<PAGE> 1
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, 1998 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, 1998
- ---------------------------- --------------------------
Common Stock, $.01 par value 10,375,494 shares
Class B Outstanding at May 1, 1998
- ---------------------------- --------------------------
Common Stock, $.01 par value 15,966,505 shares
1
<PAGE> 2
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..................................17
Part II Other Information...........................................31
2
<PAGE> 3
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Cash $ 94,517 $ 57,953
Federal funds sold and interest-bearing
deposits with banks 114,300 156,500
Restricted interest-bearing deposits 230,746 666,583
Investments available for sale 1,571,764 1,269,209
Loan and lease receivables, net:
Available for sale 579,675 1,452,560
Other loan and lease receivables, net 318,578 1,923,986
------- ---------
Total loan and lease receivables, net 898,253 3,376,546
Premises and equipment(at cost, less
accumulated depreciation of
$29,543 in 1998 and $83,746 in 1997) 60,056 152,215
Amounts due from credit card
securitizations 0 222,330
Other assets 581,082 784,796
------- -------
Total assets $3,550,718 $6,686,132
========== ==========
LIABILITIES
Deposits $ 935,041 $3,017,611
Debt and other borrowings 1,635,799 2,300,946
Other liabilities 329,777 340,625
------- -------
Total liabilities 2,900,617 5,659,182
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 1998
and 1997 1,010 1,010
Class B preferred stock, $.01 par
value: authorized -- 1,000,000 shares
in 1998 and 1997; issued -- 14,211
shares in 1998 and 25,000 in 1997 0 0
Class A common stock, $.01 par value:
authorized -- 214,500,000 shares;
issued 10,369,814 shares in 1998,
and 18,193,885 shares in 1997 104 182
Class B common stock, $.01 par value:
authorized -- 230,000,000 shares;
issued 15,422,579 shares in 1998,
and 26,564,546 in 1997 154 266
Additional paid-in capital, net 206,948 354,190
Retained earnings, net 361,101 585,709
Less: Treasury stock at cost,
558,633 Class B common shares in 1998,
418,286 Class B common shares in 1997 (19,216) (14,407)
------- -------
Total stockholders' equity 550,101 926,950
------- -------
Total liabilities and stockholders'
equity $3,550,718 $6,686,132
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
(Unaudited)
<S> <C> <C>
Interest income:
Loans and leases $ 46,454 $ 66,014
Investments 26,857 31,052
------ ------
Total interest income 73,311 97,066
Interest expense:
Deposits 36,249 27,096
Other debt 31,295 44,366
------ ------
Total interest expense 67,544 71,462
Net interest income 5,767 25,604
Provision for credit losses 33,961 60,364
------ ------
Net interest income after
provision for credit losses (28,194) (34,760)
Noninterest revenues:
Gain on transfer of credit
card business 541,287 0
Other noninterest revenues 148,608 156,862
------- -------
Total noninterest revenues 689,895 156,862
Operating expenses:
Severance and outplacement costs associated
with workforce reduction, option
exercise and other employee costs associated with
Fleet Transaction/Tender Offer 62,257 0
Expense associated with exited business/product 54,115 0
Impairment of facility assets related to
restructuring 8,700 0
Amortization of credit card
deferred origination
costs, net 18,515 18,063
Other operating expenses 120,786 130,748
------- -------
Total operating expenses 264,373 148,811
Income (loss) before income taxes 397,328 (26,709)
(Benefit) for income taxes (21,459) (6,891)
------- ------
Net income (loss) $ 418,787 $(19,818)
========= ========
Earnings per common share -
Combined (See Note 13) $ 11.84 $ (.51)
======== =======
Diluted Earnings per share -
Combined (See Note 13) $ 11.04 $ (.51)
======== =======
Weighted average common
shares outstanding - Basic 35,278 42,521
====== ======
Weighted average common
shares outstanding -
assuming dilution 37,915 42,521
====== ======
Cash dividends declared:
Class A $ .063 $ .110
Class B $ .076 $ .132
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
Consolidated Condensed Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
($ in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Class A Class B Class A Class B Additional Investment
Preferred Preferred Common Common Paid-In Deferred Holding Gains
Stock Stock Stock Stock Capital Compensation (Losses)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31,1996 $1,010 $0 $179 $256 $350,479 $(41,229) $ (618)
Change in unrealized
appreciation of
investments 466
Preferred and common
cash dividends declared
Exercise of stock options 3 6 8,468
Issuance of stock:
Dividend reinvestment 857
Benefit plans 4 14,524 (11,159)
Amortization of deferred
compensation 11,343
Termination/tax benefit -
benefit plans 5,215 15,692
Foreign currency
translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income
Balance at Dec. 31, 1997 $1,010 $0 $ 182 $ 266 $379,543 $(25,353) $ (152)
Tender offer (79) (113) (160,861)
Change in unrealized
appreciation of
investments 146
Preferred and common
cash dividends declared
Exercise of stock options 1 2 3,041
Issuance of stock:
Dividend reinvestment
plan 31
Benefit plans 2 5,913 (4,606)
Amortization of deferred
compensation 2,654
Termination/tax benefit-
benefit plans (3) (8,798) 15,384
Foreign currency
translation adjustment
Net Income
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
March 31, 1998 $1,010 $0 $104 $154 $218,869 $(11,921) $(6)
====================================================================================================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<TABLE>
<CAPTION>
($ in thousands)
- ----------------------------------------------------------------------------------------------------
Retained Treasury Stockholders'
Earnings, net Stock Equity
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Dec. 31,1996 $542,001 $(42) $852,036
Change in unrealized
appreciation of
investments 466
Preferred and common
cash dividends declared (28,301) (28,301)
Exercise of stock options 8,477
Issuance of stock:
Dividend reinvestment 857
Benefit plans 1,297 4,666
Amortization of deferred
compensation 11,343
Termination/tax benefit
- benefit plans (15,662) 5,245
Foreign currency
translation adjustment 536 536
Net Income 71,625 71,625
- ------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $585,861 $(14,407) $926,950
Tender offer (640,551) (801,604)
Change in unrealized
appreciation of
investments 146
Preferred and common
cash dividends declared (2,728) (2,728)
Exercise of stock options 3,044
Issuance of stock:
Dividend reinvestment
plan 31
Benefit plans 1,309
Amortization of deferred
compensation 2,654
Termination/tax benefit-
benefit plans (4,809) 1,774
Foreign currency
translation adjustment (262) (262)
Net Income 418,787 418,787
- ------------------------------------------------------------------------------------------------
Balance at
March 31, 1998 $361,107 $(19,216) $550,101
================================================================================================
</TABLE>
5
6
<PAGE> 6
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1997
----------------------
OPERATING ACTIVITIES (Unaudited)
<S> <C> <C>
Net income (loss) $418,787 $(19,818)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gain on transfer of credit card business (541,287) 0
Restructure and other unusual charges 99,672 0
Sales/valuation adjustments-equity securities 42,889 4,670
Depreciation and amortization of intangibles 8,256 7,997
Provision for credit losses 33,961 60,364
Change in other assets and amounts due from
credit card securitizations (52,237) 8,597
Change in other liabilities 13,469 22,765
Gain on securitization of receivables (23,604) (23,929)
------- -------
Net cash (used in) provided by operating activities (94) 60,646
INVESTING ACTIVITIES
Purchase of investments available for sale (29,262,311) (7,442,421)
Proceeds from sales of investments available for
sale 684,007 66,142
Proceeds from maturing investments available
for sale 28,232,695 7,296,061
Change in federal funds sold and interest-bearing
deposits 98,765 (729,229)
Change in credit card receivables, excluding sales/transfers (1,113,848) 237,929
Proceeds from sales/securitizations of receivables 3,009,820 711,515
Purchase of personal finance loan/lease portfolios (2,526) (63,952)
Principal collected on personal finance loans 26,423 36,583
Personal finance loans made to customers (1,174,769) (658,569)
Purchases of premises and equipment 2,679 (31,992)
Proceeds from sale of premises and equipment 0 186
Excess of cash collections over income
recognized on direct financing leases 7,742 11,333
Equipment purchased for direct financing leases (62,685) (82,435)
Change in business card receivables, excluding sales (45,712) (104,891)
Net change in other loans 97 (11,046)
------- -------
Net cash provided by (used in) investing activities 400,377 (764,786)
FINANCING ACTIVITIES
Change in demand and savings deposits (382,024) 26,489
Proceeds from sales of time deposits 663,137 339,971
Payments for maturing time deposits (196,223) (267,727)
Change in repurchase agreements and term federal funds 51,950 204,130
Proceeds from issuance of subordinated/senior debt 4,468 6,880
Payments on redemption of subordinated/senior debt (14,880) (18,570)
Proceeds from issuance of medium-term notes 25 285,500
Payments on maturity of medium-term notes (16,000) (45,000)
Change in notes payable 325,776 153,068
Stock tender offer (801,604) 0
Proceeds from issuance of stock 4,384 7,881
Cash dividends paid (2,728) (7,182)
------ ------
Net cash (used in) provided by financing activities (363,719) 685,440
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 36,564 (18,700)
Cash at beginning of period 57,953 165,875
Cash at end of period $ 94,517 $ 147,175
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
6
<PAGE> 7
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands)
March 31, 1998
1) The consolidated condensed financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the statements include all adjustments (which
include only normal recurring adjustments) required for a fair statement
of financial position, results of operations and cash flows for the
interim periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's latest annual report on Form 10-K. The results of
operations through February 20, 1998 include the results of operations of
the Company's consumer credit card business. (See Note 3.) The results of
operations for the interim periods are not necessarily indicative of the
results for a full year.
