FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 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 November 1, 1998
Common Stock, $.01 par value 10,375,494 shares
Class B Outstanding at November 1, 1998
Common Stock, $.01 par value 16,300,591 shares
<PAGE>
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Income Statements 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity 5-6
Consolidated Statements of Cash Flows 7-8
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II Other Information 39
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
ASSETS (Unaudited)
Cash $ 80,214 $ 57,953
Federal funds sold and interest-bearing
deposits with banks 302,800 156,500
Restricted interest-bearing deposits 88,882 543,239
Trading investments 186,923 0
Investments available for sale 791,594 1,392,553
Loan and lease receivables, net:
Available for sale 594,591 1,452,560
Other loan and lease receivables, net 315,564 1,923,986
Total loan and lease receivables, net 910,155 3,376,546
Retained interest-only strip 221,116 191,868
Premises and equipment(at cost, less
accumulated depreciation of
$36,338 in 1998 and $83,746 in 1997) 60,837 152,215
Other assets 744,964 815,258
Total assets $3,387,485 $6,686,132
LIABILITIES
Deposits $1,284,929 $3,017,611
Debt and other borrowings 1,187,365 2,300,946
Other liabilities 247,709 340,625
Total liabilities 2,720,003 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 10,320,489 shares
in 1998, and 18,193,885 shares in 1997 103 182
Class B common stock, $.01 par value:
authorized - 230,000,000 shares;
issued and outstanding 16,227,999 shares
in 1998, and 26,564,546 in 1997 162 266
Additional paid-in capital, net 202,204 354,190
Retained earnings, net 381,968 585,709
Less: Treasury stock at cost,
527,168 Class B common shares in 1998,
418,286 Class B common shares in 1997 (17,965) (14,407)
Total stockholders' equity 567,482 926,950
Total liabilities and stockholders'
equity $3,387,485 $6,686,132
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Revenues:
Gain on sale of receivables $ 51,275 $ 30,566 $ 115,450 $ 77,419
Interest on receivables 28,080 95,410 99,922 224,994
Interest on investments 22,224 38,231 71,116 107,051
Servicing revenues 30,677 63,406 113,885 185,528
Imputed interest 4,895 5,453 15,683 16,259
Consumer credit card
securitization income 0 90,618 84,144 235,755
Gain on transfer of consumer
credit card business 0 0 541,288 0
Other revenues, net 10,131 19,037 14 45,586
Total revenues 147,282 342,721 1,041,502 892,592
Expenses:
Salaries and employee benefits 41,908 63,964 136,822 178,594
Other operating expenses 38,331 84,940 157,183 277,685
Interest expense 39,165 88,414 142,936 239,673
Provision for credit losses 6,414 48,243 47,220 158,886
Severance and outplacement costs
associated with workforce
reduction, option exercise and
other employee costs 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 125,818 285,561 609,233 854,838
Income before income taxes 21,464 57,160 432,269 37,754
Income taxes (benefit) 6,439 14,748 (11,013) 9,741
Net income $ 15,025 $ 42,412 $ 443,282 $ 28,013
Basic earnings per common share-
Combined (See Note 16) $ .58 $ .95 $ 15.80 $ .54
Diluted earnings per share-
Combined (See Note 16) $ .58 $ .92 $ 14.88 $ .53
Basic weighted average common
shares outstanding - 24,482 42,875 27,880 42,749
Diluted weighted average common
shares outstanding - 24,514 46,115 29,776 43,608
Cash dividends declared:
Class A $ .063 $ .110 $ .189 $ .330
Class B $ .076 $ .132 $ .227 $ .396
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
Consolidated Condensed Statements of Changes in Stockholders' Equity (Unaudited)
($ in thousands)
Class A Class B Class A Class B Additional
Preferred Preferred Common Common Paid-In
Stock Stock Stock Stock Capital
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 5,156
Issuance of stock:
Dividend reinvestment 85
Benefit plans 11 18,772
Stock buyback (1) (1) (1,541)
Stock buyback-ESOP
Amortization of deferred
compensation
Termination/tax benefit-
benefit plans (4) (12,633)
Foreign currency
translation adjustment
Net Income
Balance at September 30, $1,010 $ 0 $ 103 $ 162 $ 228,521
1998
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
<TABLE>
($ in thousands)
<CAPTION>
Unrealized
Investment
Deferred Unearned Holding Retained Treasury Stockholders'
Compensation ESOP Gains Earnings Stock Equity
(Losses) Net
<S> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996 $(41,229) $ 0 $ (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) $ 0 $ (152) $585,861 $(14,407) $ 926,950
Tender offer (640,551) (801,604)
Change in unrealized
appreciation of
investments 2,018 2,018
Preferred and common
cash dividends declared (8,231) (8,231)
Exercise of stock options 5,160
Issuance of stock:
Dividend reinvestment 85
Benefit plans (20,034) 1,251 0
Stock buyback (1,543)
Stock buyback-ESOP (4,837) (4,837)
Amortization of deferred
Compensation 4,687 4,687
Termination/tax benefit-
benefit plans 19,220 (4,809) 1,774
Foreign currency
translation adjustment (259) (259)
