<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 JUNE 30, 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 JULY 31, 1998
------- ----------------------------
Common Stock, $.01 par value 10,375,494 shares
CLASS B OUTSTANDING AT JULY 31, 1998
------- ----------------------------
Common Stock, $.01 par value 15,524,656 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 33
2
<PAGE> 3
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
Cash $ 61,125 $ 57,953
Federal funds sold and interest-bearing
deposits with banks 281,100 156,500
Restricted interest-bearing deposits 289,507 666,583
Trading investments 441,644 0
Investments available for sale 613,621 1,269,209
Loan and lease receivables, net:
Available for sale 550,031 1,452,560
Other loan and lease receivables, net 252,638 1,923,986
----------- -----------
Total loan and lease receivables, net 802,669 3,376,546
Retained interest-only strip 189,057 191,868
Premises and equipment(at cost, less
accumulated depreciation of
$32,888 in 1998 and $83,746 in 1997) 59,710 152,215
Other assets 409,690 815,258
----------- -----------
Total assets $ 3,148,123 $ 6,686,132
=========== ===========
LIABILITIES
Deposits $ 870,004 $ 3,017,611
Debt and other borrowings 1,363,228 2,300,946
Other liabilities 256,337 340,625
----------- -----------
Total liabilities 2,489,569 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 and outstanding
- 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 and outstanding 10,375,494 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 and outstanding 15,525,680 shares
in 1998, and 26,564,546 in 1997 156 266
Additional paid-in capital, net 208,259 354,190
Retained earnings, net 368,241 585,709
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 558,554 926,950
----------- -----------
Total liabilities and stockholders'
equity $ 3,148,123 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Gain on sale of receivables $ 61,310 $ 30,508 $ 92,759 $ 58,375
Interest on receivables 25,388 63,561 71,842 129,583
Interest on investments 22,035 37,769 48,892 68,821
Servicing revenues 22,162 59,849 69,977 117,267
Imputed interest (13,995) 2,274 (17,789) (5,034)
Credit card securitization income 0 82,594 84,307 145,137
Gain on transfer of credit card business 0 0 541,288 0
Other revenues 14,114 19,388 2,944 35,722
--------- --------- --------- ---------
Total revenues 131,014 295,943 894,220 549,871
========= ========= ========= =========
Expenses:
Salaries and employee benefits 39,665 59,969 94,914 114,630
Other operating expenses 34,800 98,595 118,852 192,745
Interest expense 36,226 79,797 103,771 151,259
Provision for credit losses 6,846 50,279 40,806 110,643
Severance and outplacement costs
associated with workforce reduction,
option exercise and other employee
cost associated with Fleet Transaction/
Tender Offer 0 0 62,257 0
Expense associated with exited
business/product 0 0 54,115 0
Impairment of facility assets related
to restructuring 0 0 8,700 0
--------- --------- --------- ---------
Total expenses 117,537 288,640 483,415 569,277
Income (loss) before income taxes 13,477 7,303 410,805 (19,406)
Income taxes (benefit) 4,006 1,884 (17,452) (5,007)
--------- --------- --------- ---------
Net income (loss) $ 9,471 $ 5,419 $ 428,257 $ (14,399)
========= ========= ========= =========
Basic earnings per common share -
Combined (See Note 13) $ .35 $ .09 $ 14.40 $ (.42)
========= ========= ========= =========
Diluted earnings per share -
Combined (See Note 13) $ .35 $ .09 $ 13.50 $ (.42)
========= ========= ========= =========
Basic weighted average common shares
outstanding - 24,523 42,772 29,607 42,678
========= ========= ========= =========
Diluted weighted average common shares
outstanding - 24,702 43,208 31,721 42,678
========= ========= ========= =========
Cash dividends declared:
Class A $ .063 $ .110 $ .126 $ .220
Class B $ .076 $ .132 $ .151 $ .264
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
Consolidated Condensed Statements of Changes in Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Additional
Preferred Preferred Common Common Paid-In
Stock Stock Stock Stock Capital
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 31,1996 $ 1,010 $ 0 $ 179 $ 256 $ 350,479
Change in unrealized
appreciation of
investments
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
Amortization of deferred
compensation
Termination/tax benefit-
benefit plans 5,215
Foreign currency
translation adjustment
Net Income
- ------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $ 1,010 $ 0 $ 182 $ 266 $ 379,543
Tender offer (79) (113) (160,861)
Change in unrealized
appreciation of
investments
Preferred and common
cash dividends declared
Exercise of stock options 1 3 4,820
Issuance of stock:
Dividend reinvestment 62
Benefit plans 4 8,103
Amortization of deferred
compensation
Termination/tax benefit-
benefit plans (4) (10,803)
Foreign currency
translation adjustment
Net Income
- ------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1998 $ 1,010 $ 0 $ 104 $ 156 $ 220,864
============================================================================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE> 6
($ in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Unrealized
Deferred Investment Retained Treasury Stockholders'
Compensation Holding Gains Earnings, Stock Equity
(Losses) net
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Dec. 31,1996 $ (41,229) $ (618) $ 542,001 $ (42) $ 852,036
Change in unrealized
appreciation of
investments 466 466
Preferred and common
cash dividends declared (28,301) (28,301)
Exercise of stock options 8,477
Issuance of stock:
Dividend reinvestment 857
Benefit plans (11,159) 1,297 4,666
Amortization of deferred
compensation 11,343 11,343
Termination/tax benefit
benefit plans 15,692 (15,662) 5,245
Foreign currency
translation adjustment 536 536
Net Income 71,625 71,625
- ------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $ (25,353) $ (152) $ 585,861 $ (14,407) $ 926,950
Tender offer (640,551) (801,604)
Change in unrealized
appreciation of
investments 570 570
Preferred and common
cash dividends declared (5,485) (5,485)
Exercise of stock options 4,824
Issuance of stock:
Dividend reinvestment 62
Benefit plans (8,107) 0
Amortization of deferred
compensation 3,465 3,465
Termination/tax benefit-
benefit plans 17,390 (4,809) 1,774
Foreign currency
translation adjustment (259) (259)
Net Income 428,257 428,257
- ------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1998 $ (12,605) $ 418 $ 367,823 $ (19,216) $ 558,554
============================================================================================================
</TABLE>
5
<PAGE> 7
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
---- ----
OPERATING ACTIVITIES (UNAUDITED)
<S> <C> <C>
Net income (loss) $ 428,257 $ (14,399)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on transfer of credit card business (541,288) 0
Restructure and other unusual charges 99,672 0
Sales/valuation adjustments-equity securities 42,975 (9,190)
Depreciation and amortization of intangibles 11,875 16,408
Provision for credit losses 40,806 110,643
Change in other assets and amounts due from
credit card securitizations 119,155 51,497
Change in other liabilities (59,971) (28,443)
Gain on securitization of receivables (47,020) (42,678)
------------ ------------
Net cash provided by operating activities 94,461 83,838
INVESTING ACTIVITIES
Purchase of investments available for sale (40,300,085) (23,679,151)
Proceeds from sales of investments available for sale 1,000,466 378,383
Proceeds from maturing investments available for sale 39,305,266 22,749,373
Change in federal funds sold and interest-bearing
deposits (126,796) (614,245)
Change in credit card receivables, excluding
sales/transfers (1,113,094) 432,116
Proceeds from sales/securitizations of receivables 4,406,997 1,691,688
Purchase of personal finance loan/lease portfolios (16,234) (123,724)
Principal collected on personal finance loans 56,988 46,966
Personal finance loans made to customers (2,368,816) (1,554,627)
Purchases of premises and equipment (594) (43,153)
Proceeds from sale of premises and equipment 0 181
Excess of cash collections over income
recognized on direct financing leases 24,969 13,593
Equipment purchased for direct financing leases (139,182) (163,384)
Change in business card receivables, excluding sales (111,775) (218,485)
Net change in other loans (5,784) (33,580)
------------ ------------
Net cash provided by (used in) investing activities 612,326 (1,118,049)
FINANCING ACTIVITIES
Change in demand and savings deposits (345,404) 102,040
Proceeds from sales of time deposits 582,223 1,340,410
Payments for maturing time deposits (308,947) (520,454)
Change in repurchase agreements and term federal funds 0 (10,000)
Proceeds from issuance of subordinated/senior debt 11,765 8,169
Payments on redemption of subordinated/senior debt (44,984) (44,256)
Proceeds from issuance of medium-term notes 28 285,500
Payments on maturity of medium-term notes (21,000) (80,000)
Change in notes payable 224,908 (18,361)
Stock tender offer (801,604) 0
Proceeds from issuance of stock 4,885 9,815
Cash dividends paid (5,485) (14,209)
------------ ------------
Net cash (used in) provided by financing activities (703,615) 1,058,654
------------ ------------
Net increase (decrease) in cash 3,172 24,443
Cash at beginning of period 57,953 165,875
------------ ------------
Cash at end of period $ 61,125 $ 190,318
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
6
<PAGE> 8
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
JUNE 30, 1998
(UNAUDITED)
Note 1) Basis of Presentation
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, except
for items associated with the disposition of consumer credit card
assets described below) 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.