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 periods. Actual results could differ from those
estimates.
Certain prior period amounts have been reclassified to conform with
current year classifications.
3) Pursuant to the terms of the Contribution Agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between the Company and
Fleet Financial Group, Inc. ("Fleet"), the Company and certain of its
subsidiaries and Fleet and certain of its subsidiaries each contributed
certain assets and liabilities of their respective consumer credit card
businesses to Fleet Credit Card LLC (the "LLC") in exchange for an
ownership in the LLC (the "Transaction"). As of the consummation of the
Transaction on February 20, 1998, the Company's ownership interest in the
LLC was 4.99%. The Company retained certain immaterial assets of its
consumer credit card business which are not required in the operation
of such business and certain liabilities related to its consumer credit
card business, including, among others, all reserves relating to its
credit insurance business and any liability or obligation relating to
certain consumer credit card accounts generated in specific programs
which comprised a very small portion of the Company's consumer credit
card receivables as of February 20, 1998. The assets and liabilities
retained have been classified in other assets and other liabilities.
Concurrently with the Transaction the Company purchased 7,882,750 shares
of its Class A Common Stock, 12,482,850 of its Class B Common Stock, each
at $40 per share net, and 1,078,930 of its depositary shares each
representing one one-hundredth interest in a share of 6 3/4% Convertible
Class B Preferred Stock, Series 1995 (Stock Appreciated Income Linked
Securities (SAILS)) at $32.80 per share net through an issuer tender
offer which was completed on February 20, 1998. The Office of the
Comptroller of the Currency approved the payment of a special dividend
from Advanta National Bank to Advanta Corp., its parent company, to
effect the purchase of the shares.
The contribution was accounted for as a transfer of financial assets
(cash, loans, and other receivables) and an extinguishment of financial
liabilities (deposits, debt and other borrowings and other liabilities)
under Statement of Financial Accounting Standards ("SFAS") No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and a sale of non financial assets and
liabilities (principally property and equipment, prepaid assets, deferred
costs and certain contractual obligations). The financial assets and non
financial assets and liabilities of the Company's consumer credit card
business that were contributed were removed from the balance sheet. The
Company was legally released from being the primary obligor under all of
the financial liabilities contributed and accordingly, they were removed
from the balance sheet.
4) Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" was issued in July 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components. The main objective of the statement is to report a measure of
all changes in equity that result from transactions and other economic
events of the period other than transactions with owners. The Company
adopted
7
<PAGE> 8
SFAS No. 130 on January 1, 1998.
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Net income/Loss $ 418,787 $ (19,818)
Unrealized holding gain during the period, net 146 466
of tax
Cumulative translation adjustments (262) 536
---------- ---------
Comprehensive income /(loss) $ 418,671 $ (18,816)
========= ==========
</TABLE>
5) SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997, and is effective for periods
beginning after December 15, 1997. In the initial year of adoption, this
statement does not have to be applied to interim financial statements.
SFAS No. 131 introduces a new model for segment reporting, called the
"management approach". The management approach is based on the way the
chief operating decision maker organizes segments within a company for
making operating decisions and assessing performance. Reportable segments
are based on product and services, geography, legal structure, management
structure - any manner in which management disaggregates a company. The
management approach replaces the notion of industry and geographic
segments in current FASB standards. The Company currently intends to
report information on two segments as a result of the adoption of SFAS
No. 131, Advanta Mortgage and Advanta Business Services.
The American Institute of Certified Public Accountants issued Statement
of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" in March 1998. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998 and
specifies that direct costs incurred when developing computer software
for internal use should be capitalized once certain capitalization
criteria are met. SOP 98-1 specifies that internal costs incurred for
upgrades, enhancements and maintenance should be expensed as incurred.
The SOP also specifies that external costs related to maintenance,
unspecified upgrades and enhancements, and costs under agreements that
combine the costs of maintenance and unspecified upgrades and
enhancements should be recognized in expense over the contract period on
a straight-line basis unless another systematic and rational basis is
more representative of the services received. Capitalized costs of
computer software developed or obtained for internal use is to be
amortized on a straight-line basis unless another systematic and rational
basis is more representative of the software's use. The provisions of the
SOP are to be applied to internal-use software costs incurred in those
fiscal years for all projects, including those projects in progress upon
initial application of the SOP. Costs incurred prior to initial
application of this SOP, whether capitalized or not, may not be adjusted
to the amounts that would have been capitalized had this SOP been in
effect when those costs were incurred. The adoption of SOP 98-1 is not
expected to have a material effect on the Company's financial statements.
6) Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Consumer credit cards $ 0 $2,579,890
Mortgage loans 605,427 478,433
Leases and corporate cards 288,793 298,789
Other loans 11,770 40,978
---------- ----------
Gross loan and lease receivables 905,990 3,398,090
Add: Deferred origination costs,
net of deferred fees 10,177 116,229
Less: Reserve for credit losses:
Consumer credit cards 0 (118,420)
Mortgage loans (4,495) (5,822)
Leases and corporate cards (9,685) (9,798)
Other loans (3,734) (3,733)
---------- ----------
Total (17,914) (137,773)
--------- ----------
Net loan and lease receivables $ 898,253 $3,376,546
========= ==========
</TABLE>
9
<PAGE> 10
Receivables and accounts serviced for others consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Receivables:
Consumer credit cards $ 0 $ 8,664,711
Mortgage loans* 5,440,966 4,830,403
Leases and corporate cards 1,005,654 965,000
----------- -----------
Total $ 6,446,620 $14,460,114
=========== ===========
Number of Accounts:
Consumer credit cards 0 4,529,248
Mortgage loans* 100,668 93,317
Leases and corporate cards 273,274 248,546
----------- -----------
Total 373,942 4,871,111
=========== ===========
</TABLE>
*Excludes Mortgage loans which were never owned by the Company, but which
the Company services for a fee ("contract servicing"). Contract servicing
receivables were $8.8 billion and $9.2 billion at March 31, 1998 and
December 31, 1997, respectively. The related number of accounts serviced
at March 31, 1998 and December 31, 1997 were 130,340 and 130,644,
respectively.
7) The Company measures the retained interest-only (IO) strips from the
securitization of mortgage and home equity loans like investments in debt
securities classified as trading securities. These assets are
subsequently recorded at estimated fair value and the resulting
unrealized gain or loss from the valuation of the receivable is recorded
in the results of operations for the period. During the quarters ended
March 31, 1998 and 1997 the Company recorded a pretax charge of $9.8
million and $3.9 million, respectively, due to increased prepayments on
mortgage loans.
The Company measures the retained interest-only strips from the
securitization of business loans and leases like investments in debt
securities classified as available-for-sale securities.
At March 31, 1998, the Company had $5.7 billion of securitized personal
finance loan receivables outstanding which are subject to certain
recourse obligations. The Company had liabilities of $126.4 million at
March 31, 1998 related to these recourse obligations which are netted
against the retained interest-only strips. At March 31, 1998, the Company
had amounts receivable from personal finance sales and securitizations of
$415.9 million, $163.1 million of which was subject to liens.