Net Income 443,282 443,282
Balance at Sept. 30, 1998 $(21,480) $(4,837) $ 1,866 $ 380,102 $(17,965) $ 567,482
</TABLE>
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
1998 1997
(Unaudited)
OPERATING ACTIVITIES
Net income $ 443,282 $ 28,013
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on transfer of consumer credit card business (541,288) 0
Restructure and other unusual charges 99,672 0
Sales/valuation adjustments-equity securities 43,039 10,113
Depreciation and amortization of intangibles 15,797 25,243
Provision for credit losses 47,219 158,886
Change in other assets and amounts due from
consumer credit card securitizations (36,782) (37,767)
Change in other liabilities (46,308) (36,823)
Change in retained I/O strip (29,248) (67,592)
Net cash (used in) provided by operating activities (4,617) 80,073
INVESTING ACTIVITIES
Purchase of investments available for sale (42,261,460)(33,475,817)
Proceeds from sales of investments available
for sale 1,226,360 1,057,644
Proceeds from maturing investments available
for sale 41,500,657 31,800,974
Change in federal funds sold and interest-
bearing deposits (206,538) (557,198)
Change in consumer credit card receivables,
excluding sales/transfers (1,113,094) 369,906
Proceeds from sales/securitizations of receivables 5,569,946 2,705,381
Purchase of lease portfolios/Advanta Mortgage loans (23,136) (136,887)
Principal collected on Advanta Mortgage loans 79,018 85,324
Advanta Mortgage loans made to customers (3,932,942) (2,531,997)
Purchases of premises and equipment (41,060) (53,709)
Proceeds from sale of premises and equipment 10,558 226
Excess of cash collections over income
recognized on direct financing leases 26,998 28,520
Equipment purchased for direct financing leases (230,350) (242,624)
Change in business card receivables, excluding
sales (119,827) (314,126)
Net change in other loans (5,896) (36,178)
Net cash provided by (used in) investing activities 479,234 (1,300,561)
FINANCING ACTIVITIES
Change in demand and savings deposits (379,914) 180,973
Proceeds from sales of time deposits 1,143,128 1,621,209
Payments for maturing time deposits (403,256) (720,125)
Change in repurchase agreements and term federal
funds - (10,000)
Proceeds from issuance of subordinated/
senior debt 18,554 11,784
Payments on redemption of subordinated/
senior debt (51,840) (73,714)
Proceeds from issuance of medium-term notes 30 436,333
Payments on maturity of medium-term notes (188,000) (203,235)
Change in notes payable 219,913 (69,481)
<PAGE>
Nine Months Ended
September 30,
1998 1997
(Unaudited)
Stock tender offer (801,604) 0
Stock buy back (6,380) 0
Proceeds from issuance of stock 5,244 11,903
Cash dividends paid (8,231) (21,247)
Net cash (used in) provided by financing activities (452,356) 1,164,400
Net increase (decrease) in cash 22,261 (56,088)
Cash at beginning of period 57,953 165,875
Cash at end of period $ 80,214 $ 109,787
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1998
(UNAUDITED)
Note 1) Basis of Presentation
The unaudited 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, changes in stockholders' equity 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. All significant intercompany accounts
and transactions have been eliminated in consolidation. 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 the
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 Consumer 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%, which is accounted for
on the cost basis. The Contribution Agreement provides for the
parties to make a final determination of the transferred assets
and liabilities, and the settlement procedure is currently in
process. 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
<PAGE>
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 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.
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net income/(loss) $ 15,025 $ 42,412 $ 443,282 $ 28,013
Unrealized holding
gain (loss), net of tax 1,448 992 2,018 232
Cumulative translation
adjustments 0 (51) (259) 257
Comprehensive income/
(loss) $ 16,473 $ 43,353 $ 445,041 $ 28,502
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
("FASB")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
<PAGE>
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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB Statement No. 65." SFAS No. 134 amends SFAS
No. 65 to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or
hold those investments. SFAS No. 134 also conforms the
subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise
with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking
enterprise. Prior to the issuance of SFAS No. 134, the Company
was required to account for resulting mortgage-backed securities
or other retained interests as trading securities. SFAS No. 134
is effective for the first fiscal quarter beginning after
December 15, 1998, with early application encouraged. The
adoption of SFAS No. 134 is not expected to have a material
effect on the Company's financial statements.