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. Estimates are used when
accounting for gain on sale of receivables and the retained
interest-only strips, contractual mortgage servicing rights, the
allowance for credit losses and income taxes, among others. Actual
results could differ from those estimates.
The Company has reclassified its consolidated condensed income
statements and, accordingly, certain prior period amounts have been
reclassified to conform with this presentation and other current year
classifications.
Note 2) Disposition of Credit Card Assets
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 interest in the LLC (the "Fleet
Transaction"). As of the consummation of the Fleet 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 Fleet 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 (the "Tender Offer") which was completed
on February 20, 1998. The Office of the Comptroller of the
7
<PAGE> 9
Currency (the "Comptroller") 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.
Note 3) Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income/(loss) $ 9,471 $ 5,419 $ 428,257 $ (14,401)
Unrealized holding gain
(loss), net of tax 424 828 570 (760)
Cumulative translation
adjustments 0 (134) (259) 308
--------- --------- --------- ---------
Comprehensive income/(loss) $ 9,895 $ 6,113 $ 428,568 $ (14,853)
========= ========= ========= =========
</TABLE>
Note 4) Recent Accounting Pronouncements
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. The Company will adopt this SOP during the first
quarter of 1999. The adoption of SOP 98-1 is not expected to have a
material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and cannot be applied retroactively. The Company
has not yet quantified the impacts of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of
adoption of SFAS No. 133. However SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
8
<PAGE> 10
Note 5) Loan and Lease Receivables
Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1998 1997
---- ----
<S> <C> <C>
Consumer credit cards $ 0 $ 2,579,890
Mortgage loans 530,157 478,433
Leases and business cards 263,818 298,789
Other loans 17,649 40,978
----------- -----------
Gross loan and lease receivables 811,624 3,398,090
Add: Deferred origination costs,
net of deferred fees 9,573 116,229
Less: Reserve for credit losses:
Consumer credit cards 0 (118,420)
Mortgage loans (5,619) (5,822)
Leases and business cards (9,175) (9,798)
Other loans (3,734) (3,733)
----------- -----------
Total (18,528) (137,773)
----------- -----------
Net loan and lease receivables $ 802,669 $ 3,376,546
=========== ===========
</TABLE>
Receivables and accounts serviced for others consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1998 1997
---- ----
Receivables:
<S> <C> <C>
Consumer credit cards $ 0 $ 8,664,711
Mortgage loans* 6,115,844 4,830,403
Leases and business cards 1,113,498 965,000
----------- -----------
Total $ 7,229,342 $14,460,114
=========== ===========
Number of Accounts:
Consumer credit cards 0 4,529,248
Mortgage loans* 115,372 93,317
Leases and business cards 292,835 248,546
----------- -----------
Total 408,207 4,871,111
=========== ===========
</TABLE>
*Mortgage loans excludes mortgage loans which were never owned by the
Company, but which the Company services for a fee ("contract
servicing"). Contract servicing receivables were $8.2 billion and $9.2
billion at June 30, 1998 and December 31, 1997, respectively. The
related number of accounts serviced at June 30, 1998 and December 31,
1997 were 125,735 and 130,644, respectively.
Note 6) Allowance for Credit Losses
The following table shows the changes in the allowance for credit
losses for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DEC. 31,
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period $ 137,773 $ 89,184
Current provision 40,806 210,826
Reserves on receivables
(sold)/purchased, net (118,130) (11,015)
Net charge-offs (41,921) (151,222)
--------- ---------
Balance, end of period $ 18,528 $ 137,773
========= =========
</TABLE>
9
<PAGE> 11
Note 7) Interest-Only Strip
The following reflects activity in the interest-only (IO) strip:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DEC. 31,
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 191,868 $ 133,805
Retained IO on sales, net 78,930 165,303
Mark to market adjustments (33,724) (42,371)
Additional credit reserve 0 (4,400)
Amortization and recourse charge-offs, net (48,017) (60,469)
--------- ---------
Ending Balance $ 189,057 $ 191,868
========= =========
</TABLE>
Note 8) Selected Balance Sheet Information
<TABLE>
<CAPTION>
OTHER ASSETS JUNE 30, DEC. 31,
1998 1997
---- ----
<S> <C> <C>
Prepaid assets $ 79,168 $131,305
Investment in affordable housing 63,648 66,187
Other receivables 62,593 43,404
Due from trustees 56,459 25,383
Escrow advances 42,389 31,236
Contract mortgage servicing rights 32,627 24,546
Accrued interest receivable 24,486 99,167
Current and deferred federal
income taxes 13,739 0
Investments in operating leases 10,309 12,432
Due from trustees - leases and
business cards 9,517 6,736
Deferred costs 4,120 48,332
Goodwill 3,738 5,134
Other real estate (A) 2,944 689
Amounts due from consumer credit card securitizations 0 222,330
Minority interest in joint venture 0 46,243
Other 3,953 52,134
-------- --------
Total other assets $409,690 $815,258
======== ========
</TABLE>
(A) Carried at the lower of cost or fair market value less selling
costs.