At March 31, 1998, the Company had $1.0 billion of securitized business
loans and leases outstanding which are subject to certain recourse
obligations. There were liabilities of $35.2 million at March 31, 1998
related to these recourse obligations which are netted against the
retained interest-only strips. The Company had amounts receivable from
business loan and lease securitizations of $52.1 million at March 31,
1998, none of which was subject to liens.
The retained IO strips and the related recourse liabilities are
established at the time of the securitization transactions based on
anticipated future interest rates, prepayment rates and default rates. As
these estimates are influenced by factors outside of the Company's
control, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change in the near term.
8) The following table shows the changes in the reserve for credit losses
for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period $ 137,773 $ 89,184
Current provision 33,961 210,826
Reserves on receivables
(sold)/purchased, net (118,420) (11,015)
Net charge-offs (35,400) (151,222)
------- --------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C>
Balance, end of period $ 17,914 $137,773
========= ========
</TABLE>
9) Selected Balance Sheet Information
<TABLE>
<CAPTION>
OTHER ASSETS
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Retained interest-only strip,
net - personal finance loans $190,643 $191,868
Prepaid assets 71,325 131,305
Due from trustees - mortgage 46,118 25,383
Accrued interest receivable 20,414 99,167
Investments in operating leases 11,419 12,432
Due from trustees - leases and
corporate cards 10,076 6,736
Goodwill 3,808 5,134
Deferred costs 3,640 48,332
Other real estate (A) 1,494 689
Current and deferred federal
income taxes 17,647 0
Other 204,498 263,750
------- -------
Total other assets $581,082 $784,796
======== ========
</TABLE>
(A) Carried at the lower of cost or fair market value less selling
costs.
<TABLE>
<CAPTION>
OTHER LIABILITIES
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Accounts payable and accrued
expenses $109,948 $100,380
Accrued interest payable 49,507 73,103
Deferred fees and other reserves 35,853 28,050
Current and deferred federal and state income taxes
0 40,461
Other 134,469 98,631
------- ------
Total other liabilities $329,777 $340,625
======== ========
</TABLE>
10) Income tax expense reflects an effective tax rate, before the impact of
the gain and tax charges associated with exited business and products, of
approximately 30%, for the three month period ended March 31, 1998,
compared to approximately 26% tax rate for the comparable 1997 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Current:
Federal $(74,262) $ (6,649)
State 7,806 (574)
-------- --------
Total current (66,456) (7,223)
Deferred:
Federal 44,613 287
State 384 45
-------- --------
Total deferred 44,997 332
Total tax expense $(21,459) $ (6,891)
======== ========
</TABLE>
11
<PAGE> 12
The reconciliation of the statutory federal income tax to the consolidated tax
expense is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Statutory federal
Income tax $136,162 $(9,356)
State income taxes 5,323 (344)
Insurance income 22,984 (1,442)
Tax credits (2,321) (1,335)
162m limitation 4,725 0
APB 28 adjustment 20,635 5,255
Transfer of credit
card business (209,110) 0
Other 143 331
-------- -------
Consolidated tax
expense $(21,459) $(6,891)
========= ========
</TABLE>
The net deferred tax asset/(liability) is comprised of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Deferred taxes:
Gross assets $ 36,680 $ 84,676
Gross liabilities (46,623) (118,655)
--------- ---------
Total deferred taxes $ (9,943) $ (33,979)
========= =========
</TABLE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
SFAS 91 $ (3,677) $(24,655)
Loan losses 6,270 45,224
Mortgage banking revenue (5,521) (4,176)
Securitization income (8,714) (34,367)
Leasing income (17,523) (10,772)
Other 19,222 (5,233)
------ ------
Net deferred tax assets
(liabilities) $ (9,943) $(33,979)
======== ========
</TABLE>
11) In connection with the tender offer, workforce reduction and activities
which occurred during the first quarter, the number of outstanding
restricted shares issued to certain employees decreased to 753 thousand
at March 31, 1998 from 1,334 thousand at December 31, 1997. Stock
options outstanding decreased to 2,299 thousand at March 31, 1998 from
3,934 thousand at December 31, 1997.
12) Debt consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
March 31, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------
SENIOR DEBT
<S> <C> <C>
RediReserve certificates (4.06%) $ 3,222 $ 3,611
6 month senior notes (6.53%-6.86%) 4,163 3,523
12 month senior notes (6.16%-6.86%) 47,161 51,537
18 month senior notes (6.11%-6.95%) 6,474 6,795
24 month senior notes (5.87%-7.14%) 33,913 33,517
30 month senior notes (5.92%-7.56%) 14,157 14,441
48 month senior notes (5.69%-7.56%) 8,006 8,061
60 month senior notes (5.83%-7.70%) 20,206 21,999
Value notes, fixed (6.85%-7.85%) 30,755 30,755
Medium-term notes, fixed (6.38%-8.36%) 855,488 861,462
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C>
Medium-term notes, floating 228,000 238,000
Short-term bank notes 0 99,986
Short-term bank notes, floating 0 141,974
Medium-term bank notes, fixed (6.23%-7.14%) 86,491 408,651
Medium-term bank notes, floating 21,979 260,837
Other senior notes (5.97%-11.34%) 6,972 7,491
- --------------------------------------------------------------------------------------------------------------
Total senior debt 1,366,987 2,192,640
SUBORDINATED DEBT
Subordinated notes (5.69%-11.34%) 2,034 5,754
7% subordinated bank notes due 2003 4,516 49,778
- --------------------------------------------------------------------------------------------------------------
Total subordinated debt 6,550 55,532
- --------------------------------------------------------------------------------------------------------------
Total debt 1,373,537 2,248,172
Less short-term debt & certificates (452,576) (809,814)
- --------------------------------------------------------------------------------------------------------------
Long-term debt $ 920,961 $1,438,358
==============================================================================================================
</TABLE>
The Company's senior floating rate notes were priced based on a factor of
LIBOR. At March 31, 1998, the rates on these notes varied from 5.83% to
6.17%. At March 31, 1998, the Company used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR
based variable rate (see note 14).
13) During the quarter, the Company implemented a restructuring plan to
reduce corporate expenses incurred in the past to support the operations
contributed in the Transaction. In connection with this plan, the Company
accrued severance benefits of approximately $35 million during the
quarter, approximately $27 million of which has been classified as
severance and outplacement costs associated with workforce reduction,
option exercise and other employee costs associated with Fleet
Transaction/Tender Offer and the balance has been classified as
compensation expense. In connection with this plan approximately 255
employees who ceased to employed by the Company are entitled to
benefits, of which 190 employees were directly associated with the
operations contributed to Fleet and approximately 65 employees were
associated with the workforce reduction. During the quarter, the
Company paid approximately $25 million of severance benefits to
employees which were charged against the associated liability.
The Company is also implementing a plan to exit business and product
offerings not directly associated with its mortgage and business services
units. In connection with this plan, contractual commitments
associated with development activities to be discontinued were accrued.
The contractual commitments and termination benefits are expected to be
paid out over the next twelve months. The actions to complete the plan
are principally the settlement of contractual commitments and
distributing the remaining severance benefits.
The Company has contractual commitments to certain customers and other
nonrelated financial institutions that are providing benefits to these
customers under a product that will no longer be offered and for which
no future revenues or benefits will be received. A substantial portion
of the contractual commitments will be paid out over the next 42 months.
The actions required to complete this plan include the settlement of
contractual commitments and the payment of customer benefits.
During the quarter, the Company recorded $29.8 million of charges
classified as expense associated with exited business/product in
connection with the aforementioned exit plans. No significant payments
were made during the quarter related to these contractual commitments.
14) In connection with the Company's restructuring plan to reduce corporate
expenses and the Company's efforts to exit business and product
development activities previously mentioned, certain assets were
identified for disposal and written down to estimated realizable value.
These assets principally consisted of facility capital assets, software,
intangible and other assets. The Company recognized a total of $20
million of losses associated with the write-off of these assets, $11.3
million of which have been classified as expenses associated with exited
business/product. The disposal of the assets is expected to be completed
within the next twelve months.