Note 5) Loan and Lease Receivables
Loan and lease receivables on the balance sheet, including those
available for sale, consisted of the following:
September 30, Dec. 31,
1998 1997
Consumer credit cards $ 0 $ 2,579,890
Advanta Mortgage loans 571,676 478,433
Leases and business cards 282,997 298,789
Other loans 64,605 40,978
Gross loan and lease receivables 919,278 3,398,090
Add: Deferred origination costs,
net of deferred fees 10,030 116,229
Less: Reserve for credit losses:
Consumer credit cards 0 (118,420)
Advanta Mortgage loans (6,235) (5,822)
Leases and business cards (9,184) (9,798)
Other loans (3,734) (3,733)
Total (19,153) (137,773)
Net loan and lease receivables $ 910,155 $ 3,376,546
Receivables and accounts serviced for others consisted of the
following:
September 30, Dec. 31,
1998 1997
Receivables:
Consumer credit cards $ 0 $ 8,664,711
Mortgages 6,689,717 4,635,730
Auto loans 193,398 194,673
Leases 492,342 442,312
Business cards 640,468 522,688
Total $ 8,015,925 $14,460,114
Number of Accounts:
Consumer credit cards 0 4,529,248
Mortgages 105,249 74,128
Auto loans 20,310 19,189
Leases 87,089 86,261
Business cards 207,945 162,285
Total 420,593 4,871,111
<PAGE>
"Advanta Mortgage loans" include mortgage and auto loans and
exclude mortgage loans which were never owned by the Company, but
which the Company services for a fee ("contract servicing").
Contract servicing receivables were $7.6 billion and $9.2 billion
at September 30, 1998 and December 31, 1997, respectively. The
related number of accounts serviced at September 30, 1998 and
December 31, 1997 were 110,099 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:
Nine Months Year
Ended Ended
September 30, Dec. 31,
1998 1997
Balance, beginning of period $ 137,773 $ 89,184
Current provision 47,220 210,826
Reserves on receivables
(sold)/purchased, net (118,530) (11,015)
Net charge-offs (47,310) (151,222)
Balance, end of period $ 19,153 $ 137,773
Note 7) Interest-Only Strip
The following reflects activity in the interest-only (IO) strip:
Nine Months Year
Ended Ended
September 30, Dec. 31,
1998 1997
Beginning balance $191,868 $ 133,805
Retained IO on sales, net 153,481 165,303
Mark to market adjustments (50,980) (42,371)
Additional credit reserve 0 (4,400)
Amortization and recourse charge-offs, net (73,253) (60,469)
Ending Balance $221,116 $ 191,868
<PAGE>
Note 8) Selected Balance Sheet Information
September 30, Dec. 31,
Other Assets 1998 1997
Receivable from loans sold $348,449 0
Prepaid assets 83,513 $131,305
Investment in affordable housing 62,395 66,187
Due from trustees - Advanta Mortgage loans 56,416 25,383
Escrow advances 49,761 31,236
Contract mortgage servicing rights 45,920 24,546
Accrued interest receivable 26,178 99,167
Current and deferred federal
income taxes 15,059 0
Investments in operating leases 9,297 12,432
Due from trustees - leases and
business cards 9,268 6,736
Deferred costs 5,807 48,332
Goodwill 3,669 5,134
Other real estate (A) 5,652 689
Amounts due from consumer credit card
securitizations 0 222,330
Other 23,580 141,781
Total other assets $744,964 $815,258
(A) Carried at the lower of cost or fair market value less selling costs.
September 30, Dec. 31,
Other Liabilities 1998 1997
Accounts payable and accrued expenses $ 74,397 $101,493
Accrued interest payable 53,184 73,103
Custodial liability 65,943 30,217
Unearned insurance premium 19,451 17,674
Deferred fees and other reserves 11,217 28,050
Current and deferred federal and state
income taxes 0 40,461
Other 23,517 49,627
Total other liabilities $247,709 $340,625
Note 9) Income Taxes
Income tax expense is based on the estimated annual effective tax
rate of 30% for the three month period ended September 30, 1998,
compared to 26% tax rate for the comparable 1997 period.