<TABLE>
<CAPTION>
OTHER LIABILITIES JUNE 30, DEC. 31,
1998 1997
---- ----
<S> <C> <C>
Accounts payable and accrued
expenses $ 84,854 $100,380
Accrued interest payable 54,166 73,103
Custodial liability 43,400 30,217
Unearned insurance premium 16,106 17,674
Deferred fees and other reserves 11,636 28,050
Current and deferred federal and state income taxes 0 40,461
Other 46,175 50,740
-------- --------
Total other liabilities $256,337 $340,625
======== ========
</TABLE>
10
<PAGE> 12
Note 9) Income Taxes
Income tax expense is based on the estimated annual effective tax rate
of 30% for the three month period ended June 30, 1998, compared to 26%
tax rate for the comparable 1997 period.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current:
Federal $ 4,395 $ 22,460 $(69,867) $ 15,811
State (1,177) 235 6,629 (339)
-------- -------- -------- --------
Total current 3,218 22,695 (63,238) 15,472
Deferred:
Federal 1,755 (20,144) 46,369 (19,857)
State (967) (667) (583) (622)
-------- -------- -------- --------
Total deferred 788 (20,811) 45,786 (20,479)
Total tax expense (benefit) $ 4,006 $ 1,884 $(17,452) $ (5,007)
======== ======== ======== ========
</TABLE>
The reconciliation of the statutory federal income tax to the
consolidated tax expense is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal
income tax $ 4,717 $ 2,515 $ 143,736 $ (6,841)
State income taxes (1,393) 280 3,930 (625)
Insurance income (408) (1,539) 22,576 (2,981)
Tax credits (2,321) (1,394) (4,642) (2,729)
162m limitation 0 0 4,725 0
APB 28 adjustment 3,470 2,322 21,248 7,577
Transfer of credit
card business 0 0 (209,110) 0
Other (59) (300) 85 592
--------- --------- --------- ---------
Consolidated tax
expense $ 4,006 $ 1,884 $ (17,452) $ (5,007)
========= ========= ========= =========
</TABLE>
11
<PAGE> 13
Note 10) Debt
Debt consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
JUNE 30, DEC. 31,
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
SENIOR DEBT
RediReserve certificates (4.01%) $ 2,922 $ 3,611
6 month senior notes (6.53%-7.00%) 4,798 3,523
12 month senior notes (6.39%-7.33%) 47,665 51,537
18 month senior notes (6.11%-7.42%) 6,419 6,795
24 month senior notes (6.16%-7.47%) 32,743 33,517
30 month senior notes (5.92%-7.56%) 13,656 14,441
48 month senior notes (5.69%-7.79%) 7,939 8,061
60 month senior notes (5.83%-7.93%) 19,970 21,999
Value notes, fixed (6.85%-7.85%) 9,330 30,755
Medium-term notes, fixed (6.38%-8.36%) 855,490 861,462
Medium-term notes, floating (5.91%-6.13%) 223,000 238,000
Short-term bank notes 0 99,986
Short-term bank notes, floating 0 141,974
Medium-term bank notes, fixed (6.45%-7.12%) 7,334 408,651
Medium-term bank notes, floating 4,999 260,837
Other senior notes (5.97%-11.34%) 6,783 7,491
- -----------------------------------------------------------------------------------------
Total senior debt 1,243,048 2,192,640
SUBORDINATED DEBT
Subordinated notes (5.45%-11.34%) 1,818 5,754
7% subordinated bank notes due 2003 0 49,778
- -----------------------------------------------------------------------------------------
Total subordinated debt 1,818 55,532
Other borrowings 118,362 52,774
----------- -----------
Total debt and other borrowings 1,363,228 2,300,946
Less short-term debt & certificates (374,454) (809,814)
Less other borrowings (118,362) (52,774)
----------- -----------
Long-term debt $ 870,412 $ 1,438,358
=========== ===========
</TABLE>
The Company's senior floating rate notes were priced based on a factor
of LIBOR. At June 30, 1998, the rates on these notes varied from 5.91%
to 6.13%. At June 30, 1998, the Company used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR
based variable rate.
12
<PAGE> 14
Note 11) Restructuring Charges
During the first quarter of 1998, the Company implemented a
restructuring plan to reduce corporate expenses incurred in the past to
support the operations contributed in the Fleet Transaction. In
connection with this plan, the Company accrued severance benefits of
approximately $35 million during the first 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 be employed by the
Company are entitled to benefits, of which 190 employees were directly
associated with the operations contributed to the LLC and approximately
65 employees were associated with the workforce reduction. As of June
30, 1998, the Company paid approximately $27 million of severance
benefits to employees which was charged against the associated
liability.
Also during the first quarter of 1998, the Company implemented 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 nine 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 approximately the
next 40 months. The actions required to complete this plan include the
settlement of contractual commitments and the payment of customer
benefits.
During the first quarter of 1998, the Company recorded $29.8 million of
charges classified as expense associated with exited business/product
in connection with the aforementioned exit plans. As of June 30, 1998,
the Company paid approximately $4.5 million of contractual commitments,
customer benefits and termination benefits which were charged against
the associated liabilities for the aforementioned exit plans.
Note 12) Assets Held for Disposal
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. In the first quarter of 1998,
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 nine
months.
13
<PAGE> 15
Note 13) Net interest income
The following presents the components of net interest income:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30
------------------ ---------------------
1998 1997 1998 1997
(Unaudited)
Interest income
<S> <C> <C> <C> <C>
Loans and leases $ 25,388 $ 63,561 $ 71,842 $129,583
Investments 22,035 37,769 48,892 68,821
-------- -------- -------- --------
Total interest income 47,423 101,330 120,734 198,404
Interest expense:
Deposits 12,486 34,099 48,730 61,195
Other debt 23,740 45,698 55,041 90,064
-------- -------- -------- --------
Total interest expense 36,226 79,797 103,771 151,259
Net interest income 11,197 21,533 16,963 47,145
Provision for loan losses 6,846 50,279 40,806 110,643
-------- -------- -------- --------
Net interest income after
provision for credit losses 4,351 (28,746) (23,843) (63,498)
======== ======== ======== ========
</TABLE>
14
<PAGE> 16
Note 14) Earnings Per Share
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.
The following table sets forth the calculation of basic earnings per share
and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 9,471 $ 5,419 $ 428,257 $ (14,399)
less: Preferred "A" dividends 0 0 (141) (141)
less: Preferred "B" dividends, net (887) (1,603) (1,774) (3,205)
---- ----- ------ ------
Income (loss) available to common
Shareholders 8,584 3,816 426,342 (17,745)
less: Class A dividends declared (653) (1,999) (1,308) (3,996)
less: Class B dividends declared (1,133) (3,425) (2,249) (6,867)
------ ------ ------ ------
Undistributed Earnings (loss) $ 6,798 $ (1,608) $ 422,785 $ (28,608)
Shares:
Basic: Combined 24,523 42,772 29,607 42,678
Class A 10,362 18,178 12,524 18,162
Class B 14,161 24,594 17,083 24,516
Options A 10 61 10 0
Options B 49 293 198 0
AMIP B 120 82 186 0
Preferred B 0 0 1,720 0
Diluted: Combined 24,702 43,208 31,721 42,678
Class A 10,372 18,239 12,534 18,162
Class B 14,330 24,969 19,187 24,516
Earnings (loss) Per Share
Basic: Combined(1) $ .35 $ .09 $ 14.40 $ (.42)
Class A .34 .07 14.38 (.45)
Class B .35 .09 14.41 (.41)
Diluted: Combined(1) $ .35 $ .09 $ 13.50 $ (.42)
Class A .34 .07 13.49 (.45)
Class B .35 .09 13.50 (.41)
</TABLE>
(1) Combined represents a weighted average of Class A and Class B.