13
<PAGE> 14
15) The following table shows the calculation of basic earnings per share and
diluted earnings per share:
<TABLE>
<CAPTION>
March 31,
- -----------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Net income $ 418,787 $ (19,818)
less: Preferred "A" dividends (141) (141)
less: Preferred "B" dividends, net (917) (1,561)
================================================================
Income available to common Shareholders 417,729 (21,520)
less: Class A dividends declared (655) (1,997)
less: Class B dividends declared (1,116) (3,442)
================================================================
Undistributed Earnings $ 415,958 $ (26,959)
Shares
Basic Combined 35,278 42,521
Class A 14,798 18,129
Class B 20,480 24,392
Options A 24 0(1)
Options B 269 0(1)
AMIP B 310 0(1)
Preferred B 2,032 0(1)
Diluted Combined 37,915 42,521
Class A 14,822 18,129
Class B 23,093 24,392
Earnings Per Share
Basic Combined(2) $ 11.84 $ (.51)
Class A 11.84 (.52)
Class B 11.85 (.49)
Diluted Combined(2) $ 11.04 $ (.51)
Class A 11.04 (.52)
Class B 11.04 (.49)
================================================================
</TABLE>
(1) At March 31, 1997, 2.3 million of Class B common stock options, .8
million shares of restricted Class B common stock and 25,000
shares of the Company's Class B convertible preferred stock were
outstanding but were not included in the computation of diluted
earnings per share for the quarter ended March 31, 1997 because
they were antidilutive for that period.
(2) Combined represents a weighted average of Class A and Class B.
Earnings per share are calculated under the provisions of SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). Since the cash dividends declared on
the Company's Class B Common Stock were higher than the dividends
declared on the Class A Common Stock, Basic and Dilutive Earnings Per
Share have been calculated using the "two-class" method. The two-class
method is an earnings allocation formula that determines earnings per
share for each class of common stock according to dividends declared and
participation rights in undistributed earnings. The Company has also
presented "Combined Earnings Per Share," which represents a weighted
average of Class A Earnings Per Share and Class B Earnings Per Share.
16) In managing its interest rate sensitivity and foreign currency positions,
the Company may use derivative financial instruments. These instruments
are used for the express purpose of managing its interest rate and
foreign currency exposures and are not used for any trading or
speculative activities. As of March 31, 1998 and December 31, 1997, 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 interest
rate swap and swaption activity by major category for the periods
presented:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Receive Pay
Fixed Rate Fixed Rate Total
- -----------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Balance at 1/1/97 $ 812,835 $ 900,609 $ 1,713,444
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Additions 967,250 472,496 1,439,746
Net amortization 0 (142,894) (142,894)
Maturities (136,835) (10,500) (147,335)
Swaptions exercised 0 (153,000) (153,000)
Terminations (598,250) 0 (598,250)
- -------------------------------------------------------------------------
Balance at 12/31/97 $ 1,045,000 $ 1,066,711 $ 2,111,711
- -------------------------------------------------------------------------
Additions 0 311,940 311,940
Net amortization 0 (104,017) (104,017)
Maturities (106,000) 0 (106,000)
Terminations (500) 0 (500)
Transferred to Fleet (161,710) 0 (161,710)
- -------------------------------------------------------------------------
Balance at 3/31/98 $ 776,790 $ 1,274,634 $ 2,051,424
- -------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
The following table discloses the Company's interest rate swaps by major
category, notional value, weighted average interest rates, and annual maturities
for the periods presented.
<TABLE>
<CAPTION>
Balance at Balances maturing in:
- -----------------------------------------------------------------------------------------------------------------------------
3/31/98 1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable:
<S> <C> <C> <C> <C> <C> <C>
Notional Value $ 1,274,633 $ 0 $ 202,646 $ 22,191 $ 201,017 $ 400,576
Weighted Average Pay Rate 5.95% 0.00% 5.72% 5.72% 6.04% 5.98%
Weighted Average Receive Rate 5.51 0.00 5.46 5.14 5.18 5.67
Receive Fixed/Pay Variable:
Notional Value $ 776,790 $143,000 $ 141,000 $ 124,000 $ 289,255 $ 60,000
Weighted Average Receive Rate 6.49% 6.34% 6.46% 6.32% 6.61% 6.60%
Weighted Average Pay Rate 5.56 5.11 5.69 5.63 5.66 5.68
Total Notional Value $ 2,051,423 $143,000 $ 343,646 $ 146,191 $ 490,272 $ 460,576
Total Weighted Average Rates on Swaps:
Pay Rate 5.80% 5.11% 5.70% 5.64% 5.81% 5.94%
Receive Rate 5.88 6.34 5.87 6.14 6.02 5.79
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------
2003 2004 2005 2006
-------------------------------------------
Pay Fixed/Receive Variable:
<S> <C> <C> <C> <C>
Notional Value $239,817 $ 0 $208,386 0
Weighted Average Pay Rate 5.90% 0.00% 6.12% 0.00%
Weighted Average Receive Rate 5.44 0.00 5.69 0.00
Receive Fixed/Pay Variable:
Notional Value 4,535 $ 0 $ 0 $15,000
Weighted Average Receive Rate 6.90% 0.00% 0.00% 6.71%
Weighted Average Pay Rate 5.67 0.00 0.00 5.69
Total Notional Value $244,352 $ 0 $208,386 15,000
Total Weighted Average Rates on Swaps:
Pay Rate 5.90% 0.00% 6.12% 5.69%
Receive Rate 5.47 0.00 5.69 6.71
</TABLE>
16
<PAGE> 17
ADVANTA CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
For the quarter ended March 31, 1998, the Company reported net income of $418.8
million or diluted earnings per share of $11.04 for Class A and Class B shares
combined. Last year, in the same period, the Company reported a net loss of
$19.8 million, or diluted loss per share of $0.51 for Class A and Class B shares
combined.
On February 20, 1998 the Company announced that the stockholders had approved
and it had completed its transaction with Fleet Financial Group, Inc. ("Fleet")
whereby the Company and certain of its subsidiaries and Fleet and certain of its
subsidiaries each contributed substantially all of their respective consumer
credit card businesses, subject to liabilities, to a newly formed limited
liability company controlled by Fleet (the "LLC"). Concurrently with the
transaction with Fleet (the "Transaction"), the Company purchased approximately
43% of its Class A and Class B Common Stock, each at $40 per share net, and
depositary shares each representing one one-hundredth interest in a share of 6
3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciated Income
Linked Securities (SAILS)) (the "SAILS Depositary Shares") at $32.80 per share
net, through an issuer tender offer. Also during the quarter, the Company
implemented a restructuring plan to reduce corporate expenses incurred in the
past to support the operations contributed in the Transaction. The Company is
also implementing a plan to exit business and product offerings not directly
associated with its mortgage and business services units. The financial impact
of these transactions and activities are described below.
The net income for the period reflects the $536.4 million net gain on the
Transaction, a $62.3 million pretax charge for severance and outplacement costs
associated with workforce reduction, option exercises and other employee costs
associated with the Fleet Transaction / Tender Offer, a $54.1 million pretax
charge for expenses associated with exited businesses and products, $42.5
million of equity securities losses and an $8.7 million pretax charge for
facility impairments. Net income also reflected other income of $8.8 million,
which primarily represents net income of the consumer credit card business unit
for 1998 prior to the Fleet Transaction. Net income for Advanta Mortgage and
Advanta Business Services was $6.3 million. Net income for Advanta Mortgage
reflects a $9.8 million pretax charge recorded to adjust the retained
interest-only (IO) strips in accordance with the Company's practice of regularly
reviewing its assumptions to reflect the Company's actual market experience.
The first quarter 1997 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 net gain recognized by the Company of approximately $536.4 million,
represents the excess of liabilities transferred to the LLC over the net basis
of the assets transferred and included the Company's retained minority
membership interest in the LLC, which at the closing date of the Transaction was
a 4.99% ownership interest in the LLC valued at $20 million.
Pursuant to the Tender Offer, the Company purchased 7,882,750 shares of its
Class A Common Stock and 12,482,850 of its Class B Common Stock at $40 per
share net, and 1,078,930 of its SAILS Depositary Shares at $32.80 per share
net. Contingent on the Transaction, the Company accelerated vesting of 43.15%
of outstanding options that were not vested at the time of the closing of the
Transaction. In connection with the Tender Offer, present and former directors
and employees who held exercisable options to purchase Class A and Class B
Common Stock tendered such options in lieu of first exercising such options and
tendering the underlying stock. The Company used approximately $850 million
(before taking into account the exercise price of options) to repurchase the
shares in the Tender Offer. In addition, the Company also amended the terms of
options granted to employees who became employees of the LLC or whose
employment with the Company was otherwise terminated in connection with the
Transaction (the "Affected Employees") to extend the post-employment exercise
period. Although, there was a charge to earnings associated with this
amendment, there was no net impact to capital in connection with this
amendment. The Company also canceled options issued to certain members of the
Board of Directors and replaced the canceled options with stock appreciation
rights.
