration Statement No. 333-05701.
(b)(4) A Current Report on Form 8-K, dated August 7, 1997 was
filed by the Company incorporating certain documentation
into Registration Statement No. 333-05701 including a
form of distribution agreement for the Company's retail
medium term notes and the form of notes with respect
thereto.
(b)(5) A Current Report on Form 8-K, dated September 26, 1997
was filed by the Company incorporating certain
documentation into Registration Statement No. 333-05701
including a form of distribution agreement for the
Company's Medium Term Notes, Series E, and the form of
notes with respect thereto.
(b)(6) A Current Report on Form 8-K, dated October 15, 1997 was
filed by the Company setting forth the financial
highlights of the Company's results of operations for
the period ended September 30, 1997. A Financial Data
Schedule was included as an exhibit in this Form 8-K.
(b)(7) A Current Report on Form 8-K, dated October 28, 1997
was filed by the Company reporting certain announcements
made by the Company that day.
<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 14, 1997 By /s/Elizabeth H. Mai
Senior Vice President and
General Counsel
November 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.
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 15, 1997 filed
the same date.
99 Inapplicable.
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,
1997 1996 1997 1996
Net earnings $ 42,412 $ 44,356 $ 28,013 $130,506
Federal and state
income taxes 14,748 22,864 9,741 67,229
Earnings before income
taxes 57,160 67,220 37,754 197,735
Fixed charges:
Interest 88,414 77,697 239,673 200,964
One-third of all rentals (A) 746 781 2,572 1,947
Preferred stock dividend of
subsidiary trust 2,248 0 6,743 0
Total fixed charges 91,408 78,478 248,988 202,911
Earnings before income
taxes and fixed charges $148,568 $145,698 $286,742 $400,646
Ratio of earnings to fixed
charges (A) 1.63x 1.86x 1.15x 1.97x
(A) For purposes of computing these ratios, "earnings" represent income
before income taxes plus fixed charges, and "fixed charges" consist
of interest expense, one-third (the proportion deemed representative
of the interest factor) of rental expense on operating leases, and
preferred stock dividends of subsidiary trust.