For the quarters ended June 30, 1998 and 1997 and the six months ended
June 30, 1997, 14,211 shares, 25,000 shares and 25,000 shares,
respectively, of the Company's Convertible Class B Preferred Stock
(SAILS) were outstanding but were not included in the computation of
diluted earnings per share because they were antidilutive for that
period. Options to purchase 2.2 million and 640,000 shares of Class B
common stock, respectively, were outstanding during the three months
and six months ended June 30, 1998 but were not included in the
computation of diluted EPS
15
<PAGE> 17
because the options' exercise price was greater than or equal to the average
market price of the common shares during the applicable periods.
Note 15) Contingencies
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. On July 10, 1998, the complaints, which had previously been
consolidated, were dismissed by the Court for failing to state a claim. While
the Company believes that the allegations in the complaints are without merit,
the plaintiffs may seek to amend the allegations. In the opinion of management,
the ultimate resolution of these complaints is not expected to have a material
adverse effect on the financial position or future operating results of the
Company.
Between August 25, 1997 and December 18, 1997, the Company and certain
other subsidiaries were named as defendants in lawsuits by certain consumer
credit cardholders claiming to represent consumer credit cardholders in a
specific program. The class action 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. Management believes that the allegations are without merit.
On June 3, 1998, the Judicial Panel on multidistrict litigation ordered that all
of the federal court actions be consolidated into one proceeding for pretrial
purposes in the United States District Court for the Eastern District of
Pennsylvania. In the opinion of management, the ultimate resolution of these
complaints is not expected to have a material adverse effect on the financial
position or future operating results of the Company.
16
<PAGE> 18
ADVANTA CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
For the quarter ended June 30, 1998, the Company reported net income of $9.5
million or diluted earnings per share of $.35 for Class A and Class B shares
combined. The net income for the quarter ended June 30, 1998 includes $7.5
million and $1.7 million for Advanta Mortgage and Advanta Business Services,
respectively. This represents an increase of $3.2 million, or 51% from the net
income of $6.3 million from Advanta Mortgage and Advanta Business Services that
was reported in the first quarter of this year. Last year, the Company reported
net income of $5.4 million, or diluted earnings per share of $.09 for Class A
and Class B shares combined for the quarter ended June 30, 1997.
For the six months ended June 30, 1998 the Company reported net income of $428.3
million or diluted earnings per share of $13.50 for Class A and Class B shares
combined. In the same period of 1997 the Company reported a net loss of $14.4
million or a diluted loss per share of $.41 for Class A and Class B shares
combined.
The net income for the six month period of 1998 reflects the $536.4 million net
gain on the Fleet Transaction (See Note 2 to Consolidated Condensed Financial
Statements), 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 for Advanta Mortgage and Advanta Business
Services was $12.3 million and $3.2 million, respectively. Net income for
Advanta Mortgage reflects a $33.7 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 loss for the first six months of 1997 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.
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, the timing of the Company's
securitizations, 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
and other filings with the Securities and Exchange Commission.
GAIN ON SALE OF RECEIVABLES
Advanta Mortgage completed three securitizations with an aggregate principal
balance of $1.06 billion for the quarter ended June 30, 1998. In addition, the
Company sold $89 million in whole loans and increased its portfolio of loans
held in off-balance sheet Commercial Paper conduit facilities by approximately
$64 million. Total
17
<PAGE> 19
Advanta Mortgage sales / securitization increased 19.7% and 58.7% over the
comparable periods ended March 31, 1998 and June 30, 1997, respectively. The
increase in sales / securitizations resulted primarily from the increase in
mortgages originated during this quarter. Advanta Mortgage originated $1.25
billion in new loans during the second quarter, an increase of 36.3% over the
year-ago quarter and 9.8% over the first quarter of 1998.
The Company recognized $53.9 million in gains resulting from the securitization
and sale of these receivables. This gain, which represents approximately 4.4% of
the loans sold in this quarter, is higher than the 2.6% recognized on loans sold
last quarter. The increase in gain as a percentage of loans sold this quarter is
primarily due to the mix of loans sold during this quarter. The gain realized
varies for each of the Company's products and origination channels. Typically,
the gain realized from loans directly originated is higher than the gain from
indirect origination channels.
Advanta Business Services recognized $7.5 million in securitization income. This
includes approximately $3.9 million in gains from the securitization of $72.6
million of leases. The remainder represents gains on the sale of new business
card receivables which are sold to the trust on a continuous basis to replenish
the investors' interest in trust receivables which have been repaid by the
cardholders.
The FASB is currently addressing several implementation issues relating to SFAS
No. 125. One of these issues relates to an exception SFAS No. 125 currently
makes for FDIC-insured institutions. The FDIC, upon reclamation of assets from
an FDIC-insured institution, would not be required to pay interest between the
date of reclamation and the date of payment, which could indicate that they
would not meet the isolation from creditors criterion established in SFAS No.
125. In January 1998, the FASB staff announced that it would study the issue and
said that, in the interim, FDIC-insured institutions need not conclude that the
FDIC receivership powers preclude sale accounting. An exposure draft of proposed
amendments is expected in 1998, but the timing of such draft is still uncertain,
and the effective date would likely not be prior to January, 1999.
ORIGINATIONS FOR ADVANTA MORTGAGE WERE AS FOLLOWS ($ IN THOUSANDS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Direct $382,242 $218,392 $ 665,290 $ 394,567
Broker 106,188 66,156 184,611 130,189
Conduit 376,145 298,735 779,956 512,494
Corporate Finance 324,484 298,968 673,899 540,481
Auto 58,356 32,651 79,459 53,250
-------- -------- --------- ---------
$1,247,415 $914,902 $2,383,215 $1,630,981
========== ======== ========== ==========
</TABLE>
Total second quarter originations for Advanta Mortgage increased 36.3% over the
comparable 1997 period. Direct mortgage originations for the second quarter
increased 75.0% and indirect mortgage originations increased 24.2% from the
comparable period of the prior year. Total year-to-date originations for the
Advanta Mortgage increased 46.1% from the comparable six month period of the
prior year. Direct mortgage originations increased 68.6% and indirect mortgage
originations increased 38.9% from the comparable period of the prior year. The
increase in direct originations reflects the Company's focus on capitalizing on
its direct marketing experience and centralized telemarketing and processing
capabilities. The slight decrease in quarter-to-quarter originations by the
Company's Conduit and Corporate Finance businesses is attributable to shifts in
market pricing relative to the Company's pricing. Production from both of these
channels was strong in June and the Company expects continued growth from these
channels in the second half of the year.