In March 1997, the Compensation Committee of the Board of Directors approved the
Advanta Senior Management Change of Control Severance Plan (the "Management
Severance Plan") which provides benefits to senior management employees in the
event of a change of control of the Company (as defined) if, within one year of
the date of a change of control, there has been either an actual or constructive
termination of the senior management employee. In February 1998, pursuant to the
Company's agreement with Fleet, the Compensation Committee approved an amendment
to the Management Severance Plan that allows the Office of the Chairman, in its
sole discretion, to extend the level of benefits that would otherwise be allowed
in the event of a change of control to Affected Employees. The Board of
Directors also authorized the Chairman
17
<PAGE> 18
of the Board, in his sole discretion, to pay bonuses to certain key employees
in recognition of their efforts on behalf of the Company in the strategic
alternatives process. In accordance with the Company's agreement with Fleet,
the LLC agreed to assume the Company's Management Severance Plan and 50% of the
bonus payments with respect to those Affected Employees who became employees of
the LLC in connection with the Transaction. In May 1997, the Board of Directors
adopted the Office of the Chairman Supplemental Compensation Program which
entitled the members of the Office of the Chairman to receive benefits in the
event of a change of control (as defined) or other similar transaction. In
October 1997, the Company announced that the CEO of the Company and the CEO of
the consumer credit card business unit were leaving the Company in connection
with the Transaction. These benefits were all contingent upon the Transaction
and were recognized upon the consummation of the transaction.
In connection with the Company's evaluation of strategic alternatives and the
Transaction, the Company adopted special retention programs. Under these
programs certain employees are entitled to receive special payments based on
their targeted bonuses and contingent upon their continued employment with the
Company or a successor entity. The first payments under the special retention
programs were made in March 1998. Further, in March 1998, the Company identified
employees that would be terminated in connection with the Transaction as part of
the corporate restructuring to reduce corporate expenses. During the quarter,
the corporate restructuring was approved by the Board of Directors and affected
employees were informed of the termination benefits they would receive.
Substantially all of these employees ceased employment with the Company prior to
April 30, 1998.
The Company recorded a $62.3 million pretax charge to earnings in connection
with the foregoing plans, plan amendments and workforce reduction activities.
In connection with the Company's restructuring efforts to reduce expenses
associated with business and product offerings which are not directly associated
with its mortgage and business services units, management approved exit and
disposition plans during the quarter related to certain businesses and products
previously offered. The Company recorded charges in the quarter related to costs
to be incurred by the Company in executing these plans, including contractual
obligations to customers for which no future revenue will be received, and
contractual vendor obligations for services from which no future benefit will be
derived. The charges also include termination benefits to employees associated
with the businesses and products identified in the exit plan. Related to the
exit plan, certain assets were identified for disposal and written down to
estimated realizable value. In addition, the Company recognized investment
banking, professional and consulting fees that were contingent upon completion
of the Fleet transaction as well as other professional and consulting fees
associated with the Company's corporate restructuring. The Company recorded a
$54.1 million pretax charge to earnings in connection with exited businesses and
products.
Earnings for the first quarter reflect equity securities losses of $42.5
million. The equity securities losses reflect changes in the fair value of
Advanta Partners LP investments Most of the loss relates to investments not
publicly traded for which Advanta Partners decided during the first quarter to
expedite a disposal plan.
In connection with the Company's corporate restructuring, certain facility
assets were identified for disposal and were written down to their estimated
realizable value resulting in an asset impairment charge of $8.7 million.
The managed charge-off rate decreased to 4.35% for the first quarter of 1998
from 5.26% for the same period in 1997. The managed delinquency rate was 6.9%
for the first quarter of 1998 compared to 5.5% for the first quarter of 1997.
The operating expense ratio (excluding the previously discussed restructuring
costs and credit card DAC) increased to 3.4% in the first quarter of 1998 from
3.2% for the first quarter of 1997.
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, the receivables volume and initial pricing of new accounts,
prepayment rates, 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. 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, 1997
18
<PAGE> 19
and other filings with the Securities and Exchange Commission.
19
<PAGE> 20
NET INTEREST INCOME
Net interest income for the first quarter of 1998 decreased $19.8 million
or 77.5% to $5.8 million from $25.6 million for the same period of
1997. Net interest margin in the first quarter 1998 was .64% compared to 2.22%
for the first quarter 1997. The decrease in interest income was mainly
attributable to the closing of the Fleet transaction, new accounts added at
introductory rates, credit card securitization transactions as well as the mix
of receivables. The increase in the owned cost of interest bearing liabilities
is primarily attributable to the rate increases and credit rating downgrades
experienced by the Company subsequent to the March 17, 1997 earnings
announcement. Both periods carry high investment balances as a percent of owned
assets, thereby suppressing margins.
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 month period ended March 31, 1998 and
1997. Average owned loan and lease receivables and the related interest revenues
include certain loan fees.
20
<PAGE> 21
INTEREST RATE ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate
----------- -------- ---- ----------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
On-balance sheet
----------------
Consumer credit cards $ 1,560,159 $ 23,457 6.10% $ 1,815,920 $ 46,628 10.41%
Mortgage loans 586,317 14,713 10.18 430,948 11,850 11.15
Leases and corporate cards 312,353 9,391 12.13 256,234 8,122 12.78
Other loans 12,458 302 9.83 25,165 543 8.75
------ --- ------ ---
Gross receivables(2) 2,471,287 47,863 7.85 2,528,267 67,143 10.76
Investments(2) 1,901,288 26,896 5.67 2,198,599 31,076 5.57
--------- ------ --------- ------
Total interest earning
assets $ 4,372,575 $ 74,759 6.90% $ 4,726,866 $ 98,219 8.35%
Interest-bearing
liabilities $ 4,291,185 $ 67,544 6.35% $ 4,724,566 $ 71,642 6.05%
Net interest spread .55% 2.30%
Net interest margin .64% 2.22%
Off-balance sheet
-----------------
Consumer credit cards $ 5,926,838 $10,506,076
Mortgage loans 5,034,343 2,532,504
Leases and corporate cards 950,351 617,073
------- -------
Total average
securitized receivables $11,911,532 $13,655,653
=========== ===========
Total average managed
receivables $14,382,819 $16,183,920
=========== ===========
</TABLE>
(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%.
21
<PAGE> 22
PROVISION FOR CREDIT LOSSES
For the first quarter of 1998 the provision for credit losses decreased to
$34.0 million from $60.4 million for the same period of 1997 and charge-offs
on owned receivables decreased to $35.4 million in the first quarter of 1998
from $37.8 million during the same period of 1997. Impaired assets and
delinquency levels also decreased. These decreases are mainly attributable to
the transfer of the credit card receivables to Fleet.
ASSET QUALITY
Impaired assets include both nonperforming assets (mortgage, auto and business
loans and leases past due 90 days or more, real estate owned, bankrupt, decedent
and fraudulent business cards) and accruing loans past due 90 days or more on
business card and leases. The Company charges off expected losses on all
nonperforming home equity loans generally no later than when they have become 12
months delinquent, regardless of anticipated collectibility. Lease receivables
are written off no later than when they have become 120 days delinquent. All
other loans are charged off upon the earlier of approximately 6 months or
after an investigative period for bankrupt and fraudulent accounts.
The consolidated managed charge-off rate for the first quarter of 1998 was 4.4%,
down from 4.8% for the fourth quarter of 1997 and 5.3% for the first quarter of
1997. The following represents the quarterly results by product:
<TABLE>
<CAPTION>
For the Quarter Ended Managed Receivables
3/31/98 12/31/97 3/31/97 3/31/98 (in millions)
-------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C>
Mortgage only 0.49% 0.49% 0.56% $ 5,826
Auto 10.05 10.32 1.76 220
Business Card 5.79 4.45 1.55 701
Leases 3.21 2.78 2.50 594
</TABLE>
The charge-off rate for Mortgages and Leases are expected to remain relatively
consistent with the first quarter 1998 while Auto loan charge-offs are
anticipated to decline. Current experience on the existing portfolio and new
originations suggest anticipated Auto losses in the 5% range by year end. The
rate of growth in the business card charge-offs is expected to moderate
through the remainder of 1998. Historical business card loss ratios have been
affected by the rapid growth in the portfolio.