18
<PAGE> 20
ORIGINATIONS FOR ADVANTA BUSINESS SERVICES WERE AS FOLLOWS ($ IN THOUSANDS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Leases $ 74,352 $ 87,876 $137,003 $162,800
Business card 348,222 262,644 637,622 483,635
-------- -------- -------- --------
$422,574 $350,520 $774,625 $646,435
======== ======== ======== ========
</TABLE>
Total originations for business loans and leases increased 20.6% in the second
quarter of 1998 when compared to second quarter of 1997. Business card
originations increased 20.3% and lease originations increased 18.7% from the
first quarter of 1998. Total year-to-date originations for the business loans
and leases increased 19.8% from the comparable period of the prior year.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments decreased $38.2 million and $15.8
million, respectively, for the second quarter of 1998 from the same period of
1997 and interest expense decreased $43.6 million during the same comparative
period. For the six month period ended June 30, 1998 interest income on
receivables and investments decreased $57.7 million and $19.9 million,
respectively, as compared to the six months ended June 30, 1997, and interest
expense decreased $47.5 million during the same comparative period. The
decreases in interest income and interest expense were mainly attributable to
the decrease in interest bearing assets and liabilities in connection with the
Fleet Transaction and Tender Offer. Also impacting interest income on
receivables during the six months ended June 30, 1998 were consumer credit card
securitization transactions prior to the Fleet Transaction as well as the mix of
receivables. Partially offsetting the decrease in interest expense was an
increase in the owned cost of interest bearing liabilities which was primarily
attributable to the rate increases attributed to 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 and six month periods ended June
30, 1998 and 1997. Average owned loan and lease receivables and the related
interest revenues include certain loan fees.
19
<PAGE> 21
INTEREST RATE ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
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 $ 0 $ 0 0.00% $ 1,528,193 $ 38,880 10.21%
Mortgage loans 689,019 17,905 10.42 556,196 13,450 9.70
Leases and business cards 283,583 8,356 11.80 373,775 11,713 12.56
Other loans 14,785 412 11.18 25,390 564 8.90
----------- ----------- ----------- -----------
Gross receivables(2) 987,387 26,673 10.83 2,483,554 64,607 10.43
Trading investments 43,818 693 6.33 0 0 0.00
Investments(2) 1,415,424 21,379 6.04 2,550,811 37,793 5.91
----------- ----------- ----------- -----------
Total interest earning assets $ 2,446,629 $ 48,745 7.98% $ 5,034,365 $ 102,400 8.14%
Interest-bearing liabilities $ 2,297,048 $ 36,226 6.31% $ 5,113,980 $ 79,797 6.23%
Net interest spread 1.67% 1.91%
Net interest margin 2.05% 1.81%
Off-balance sheet
Consumer credit cards $ 0 $10,073,913
Mortgage loans 5,519,507 3,001,737
Leases and business cards 1,057,354 639,730
----------- -----------
Total average securitized
receivables $ 6,576,861 $13,715,380
=========== ===========
Total average managed
receivables $ 7,564,247 $16,198,934
=========== ===========
</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%.
20
<PAGE> 22
INTEREST RATE ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
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 $ 775,769 $ 23,457 6.10% $ 1,671,261 $ 85,509 10.32%
Mortgage loans 637,952 32,618 10.31 493,918 25,300 10.33
Leases and business cards 297,889 17,747 11.98 315,329 19,836 12.65
Other loans 13,628 714 10.57 24,252 1,098 9.14
----------- ----------- ----------- -----------
Gross receivables(2) 1,725,238 74,536 8.71 2,504,760 131,743 10.59
Trading investments 22,030 693 6.29 0 0 0.00
Investments(2) 1,657,013 48,276 5.83 2,375,682 68,869 5.81
----------- ----------- ----------- -----------
Total interest earning assets $ 3,404,281 $ 123,505 7.31% $ 4,880,442 $ 200,612 8.26%
Interest-bearing liabilities $ 3,288,610 $ 103,771 6.33% $ 4,919,601 $ 151,259 6.17%
Net interest spread 0.98% 2.09%
Net interest margin 1.16% 2.04%
Off-balance sheet
Consumer credit cards $ 2,947,048 $10,288,802
Mortgage loans 5,278,290 2,768,417
Leases and business cards 1,004,148 628,464
----------- -----------
Total average securitized
receivables $ 9,229,486 $13,685,683
=========== ===========
Total average managed
receivables $10,954,724 $16,190,443
=========== ===========
</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> 23
SERVICING REVENUES
Servicing revenues decreased to 22.2 million for the three months ended June 30,
1998 as compared to 59.8 million for the three months ended June 30 1997. For
the six months ended June 30, 1998, servicing revenues were approximately $70
million as compared to $117.3 million for the six months ended June 30, 1997.
The 1997 and first quarter 1998 amounts included consumer credit card servicing
income, which activities were transferred in connection with the Fleet
Transaction. The Company's contract servicing portfolio was $8.2 billion at June
30, 1998 versus $8.8 billion at March 31, 1998 and $7.5 billion at June 30,
1997. The decrease in contract servicing volume since the first quarter resulted
from the withdrawal of business by certain customers who have begun servicing
their own portfolios, and from higher prepayments in these contract servicing
portfolios.
IMPUTED INTEREST IS COMPRISED OF THE FOLLOWING ($ IN THOUSANDS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash received on IO $ 33,140 $ 20,153 $ 63,952 $ 32,766
Valuation provision(1) (23,899) 0 (33,724) 0
Amortization and charge-offs (23,236) (17,879) (48,017) (37,800)
-------- -------- -------- --------
Imputed interest, net $(13,995) $ 2,274 $(17,789) $ (5,034)
======== ======== ======== ========
</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.
In this quarter, in accordance with the Company's practice of regularly
reviewing and, where appropriate, adjusting the gain receivable ("IO Strip")
assumptions for its experience, the Company recognized a pretax charge
against second quarter earnings of $23.9 million. In the first quarter of 1998,
the Company recorded a $9.8 million pretax charge to adjust the IO Strip.
Prepayment rate assumptions used in valuing the Company's IO Strip were revised
to 27% for fixed rate loans, 33% for intermediate rate loans and 39% for ARMs.
At the end of the first quarter the prepayment assumptions were 24% for fixed
rate loans, 29% for intermediate rate loans and 34% for ARMs.
GAIN ON TRANSFER OF CREDIT CARD BUSINESS
The net gain recognized by the Company in 1998 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 Fleet
Transaction was a 4.99% ownership interest in the LLC valued at $20 million.
22
<PAGE> 24
ORIGINATIONS FOR ADVANTA BUSINESS SERVICES WERE AS FOLLOWS ($ IN THOUSANDS):
OTHER REVENUES
OTHER REVENUES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity securities (losses)/gains $ (86) $ (775) $(42,975) $ (9,190)
Mortgage other revenues 1,150 547 2,332 8,290
Leasing other revenues 4,682 7,507 7,849 15,285
Business card other revenues 10,200 3,758 17,928 6,444
Insurance revenues, net 442 8,979 8,365 18,668
Other (2,274) (628) 9,445 (3,775)
-------- -------- -------- --------
Total other revenues $ 14,114 $ 19,388 $ 2,944 $ 35,722
======== ======== ======== ========
</TABLE>
Other revenues reflect equity securities losses of $42.5 million recognized in
the first quarter of 1998. 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 LP decided during the
first quarter to expedite a disposal plan. Other mortgage, business card, and
leasing revenues generally consist of late fees, plus annual fees and
interchange income related to the business card.
OPERATING EXPENSES
The Company's operating expenses this quarter totaled $74.5 million, or 3.9% of
average managed receivables. As the Company's managed portfolio continues to
grow during the year, it is expected that the ratio of operating expenses to
managed receivables will be within the range of 3.6% to 3.9%.
Salaries and employee benefits decreased $20.3 million to $39.7 million for the
three months ended June 30, 1998 from $60.0 million for the three months ended
June 30, 1997. This reduction reflects the decrease in the number of employees
associated with the Fleet Transaction as well as workforce reductions and exit
and disposition plans associated with business and product offerings not
directly associated with the Company's mortgage and business services units. The
Company began to realize the decreases in salaries and employee benefits in this
quarter.
OTHER OPERATING EXPENSES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Amortization of credit card
deferred origination costs, net $ 1,419 $ 15,458 $ 19,934 $ 33,521
Other operating expenses:
Marketing 10,295 12,522 24,363 23,651
External processing 3,256 13,457 14,522 25,446
Equipment expense 4,586 9,708 13,642 18,267
Occupancy expense 3,003 6,105 8,451 11,396
Telephone expense 2,091 5,310 7,450 10,217
Professional fees 1,753 7,811 6,544 16,106
Postage 1,568 7,623 6,266 14,743
Credit and collection expense 3,456 5,678 8,073 10,034
Credit card fraud losses 128 6,699 2,900 13,176
Other 3,245 8,224 6,707 16,188
-------- -------- -------- --------
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total other operating expenses 33,381 83,137 98,918 159,224
-------- -------- -------- --------
Total operating expenses $ 34,800 $ 98,595 $118,852 $192,745
======== ======== ======== ========
</TABLE>
Other operating expenses decreased $63.8 million to $34.8 million for the three
months ended June 30, 1998 from $98.6 million for the three months ended June 30
1997. For the six months ended June 30, 1998, other operating expenses decreased
$73.9 million to $118.9 million from $192.7 million for the six months ended
June 30, 1997. The decreases in these expenses reflect the decrease in operating
expenses resulting from the Fleet Transaction.
PROVISION FOR CREDIT LOSSES
For the second quarter of 1998 the provision for credit losses decreased to $6.8
million from $50.3 million for the same period of 1997 and charge-offs on owned
receivables decreased to $6.5 million in the second quarter of 1998 from $38.7
million during the same period of 1997. For the six months ended June 30, 1998
the provision for credit losses decreased to $40.8 million from the $110.6
million recorded for the same period of 1997. Charge-offs for the same six month
periods decreased to $41.9 million in 1998 from the $76.4 million for 1997.
These decreases are mainly attributable to the transfer of the consumer credit
card receivables in connection with the Fleet Transaction.
ASSET QUALITY
Managed impaired assets at June 30,1998 decreased to $294.5 million from the
$434.7 million at the comparable period of 1997. The levels of managed loans 30
days or more delinquent also decreased to $528.1 million from the $870.5 million
at June 30, 1997. Impaired assets include both nonperforming assets (mortgage,
auto and business loans and leases past due 90 days or more; real estate owned;
and bankrupt, decedent and fraudulent business cards) and accruing loans past
due 90 days or more on business cards and leases. The Company charges off
expected losses on all nonperforming mortgage 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 generally 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 second quarter of 1998 was
1.5%, down from 4.4% for the first quarter of 1998 and 5.5% for the second
quarter of 1997. The following represents the quarterly results by product:
<TABLE>
<CAPTION>
MANAGED RECEIVABLES
FOR THE QUARTER ENDED 6/30/98
6/30/98 3/31/98 6/30/97 (IN MILLIONS)
------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Mortgage only 0.61% 0.49% 0.46% $6,395
Auto 6.54(1) 10.05 5.67 251
Business Card 6.57 5.71 4.56 762
Leases 2.26 3.17 2.65 616
</TABLE>
(1) Reflects an impact due to the timing of auto loan charge-offs. The
current quarter's rate comparable to the prior quarter would be
approximately 9%. However, the difference had no effect on earnings.
The charge-off rates for mortgages and leases are expected to remain relatively
consistent with the second quarter 1998 while auto loan charge-offs are
anticipated to decline. The Company expects the charge-off rate for auto loans
to decline moderately by the end of the year.
24
<PAGE> 26
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 is reflected in the calculations of
mortgage banking and business loan and lease 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 $18.5 million
or 2.3% of owned receivables at June 30, 1998 compared to $137.8 million or 4.1%
of receivables at December 31, 1997 and $116.9 million or 4.8% of receivables at
June 30, 1997. The decrease is a result of an increase in the relative percent
of secured receivables in the total loan portfolio. The decline in balance is
predominately attributable to the transfer of the consumer credit card allowance
in conjunction with the Fleet Transaction.
On the total managed portfolio, impaired assets were $294.5 million or 3.7% of
receivables at June 30, 1998, as compared to $532.0 million or 3.0% of
receivables at December 31, 1997 and $434.7 million or 2.7% of receivables at
June 30, 1997. On the total owned portfolio, impaired assets were $37.3 million
or 4.6% of receivables at June 30, 1998, compared to $100.6 million or 3.0% of
receivables at December 31, 1997, and $72.4 million or 3.0% of receivables at
June 30, 1997.
The following tables provide a summary of impaired assets, delinquencies and
charge-offs, as of and for the year-to-date periods indicated.
<TABLE>
<CAPTION>
JUNE 30, DEC. 31, JUNE 30,
CONSOLIDATED-MANAGED(1) 1998 1997 1997
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Nonperforming assets (2) $ 294,398 $ 328,835 $ 243,013
Accruing loans past due 90 days or more 75 203,117 191,686
Impaired assets 294,473 531,952 434,699
Total loans 30 days or more delinquent 528,059 1,068,183 870,477
As a percentage of gross receivables:
Nonperforming assets (2) 3.7% 1.8% 1.5%
Accruing loans past due 90 days or more 0.0 1.1 1.2
Impaired assets 3.7 3.0 2.7
Total loans 30 days or more delinquent 6.6 6.0 5.4
Net charge-offs:
Amount $ 184,733 $ 860,098 $ 437,188
As a percentage of average gross
receivables (annualized) 3.4% 5.3% 5.4%
MORTGAGE LOANS - MANAGED
Nonperforming assets (2) $ 267,271 $ 200,600 $ 118,403
Total loans 30 days or more delinquent 455,775 391,929 250,306
As a percentage of gross receivables:
Nonperforming assets (2) 4.0% 3.8% 3.0%
Total loans 30 days or more delinquent 6.9% 7.4 6.4
Net charge-offs:
Amount $ 15,674 $ 19,953 $ 7,952
As a percentage of average
receivables (annualized) .6% .5% .5%
Net charge-offs - Auto Amount $ 9,235 $ 10,212 $ 2,082
As a percentage of average
receivables (annualized) 8.3%(3) 7.3% 3.9%
LEASES AND BUSINESS CARDS - MANAGED
Nonperforming assets (2) $ 26,973 $ 26,782 $ 18,506
Impaired assets 27,026 26,817 18,628
Total loans 30 days or more delinquent 71,933 81,675 66,199
As a percentage of receivables:
Nonperforming assets (2) 2.0% 2.1% 1.7%
Impaired assets 2.0 2.1 1.7
Total loans 30 days or more delinquent 5.2 6.5 6.1
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
JUNE 30, DEC. 31, JUNE 30,
CONSOLIDATED-MANAGED(1) 1998 1997 1997
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Net charge-offs - Leases
Amount $ 8,028 $ 15,074 $ 6,821
As a percentage of average
receivables (annualized) 2.7% 2.7% 2.6%
Net Charge-offs - Business Cards
Amount $ 21,842 $ 18,928 $ 6,761
As a percentage of average
receivables (annualized) 6.2% 3.9% 3.3%
</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; and bankrupt,
decedent and fraudulent business cards.