The allowance for credit losses is maintained for on-balance sheet receivables.
This allowance 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 liabilities are reflected in the calculations of
mortgage banking and business services securitization income and other assets.
Recourse liabilities are intended to cover all probable credit losses over the
life of the securitized receivables.
The allowance for credit losses on a consolidated owned basis was $17.9 million
or 2.0% of receivables at March 31, 1998 compared to $137.8 million or 4.1% of
receivables at December 31, 1997 and $105.4 million or 4.2% of receivables at
March 31, 1997. The decrease in coverage is a result of an increase in the
relative percent of secured receivables to the total loan portfolio. The decline
in balance is predominately attributable to the transfer of the consumer credit
card allowance in conjunction with the Transaction.
On the total managed portfolio, impaired assets were $277.8 million or 3.8% of
receivables at March 31, 1998, down from $532.0 million or 3.0% of receivables
at December 31, 1997 and $470.2 million or 2.9% of receivables at March 31,
1997. On the total owned portfolio, impaired assets were $33.7 million or 3.7%
of receivables at March 31, 1998, compared to $100.6 million or 3.0% of
receivables at December 31, 1997, and $78.1 million or 3.1% of receivables at
March 31, 1997.
22
<PAGE> 23
The following tables provide a summary of impaired assets, delinquencies and
charge-offs, as of and for the year-to-date periods indicated.
($ in thousands)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
CONSOLIDATED - MANAGED (1) 1998 1997 1997
---- ---- ----
<S> <C> <C> <C> <C>
Nonperforming assets (2) $ 277,808 $ 328,835 $ 237,333
Accruing loans past due 90 days or more 0 203,117 232,879
Impaired assets 277,808 531,952 470,212
Total loans 30 days or more delinquent 506,131 1,068,183 903,262
As a percentage of gross receivables:
Nonperforming assets (2) 3.8% 1.8% 1.4%
Accruing loans past due 90 days or more 0.0 1.1 1.4
Impaired assets 3.8 3.0 2.9
Total loans 30 days or more delinquent 6.9 6.0 5.5
Net charge-offs:
Amount $ 156,515 $ 860,098 $ 212,710
As a percentage of average gross
receivables (annualized) 4.4% 5.3% 5.3%
MORTGAGE LOANS - MANAGED
Nonperforming assets (2) $ 246,458 $ 200,600 $ 111,555
Total loans 30 days or more delinquent 426,244 391,929 208,018
As a percentage of gross receivables:
Nonperforming assets (2) 4.1% 3.8% 3.4%
Total loans 30 days or more delinquent 7.1 7.4 6.3
Net charge-offs:
Amount $ 12,244 $ 30,165 $ 4,416
As a percentage of average gross
receivables (annualized) .9% .8% .6%
LEASES AND CORPORATE CARDS - MANAGED
Nonperforming assets (2) $ 31,196 $ 26,782 $ 16,019
Impaired assets 31,196 26,817 16,019
Total loans 30 days or more delinquent 79,546 81,675 66,285
As a percentage of receivables:
Nonperforming assets (2) 2.4% 2.1% 1.7%
Impaired assets 2.4 2.1 1.7
Total loans 30 days or more delinquent 6.2 6.5 6.9
Net charge-offs:
Amount $ 14,317 $ 34,002 $ 4,641
As a percentage of average
receivables (annualized) 4.5% 3.2% 2.1%
</TABLE>
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage, auto and business loans and leases
past due 90 days or more, real estate owned, bankrupt, decedent and
fraudulent business cards.
23
<PAGE> 24
<TABLE>
<CAPTION>
March 31, December 31, March 31,
CONSOLIDATED - OWNED (1) 1998 1997 1997
- ----------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Allowance for credit losses $ 17,914 $ 137,773 $ 105,377
Nonperforming assets (2) 33,691 51,149 35,263
Accruing loans past due 90 days or more 0 49,458 42,821
Impaired assets 33,691 100,607 78,084
Total loans 30 days or more delinquent 57,152 201,891 137,598
As a percentage of gross receivables:
Allowance for credit losses 1.9% 4.1% 4.2%
Nonperforming assets (2) 3.7 1.5 1.4
Accruing loans past due 90 days or more 0.0 1.5 1.7
Impaired assets 3.7 3.0 3.1
Total loans 30 days or more delinquent 6.1 5.9 5.4
Net charge-offs:
Amount $ 35,399 $ 151,222 $ 37,765
As a percentage of average gross
receivables (annualized) 5.7% 5.6% 6.0%
MORTGAGE LOANS - OWNED
Allowance for credit losses $ 4,495 $ 5,822 $ 3,683
Nonperforming assets (2) 26,564 23,234 15,056
Total loans 30 days or more delinquent 41,568 42,916 18,664
As a percentage of gross receivables:
Allowance for credit losses .7% 1.2% .9%
Nonperforming assets (2) 4.4 4.9 3.7
Total loans 30 days or more delinquent 6.9 9.0 4.6
Net charge-offs:
Amount $ 3,959 $ 5,834 $ 1,076
As a percentage of average gross
receivables (annualized) 2.7% 1.0% 1.0%
LEASES AND CORPORATE CARDS - OWNED
Allowance for credit losses $ 9,685 $ 9,798 $ 7,449
Nonperforming assets (2) 6,973 6,705 3,096
Impaired assets 6,973 6,740 3,096
Total loans 30 days or more delinquent 15,244 17,799 10,515
As a percentage of receivables:
Allowance for credit losses 3.4% 3.3% 2.3%
Nonperforming assets (2) 2.4 2.2 .9
Impaired assets 2.4 2.3 .9
Total loans 30 days or more delinquent 5.3 6.0 3.2
Net charge-offs:
Amount $ 3,163 $ 8,368 $ 1,042
As a percentage of average
receivables( annualized) 4.1% 2.5% 1.6%
</TABLE>
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage, auto and business loans and leases
past due 90 days or more, real estate owned, bankrupt, decedent and
fraudulent business cards.
24
<PAGE> 25
NONINTEREST REVENUES
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Gain on transfer of credit cards $541,287 $ 0
Other noninterest revenues:
Credit card securitization
income 64,796 27,061
Revenues from mortgage
activities 45,169 32,584
Credit card servicing
income 26,090 47,311
Lease and corporate card
other revenues 17,237 15,458
Credit card interchange
income 11,881 20,213
Insurance revenues, net 9,132 10,359
Equity securities (losses)/gains (42,889) (4,670)
Other 17,192 8,546
------- -------
Total other noninterest
revenues 148,608 156,862
-------- --------
Total noninterest revenues $689,895 $156,862
======== ========
Comparing the first quarter 1998, excluding the gain of $541.3 and $42.5 million of equity
losses as previously discussed, with the same period 1997 there was a $34.3 million increase.
Credit card sucuritization income of $27.1 million in 1997 was adversely affected by higher
charge-offs and higher levels of introductory rate cards in the trusts. Income from mortgage loan
activities increases of $12.6 million were partially offset by lower credit card servicing income
and credit card interchange income of $21.2 million and $8.3 million, respectively.
</TABLE>
REVENUES FROM MORTGAGE ACTIVITIES IS COMPRISED OF THE FOLLOWING:
<TABLE>
<CAPTION>
March 31
1998 1997
-------- --------
<S> <C> <C>
Gain on sale $ 25,956 $ 24,440
Servicing revenue 21,786 10,050
Imputed interest, net (1) (3,764) (2,345)
Other revenues 1,191 439
-------- --------
Total revenues from mortgage activities 45,169 32,584
Interest revenues (2) 18,056 17,729
-------- --------
Total interest and noninterest revenues from
mortgage activities $ 63,225 $ 50,313
======== ========
</TABLE>
(1) Imputed interest, net includes pretax charges recorded to adjust the
retained interest-only (IO) strip in accordance with the Company's
practice of regularly reviewing its assumptions to reflect the Company's
actual market experience.
(2) Interest revenues include interest on mortgage loans and interest on
restricted interest bearing deposits and other amounts due from mortgage
trusts.
Prepayment rate assumptions used in valuing the Company's IO strips were revised
to 24% for fixed rate loans, 29% for intermediate rate loans and 34% for ARM's.
The other significant valuation assumptions remained constant during the
quarter.