(3) Reflects an impact due to the timing of auto loan charge-offs. The
current quarter's rate comparable to the prior quarter would be
approximately 9%. However, the difference had no effect on earnings.
26
<PAGE> 28
<TABLE>
<CAPTION>
JUNE 30, DEC. 31, JUNE 30,
CONSOLIDATED-OWNED(1) 1998 1997 1997
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Allowance for credit losses $ 18,528 $ 137,773 $ 116,867
Nonperforming assets (2) 37,198 51,149 34,717
Accruing loans past due 90 days or more 75 49,458 37,690
Impaired assets 37,273 100,607 72,407
Total loans 30 days or more delinquent 56,406 201,891 138,274
As a percentage of gross receivables:
Allowance for credit losses 2.3% 4.1% 4.8%
Nonperforming assets (2) 4.6 1.5 1.4
Accruing loans past due 90 days or more .0 1.5 1.6
Impaired assets 4.6 3.0 3.0
Total loans 30 days or more delinquent 7.0 5.9 5.7
Net charge-offs:
Amount $ 41,919 $ 151,222 $ 76,443
As a percentage of average gross
receivables (annualized) 4.8% 5.6% 6.1%
MORTGAGE LOANS - OWNED
Allowance for credit losses $ 5,619 $ 5,822 $ 5,118
Nonperforming assets (2) 29,699 23,234 6,748
Total loans 30 days or more delinquent 39,991 42,916 16,150
As a percentage of gross receivables:
Allowance for credit losses 1.1% 1.2% .9%
Nonperforming assets (2) 5.6 4.9 1.2
Total loans 30 days or more delinquent 7.5 9.0 2.9
Net charge-offs - Mortgage:
Amount $ 1,327 $ 2,310 $ 773
As a percentage of average gross
receivables (annualized) .5% .4% .3%
Net charge-offs - Auto:
Amount $ 4,131 $ 3,524 $ 815
As a percentage of average gross
receivables (annualized) 15.4% 5.8% 3.6%
LEASES AND BUSINESS CARDS - OWNED
Allowance for credit losses $ 9,175 $ 9,798 $ 9,433
Nonperforming assets (2) 7,345 6,705 6,084
Impaired assets 7,398 6,740 6,206
Total loans 30 days or more delinquent 16,064 17,799 16,679
As a percentage of receivables:
Allowance for credit losses 3.5% 3.3% 3.0%
Nonperforming assets (2) 2.8 2.2 1.9
Impaired assets 2.8 2.3 2.0
Total loans 30 days or more delinquent 6.1 6.0 5.3
Net charge-offs - Leases:
Amount $ 2,647 $ 2,170 $ 1,203
As a percentage of average
receivables( annualized) 3.7% 1.5% 1.7%
Net charge-offs - Business Cards:
Amount $ 5,538 $ 6,198 $ 2,317
As a percentage of average gross
receivables (annualized) 7.2% 3.3% 2.7%
</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; and bankrupt,
decedent and fraudulent business cards.
27
<PAGE> 29
COSTS AND EXPENSES ASSOCIATED WITH FLEET TRANSACTION / TENDER OFFER
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
Fleet 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
Fleet 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 (as defined) of the Company 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 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 Fleet
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 Chief Executive Officer ("CEO") of the Company and the CEO of
the consumer credit card business unit were leaving the Company in connection
with the Fleet Transaction. These benefits were all contingent upon the
consummation of the Fleet Transaction and were recognized upon the closing of
the transaction.
In connection with the Company's evaluation of strategic alternatives and the
Fleet 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 Fleet Transaction as
part of the corporate restructuring to reduce corporate expenses. During the
first quarter of 1998, 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.
EXPENSE ASSOCIATED WITH EXITED BUSINESS/PRODUCT
In connection with the Company's restructuring efforts to reduce expenses
associated with business and product offerings which are not directly associated
with its
28
<PAGE> 30
mortgage and business services units, management approved exit and disposition
plans during the first quarter of 1998 related to certain businesses and
products previously offered. The Company recorded charges in the quarter ended
March 31, 1998 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. During the quarter ended March 31, 1998 the Company recorded a
$54.1 million pretax charge to earnings in connection with exited businesses and
products.
IMPAIRMENT OF FACILITY ASSETS
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.
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 six months of 1998, the Company, through its
subsidiaries, securitized approximately $2.0 billion of mortgage loans and $.3
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 mortgage loan and business loan and lease receivable growth. At June 30,
1998, the Company had approximately $.6 billion of loan and lease receivables
and $.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 Fleet Transaction as well as
deposit gathering activity at both Advanta National Bank ("ANB") and Advanta
Bank Corp. ("ABC", formerly Advanta Financial Corp. ("AFC")). As a result of the
Fleet Transaction, 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
the Tender Offer which was completed on February 20, 1998.
Advanta Mortgage Corp. USA and its subsidiaries are parties to a $500
million secured revolving credit facility, $250 million of which is committed.
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.
As of June 30, 1998 ANB's total deposits were $729.9 million after a
significant portion of its deposits were contributed to the LLC in connection
with the Fleet Transaction, and ABC, a Utah state-chartered, FDIC-insured
industrial loan corporation had total deposits of $140.1 million.
ANB's combined Tier I and Tier II capital ratio at June 30, 1998 was
23.60%. 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.
During May of 1998, ANB offered to repurchase its outstanding Bank
Notes that were not assumed by the LLC in connection with the acquisition of the
Company's consumer credit card business by Fleet and certain of its affiliates.
ANB repurchased $93.4 million of Bank Notes; $12.3 million of Bank Notes that
were not tendered remain outstanding.
29
<PAGE> 31
In June of 1998, ANB retained $445 million of Advanta Mortgage Loan
Trust 1998-2 securities to be held in its trading portfolio. This decision was
consistent with ANB's liquidity management objectives and its high levels of
liquidity. By holding these securities, ANB receives an attractive yield and
maintains flexibility for future funding requirements.