Mortgage revenues increased $18,485 or 50.7% from the comparable period of the
prior year before consideration of the $9.8 million and $3.9 million pretax
charge recorded in the quarter ended March 31, 1998 and 1997, respectively.
Mortgage revenues increased $12,585 or 38.7% after consideration of the
valuation charges.
ORIGINATIONS FOR THE MORTGAGE BUSINESS UNIT WERE AS FOLLOWS:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
3/31/98 3/31/97 12/31/97
--------------------------------------------------------------------------
<S> <C> <C> <C>
Direct $ 283,048 $176,174 $ 863,883
Broker 78,423 64,033 266,003
Conduit 403,811 213,760 1,238,343
Corp Finance 349,415 241,513 1,104,198
Auto 21,103 20,599 194,806
---------- ------- ---------
$1,135,800 $716,079 $3,667,233
</TABLE>
25
<PAGE> 26
Total originations for the mortgage business unit increased 58.6%. Direct
mortgage originations increased 60.7% and indirect mortgage originations
increased 60.2% from the comparable period of the prior year. The growth rate of
Mortgage originations is expected to be approximately 30-40% for the full year
1998. The Company recognizes considerably higher yields on direct versus
indirect loan originations.
ORIGINATIONS FOR BUSINESS LOANS AND LEASES WERE AS FOLLOWS:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
3/31/98 3/31/97 12/31/97
- -----------------------------------------------------------------
<S> <C> <C> <C>
Business Card $289,400 $220,377 $1,072,662
Leases 62,651 75,538 323,526
-------- -------- ----------
$352,051 $295,915 $1,396,188
</TABLE>
Total originations for the business loans and leases increased 19% in the first
quarter of 1998 when compared to first quarter of 1997. The growth rate of
originations is expected to remain at this level for the full year of 1998.
OPERATING EXPENSES
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Severance and outplacement costs
associated with workforce reduction,
option exercise and other employee
cost associated with Fleet
Transaction/Tender Offer $ 62,257 $ 0
Expense associated with exited business/product 54,115 0
Impairment of facility assets related to
restructuring 8,700 0
Amortization of credit card
deferred origination costs,
net 18,515 18,063
Other operating expenses:
Salaries and employee
benefits 55,248 54,661
Marketing 14,067 11,129
External processing 11,266 11,989
Equipment expense 9,056 8,559
Occupancy expense 5,448 5,291
Telephone expense 5,358 4,907
Professional fees 4,791 8,295
Postage 4,698 7,120
Credit and collection
expense 4,618 4,356
Credit card fraud losses 2,772 6,477
Other 3,464 7,964
-------- --------
Total other operating
expenses 120,786 130,748
-------- --------
Total operating expenses $264,373 $148,811
======== ========
</TABLE>
Total operating expenses of $264.4 million for the quarter ended March 31, 1998
increased $115.6 million, over the same period of the prior year, mainly
attributable to $125.1 million of expenses for restructuring and other unusual
items from the Company's transaction with Fleet. Partially offsetting the
restructuring expenses were savings of $3.7 million of credit card fraud losses,
$3.5 million of professional fees and $2.4 million of postage expenses, all
directly related to the consumer credit card transaction. 1998 operating
expenses include the
26
<PAGE> 27
consumer credit card business through February 20, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, for
both long- and short-term needs, through active management of both assets and
liabilities. During the first quarter of 1998, the Company, through its
subsidiaries, securitized $.9 billion of personal finance loans and $.1 billion
of business loan and lease receivables. Cash generated from these transactions
was temporarily invested in short-term, high quality investments at money market
rates awaiting redeployment to pay down borrowings and to fund future personal
finance and business loan receivable growth. At March 31, 1998, the Company had
approximately $.6 billion of loan and lease receivables and $1.6 billion of
investments available for sale which could be sold to generate additional
liquidity.
The Company's funding strategy for 1998 relies heavily on the cash,
cash equivalents and investments released by the Transaction with Fleet as well
as deposit gathering activity at both ANB and AFC. As a result of the
Transaction with Fleet, approximately $1.3 billion in cash, cash equivalents and
investments which had previously been held by the Company in connection with its
consumer credit card business was no longer required in such business and became
available for general corporate purposes. The Company used approximately $850
million of such amount (before taking into account the exercise price of
options) to purchase 7,882,750 shares of its Class A Common Stock, 12,482,850 of
its Class B Common Stock, and 1,078,930 of its SAILS Depositary Shares through
an issuer tender offer which was completed on February 20, 1998.
Funding diversification has been an essential component of the
Company's liquidity and capital management. Advanta and ANB have utilized both
retail and institutional on balance sheet funding sources issuing a variety of
debt and deposit products. The Company and ANB also have utilized a secured
revolving credit facility and off-balance sheet securitization funding
(described below).
The debt securities of Advanta and ANB (and its predecessors by merger)
had investment-grade ratings from all of the nationally recognized statistical
rating agencies throughout 1996. These ratings had allowed the Company to
further diversify its funding sources. Beginning March 1997 through early 1998,
the various rating agencies lowered their ratings on the debt securities of each
of Advanta and its banking subsidiaries. As of March 1998, senior debt of
Advanta was rated investment grade by one agency and below investment grade by
the other four agencies; and debt of ANB was rated investment grade by two
agencies and below investment grade by the other three agencies.
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 in 1997. In addition,
notwithstanding the Company's current liquidity, efforts continue to develop new
sources of funding, both through previously untapped customer segments and
through development of new financing structures.
During 1996, the Company filed a shelf registration statement with the
Securities and Exchange Commission which provides for the Company to sell up to
$1.6 billion of debt securities. The Company has issued approximately $1.0
billion of debt securities under this shelf.
As of December 31, 1997, the Company and ANB had a $1 billion unsecured
revolving credit facility. Following the closing of the Transaction on February
20, 1998, that facility was terminated by the Company and ANB.
As of March 31, 1998 ANB's total deposits were $766.8 million after a
significant portion of its deposits were contributed to the LLC in connection
with the Transaction, and AFC, a Utah state-chartered, FDIC-insured industrial
loan corporation had total deposits of $168.2 million.
ANB's combined Tier I and Tier II capital ratio at March 31, 1998 was
36.89%. At December 31, 1997, the combined Tier I and Tier II capital ratio was
16.39% for ANB. In each case, ANB met the requirements of the Comptroller and
qualified as well-capitalized.
The Company's insurance subsidiaries are subject to certain capital,
deposit and dividend rules and regulations as prescribed by state jurisdictions
in which they are authorized to operate. At March 31, 1998 and December 31, 1997
the insurance subsidiaries were in compliance with such rules and regulations.
MARKET RISK SENSITIVITY
Market risk is the potential for loss or diminished financial
performance arising from
27
<PAGE> 28
adverse changes in market forces such as interest rates and market prices.
Market risk sensitivity is the degree to which a financial instrument, or a
company that owns financial instruments is exposed to market forces. The Company
regularly evaluates its market risk profile and attempts to minimize the impact
of market risks on net interest income and net income.
The Company's exposure to foreign currency exchange rate risk,
commodity price risk, and equity price risk is immaterial relative to expected
overall financial performance. The Company's financial performance can, however,
be affected by fluctuations in interest rates, changes in economic conditions,
shifts in customer behavior, and other factors. Changes in economic conditions
and shifts in customer behavior are difficult to predict, and the financial
performance of the Company generally cannot be insulated from such forces.
Financial performance variability as a result of fluctuations in
interest rates is commonly called interest rate risk. Interest rate risk
generally evolves from mismatches in the timing of asset and liability repricing
(gap risk) and from differences between the repricing indices of assets and
liabilities (basis risk).
The Company attempts to analyze the impact of interest rate risk by
regularly evaluating the perceived risks inherent in its asset and liability
structure, including securitized instruments and off-balance sheet instruments.
Risk exposure levels vary continuously, as changes occur in the Company's
asset/liability mix, market interest rates, prepayment trends, and other factors
affecting the timing and magnitude of cash flows. Computer simulations are used
to generate expected financial performance in a variety of interest rate
environments. Those results are analyzed to determine if actions need to be
taken to mitigate the Company's interest rate risk.
In managing interest rate risk exposure, the Company periodically
securitizes receivables, sells and purchases assets, alters the mix and term
structure of its funding base, changes its investment portfolio and uses
derivative financial instruments. Derivative instruments, by policy, are not
used for speculative purposes (see discussion under "Derivative Activities").