MARKET RISK SENSITIVITY
Market risk is the potential for loss or diminished financial
performance arising from 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 Company 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 (see
Note 13 to Consolidated Condensed Financial Statements). The Company estimates
that its net interest income over a twelve month period would approximately
increase or decrease by 2.5%, respectively, if interest rates were to fall or
rise 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
impact on the fair value of these assets assuming a change on prepayments of
2.7% CPR for fixed rate loans and 3.4% CPR for variable rate loans. These
changes in prepayment assumptions could result in a $27 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
30
<PAGE> 32
management's expectation regarding the future direction of prepayments, and they
depict only two possibilities out of a large set of possible scenarios.
The Company currently has securities in a trading portfolio for
liquidity purposes (see Liquidity and Capital Resources). The values of these
securities can be affected by market conditions; therefore, a hedge was
constructed to mitigate the effects of such changes. This hedge is carried at
fair value with changes in its fair value included in other income. The Company
has estimated the change in value of these securities together with the hedging
instruments. Assuming a 10% change in market-based investment yield, the
resulting changes in value are immaterial.
DERIVATIVES ACTIVITIES
The Company uses derivative financial instruments for the purpose of
managing its exposure to interest rate risk and has used derivatives to manage
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 June 30, 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 June 30, 1998 and December 31, 1997 ($ in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
JUNE 30,
JUNE 30, DEC. 31, 1998 ASSET/
1998 1997 (LIABILITY)
---------- ---------- ----------
<S> <C> <C> <C>
Interest rate swaps $1,835,272 $2,111,711 $ 5,634
Interest rate options:
Caps written 327,328 1,018,781 (207)
Caps purchased 327,328 328,781 207
Forward contracts 486,000 400,437 (190)
---------- ---------- ----------
$2,975,928 $3,859,710 $ 5,444
========== ========== ==========
</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 is being used to
31
<PAGE> 33
measure the degree to which each of the Company's computer applications are
impacted by the Year 2000 Issue.
The Company is proceeding with its projects addressing compliance with
the Year 2000 Issue. Each of the Company's business units has completed 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. In addition,
the Project Office is developing contingency plans for each of the Company's
business units in the event that the remediation plans are not successfully
implemented. 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 it. The Company notes that GAAP generally requires 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. Based on current information, the Company projects that
its total costs to address the Year 2000 Issue will be approximately $20
million, of which approximately $9.5 million is available for contingency plans
as described above. Of this amount, the Company estimates that during 1998 it
will incur approximately $10 million, of which approximately $3 million will be
capital expenditures and $1 million is available for contingency plans. Of the
remaining $10 million estimated for 1999, approximately $8.5 million is
available for contingency plans. 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.
32
<PAGE> 34
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. On July 10, 1998, the complaints, which had been
previously been consolidated, were dismissed by the Court for failing
to state a claim. While the Company believes that the allegations in
the complaints are without merit, the plaintiffs may seek to amend the
allegations.
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. On June 3, 1998,
the Judicial Panel on multidistrict litigation ordered that all of the
federal court actions be consolidated into one proceeding for pretrial
purposes in the United States District Court for the Eastern District
of Pennsylvania.
33
<PAGE> 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders held on June 4, 1998,
the following nominees for reelection as directors of the Company were
elected by the votes indicated below:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
-------- --------- --------------
<S> <C> <C>
Dennis Alter 9,117,011 52,247
Arthur P. Bellis 8,786,849 382,409
William C. Dunkelberg 9,117,508 51,750
Dana Becker Dunn 9,117,790 51,468
Robert C. Hall 9,116,117 53,141
</TABLE>
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
4 Amendment No. 1, dated as of June 4, 1998, to the Rights
Agreement dated as of March 14, 1997, by and between the
Company and ChaseMellon Shareholder Services, L.L.C. as
Rights Agent (incorporated by reference to Exhibit 1 to
the Registrant's Amended Registration on Form 8-A/A, dated
June 11, 1998).
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 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.
34
<PAGE> 36
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)
August 14, 1998 By /s/Philip M. Browne
Senior Vice President and
Chief Financial Officer
August 14, 1998 By /s/John J. Calamari
Vice President, Finance and
Principal Accounting Officer
35
<PAGE> 37
EXHIBIT INDEX
EXHIBIT DESCRIPTION
2 Inapplicable.
3 Inapplicable.
4 Amendment No. 1, dated as of June 4, 1998, to the Rights
Agreement dated as of March 14, 1997, by and between the
Company and ChaseMellon Shareholder Services, L.L.C. as
Rights Agent (incorporated by reference to Exhibit 1 to the
Registrant's Amended Registration on Form 8-A/A, dated June
11, 1998).
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.
36
<PAGE> 1
Exhibit 12
ADVANTA CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
30-Jun-98 30-Jun-98
---------------------- -----------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Earnings $ 9,471 $ 5,419 $428,257 $(14,401)
Federal and state
income taxes 4,006 1,884 (17,452) (5,006)
Earnings before income taxes 13,477 7,303 410,805 (19,407)
Fixed charges:
Interest 36,226 79,797 103,771 151,259
One-third of all rentals 588 1,006 1,423 1,825
Preferred stock dividend of
subsidiary trust 2,248 2,248 4,495 4,495
Total fixed charges 39,062 83,051 109,689 157,579
Earnings before income
taxes and fixed charges 52,539 90,354 520,494 138,172
Ratio of earnings to fixed
charges (A) 1.35x 1.09x 4.75x (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 six months ended June 30, 1997, earnings were inadequate to cover
fixed charges. The deficiency was approximately $19.4 million.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 61,125
<INT-BEARING-DEPOSITS> 289,507
<FED-FUNDS-SOLD> 281,100
<TRADING-ASSETS> 441,644
<INVESTMENTS-HELD-FOR-SALE> 613,621
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 821,197
<ALLOWANCE> 18,528
<TOTAL-ASSETS> 3,148,123
<DEPOSITS> 870,004
<SHORT-TERM> 492,816
<LIABILITIES-OTHER> 256,337
<LONG-TERM> 870,412
0
1,010
<COMMON> 260
<OTHER-SE> 557,284
<TOTAL-LIABILITIES-AND-EQUITY> 3,148,123
<INTEREST-LOAN> 71,842
<INTEREST-INVEST> 48,892
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 120,734
<INTEREST-DEPOSIT> 48,730
<INTEREST-EXPENSE> 55,041
<INTEREST-INCOME-NET> 16,963
<LOAN-LOSSES> 40,806
<SECURITIES-GAINS> (42,975)
<EXPENSE-OTHER> 338,838
<INCOME-PRETAX> 410,805
<INCOME-PRE-EXTRAORDINARY> 410,805
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 428,257
<EPS-PRIMARY> 14.40
<EPS-DILUTED> 13.50
<YIELD-ACTUAL> 1.16
<LOANS-NON> 37,198
<LOANS-PAST> 75
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 137,773
<CHARGE-OFFS> 47,157
<RECOVERIES> 5,238
<ALLOWANCE-CLOSE> 18,528
<ALLOWANCE-DOMESTIC> 14,794
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,734
</TABLE>