The Company has measured its interest rate risk using a rising rate
scenario and a declining rate scenario. Net interest income is estimated using a
third party software model that uses standard income modeling techniques. The
Company estimates that its net interest income over a twelve month period would
approximately increase or decrease by 4.0%, respectively, if interest rates were
to rise or fall by 200 basis points. Both increasing and decreasing rate
scenarios assume an instantaneous shift in rates and measure the corresponding
change in expected net interest income over one year.
The above estimates of net interest income sensitivity alone do not
provide a comprehensive view of the Company's exposure to interest rate risk.
The quantitative risk information is limited by the parameters and assumptions
utilized in generating the results. Such analyses are useful only when viewed
within the context of the parameters and assumptions used. The above rate
scenarios in no way reflect management's expectation regarding the future
direction of interest rates, and they depict only two possibilities out of a
large set of possible scenarios.
In addition to interest rate risk, the Company has other financial
instruments, namely capitalized servicing rights and interest-only strips, that
are subject to prepayment risk. Prepayments are principal payments in excess of
scheduled principal payments. Prepayments generally result from entire loan
payoffs due largely to refinancing a loan or selling a home. Actual or
anticipated prepayment rates are expressed in terms of a constant prepayment
rate ("CPR"), which represents the annual percentage of beginning loan balances
that prepay. To a degree, prepayment rates are related to market interest rates
and changes in those interest rates. The precise relationship between them,
however, is not known at this time. Accordingly, the Company believes it is
prudent to disclose the fair value sensitivity of these instruments based on
changes in prepayment rate assumptions rather than based on changes in interest
rates.
The Company's capitalized servicing rights and interest only strips
derive from both fixed and variable rate loans, the majority of which are fixed.
Fixed and variable rate loans are currently prepaying at different rates and are
expected to continue this behavior in the future. The Company has estimated the
fair value impact of prepayment changes of 2.5% CPR for fixed rate loans and 3%
CPR for variable rate loans. These key changes in prepayment assumptions could
result in an $22 million change in fair value. In addition, changes in the
interest rate environment generally affect the level of loan originations.
Prepayment assumptions are not the only assumptions in the fair value
calculation, but they are the most influential. Other key assumptions are not
directly impacted by market forces as defined earlier. The above prepayment
scenarios do not reflect management's expectation regarding the
28
<PAGE> 29
future direction of prepayments, and they depict only two possibilities out of a
large set of possible scenarios.
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.
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 market rates. 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, 1998 and December 31, 1997, 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
derivatives instruments as of March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
Estimated Fair Value
March 31, December 31, March 31, 1998
1998 1997 Asset/(Liability)
---- ---- -----------------
<S> <C> <C> <C>
Interest rate swaps $2,051,424 $2,111,711 $ 4,679
Interest rate options:
Caps written 356,147 1,018,781 (423)
Caps purchased 356,147 328,781 423
Forward contracts 457,000 400,437 843
========== ========== ==========
$3,220,719 $3,859,710 $ 5,522
========== ========== ==========
</TABLE>
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.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. In connection with this issue (the "Year 2000 Issue"), the Company has
initiated a comprehensive assessment of its computer systems and applications,
managed by a team led by two senior information technology managers and
organized as a separate Year 2000 Project Office (the "Project Office"). The
Project Office has developed standards for its work based on work of leading
consultants in the field. The Project Office has developed a review process
featuring a "Year 2000 Score Card" that will be used to measure the degree to
which each of the Company's computer applications are impacted by the Year 2000
Issue.
29
<PAGE> 30
The Company is proceeding with its projects addressing compliance with
the Year 2000 Issue. Each of the Company's business units is completing the
evaluation of its systems, applications and vendor lists, and is implementing
project plans to modify existing computer programs or conversions to new
programs, to the extent necessary to address the Year 2000 Issue. The Company
expects that testing will be substantially completed by the end of 1998,
consistent with the Year 2000 guidelines issued by the Office of the Comptroller
of the Currency.
The Company has also initiated communications with all of its significant
outside service providers and some of its larger clients to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 Issue. There can be no assurance that the systems used by
outside service providers or other third parties upon which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The Company, believes that the Year 2000 Issue will not pose significant
operational problems for the Company. The Company, however, has not completed
its evaluation of the costs of addressing the issue. While management does not
expect that the costs of evaluating and reprogramming these systems will be
significant, the Company cannot yet estimate the actual costs of the necessary
remediation program. Moreover, the Company notes that GAAP require that the
costs of becoming Year 2000 compliant, including without limitation modifying
computer software or converting to new programs, be charged to expense as they
are incurred. The Company believes that the Year 2000 Issue will not have a
material adverse effect on the Company's future financial condition, liquidity
or results of operations during 1998 and in future periods.
30
<PAGE> 31
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 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 purported consumer credit cardholder of
the Company instituted a putative class action complaint against
the Company and certain of its subsidiaries in Delaware Superior
Court for New Castle County. Subsequently, on September 8, 10,
and 12, October 2, November 7 and 12, and December 2, 10, 15 and
18 (2 cases), 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, the
Circuit Court of Covington County, Alabama, the United States
District Court for the Northern District of California, the
United States District Court for the Central District of
California, the United States District Court for the Eastern
District of Pennsylvania, the District Court of Bexar County,
Texas, the United States District Court for the Northern
District of Texas, the United States District Court for the
District of New Jersey and the Circuit Court of the Ninth
Judicial Circuit in and for Orange County, Florida,
respectively. The complaints allege that consumer credit
cardholder accounts in a 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 comprised 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 4. Submission of Matters to a Vote of Securityholders.
On February 20, 1998, the Company held a Special Meeting of
Stockholders (the "Special Meeting") at which the Company's
Class A Common stockholders voted on a resolution regarding the
contribution of the Company's consumer credit card business to
Fleet Credit Card LLC pursuant to a Contribution Agreement,
dated as of October 28, 1997, between the Company and Fleet
Financial Group, Inc. The total number of Class A Common shares
represented at the Special Meeting were 12,816,748, constituting
a quorum, of which 12,754,956 votes were case in favor of the
resolution, 53,954 votes were cast against the resolution and
7,838 votes were cast to abstain.
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 May 15,
1998 filed the same date.
(b) Reports on Form 8-K.
(b)(1) A current Report on Form 8-K, dated January 22, 1998
was filed by the Company setting forth the financial
highlights of the Company's results of operations for
31
<PAGE> 32
the period ended December 31, 1997.
(b)(2) A Current Report on Form 8-K, dated February 24, 1998
as filed by the Company reporting the results of the
vote during a special meeting of stockholders of
Advanta Corp. to approve the contribution of the
consumer credit card business to Fleet Credit Card,
LLC.
(b)(3) A Current Report on Form 8-K, dated March 6, 1998 was
filed by the Company reporting the February 20, 1998
consummation of the transaction between Advanta Corp. and
Fleet Financial Group, Inc. transferring certain assets
and liabilities of its consumer credit card business.
(b)(4) A Current Report on Form 8-K, dated April 22, 1998 was
filed by the Company setting forth the financial
highlights of the Company's results of operations for the
period ending March 31, 1998.
32
<PAGE> 33
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 15, 1998 By /s/Elizabeth H. Mai
---------------------------------------
Senior Vice President and
General Counsel
May, 15, 1998 By /s/John J. Calamari
---------------------------------------
Vice President, Finance and Principal
Accounting Officer
33
<PAGE> 34
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.
99 Inapplicable.
34
<PAGE> 1
Exhibit 12
ADVANTA CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Net earnings $ 418,787 $ (19,818)
Federal and state
income taxes (21,459) (6,891)
-------- -------
Earnings before income
taxes 397,328 (26,709)
------- --------
Fixed charges:
Interest 67,544 71,462
One-third of all rentals (A) 835 820
Preferred stock dividend of
subsidiary trust 2,248 2,248
----- -----
Total fixed charges 70,627 74,530
------ ------
Earnings before income
taxes and fixed charges 467,955 47,821
Ratio of earnings to fixed
charges (A) 6.63 (B)
</TABLE>
(A) For purposes of computing these ratios, "earnings" represent income before
income taxes plus fixed charges. "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.
(B) For the three months ended March 31, 1998, earnings were inadequate to
cover fixed charges. The deficiency was approximately $26.7 million.
35
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
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0
1,010
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