Income tax expense (benefit) consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Current:
Federal $ 24,216 $ (1,079) $ (45,651) $ 14,732
State 1,937 4,232 8,566 3,893
Total current 26,153 3,153 (37,085) 18,625
Deferred:
Federal (19,843) 12,742 26,526 (7,115)
State 129 (1,147) (454) (1,769)
Total deferred (19,714) 11,595 26,072 (8,884)
Total tax expense
(benefit) $ 6,439 $ 14,748 $ (11,013) $ 9,741
The reconciliation of the statutory federal income tax to the
consolidated tax expense is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Statutory federal
income tax $ 7,484 $ 19,983 $ 151,220 $ 13,142
State income taxes 1,343 2,006 5,273 1,380
Insurance income 755 (2,981) 23,331 (5,177)
Tax credits (2,321) (1,346) (6,963) (4,075)
162m limitation 0 0 4,725 0
APB 28 adjustment (742) (3,960) 20,506 3,617
Transfer of consumer credit
card business 0 0 (209,110) 0
Other (80) 1,046 5 854
Consolidated tax
expense $ 6,439 $ 14,748 $ (11,013) $ 9,741
<PAGE>
Note 10) Debt
Debt consisted of the following:
September 30, Dec. 31,
1998 1997
SENIOR DEBT
RediReserve certificates (3.77%) $ 2,806 $ 3,611
6 month senior notes (6.53%-7.00%) 4,581 3,523
12 month senior notes (6.86%-7.33%) 49,486 51,537
18 month senior notes (6.39%-7.42%) 6,074 6,795
24 month senior notes (6.16%-7.48%) 32,437 33,517
30 month senior notes (5.92%-7.56%) 13,111 14,441
48 month senior notes (5.97%-7.79%) 8,053 8,061
60 month senior notes (5.83%-7.93%) 19,677 21,999
Value notes, fixed (6.85%-7.85%) 9,330 30,755
Medium-term notes, fixed (6.40%-8.36%) 728,492 861,462
Medium-term notes, floating (5.69%-6.43%) 183,000 238,000
Short-term bank notes 0 99,986
Short-term bank notes, floating 0 141,974
Medium-term bank notes, fixed (6.45%-7.12%) 7,336 408,651
Medium-term bank notes, floating 0 260,837
Other senior notes (6.53%-11.34%) 6,808 7,491
Total senior debt 1,071,191 2,192,640
SUBORDINATED DEBT
Subordinated notes (5.83%-11.34%) 1,614 5,754
7% subordinated bank notes due 2003 0 49,778
Total subordinated debt 1,614 55,532
Other borrowings 114,560 52,774
Total debt and other borrowings 1,187,365 2,300,946
Less short-term debt & certificates (327,780) (809,814)
Less other borrowings (114,560) (52,774)
Long-term debt $ 745,025 $ 1,438,358
The Company's senior floating rate notes were priced based on a
factor of LIBOR. At September 30, 1998, the rates on these notes
varied from 5.69% to 6.43%. At September 30, 1998, the Company
used derivative financial instruments to effectively convert
certain fixed rate debt to a LIBOR based variable rate.
Note 11) Capital Stock
During the third quarter of 1998, the Board of Directors
authorized the repurchase shares of the Company's Class A and
Class B common stock and the formation of an Employee Stock
Ownership Plan ("ESOP")(see Note 12). Up to 2.5 million shares
of the Company's Class A and Class B common stock will be
purchased in connection with the stock repurchase program and the
ESOP. At September 30, 1998, the Company had purchased
approximately 89,000 Class B shares and approximately 427,000
Class A shares at a total cost of $6.4 million. Of the total
shares purchased, approximately 372,000 Class A shares were
purchased for the Company's newly formed Employee Stock Ownership
Plan (see Note 12).
Note 12) Employee Stock Ownership Plan
On September 10, 1998, the Company's Board of Directors
authorized the formation of an Employee Stock Ownership Plan
("ESOP"), covering all employees of the Company who have reached
age 21 with one year of service. During September 1998, the ESOP
borrowed approximately $4.8 million from the Company (the "ESOP
Loan") and used the proceeds to purchase approximately 372,000
shares of the Company's Class A common stock. The ESOP Loan is
payable over 30 years. The Company makes annual contributions to
the ESOP equal to the ESOP's debt service less dividends received
<PAGE>
by the ESOP. All dividends received by the ESOP are used to pay
debt service. As the ESOP Loan is repaid, shares are allocated
to active employees, based on the proportion of debt service paid
in the year. The Company accounts for its ESOP in accordance
with AICPA Statement of Position 93-6, "Employer's Accounting for
Employee Stock Ownership Plans." Accordingly, unallocated shares
are reported as unearned ESOP shares in the balance sheet. As
shares of common stock acquired by the ESOP are allocated to each
employee based on the repayment of the ESOP Loan, the Company
reports compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings-per-
share computations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and
interest expense. ESOP compensation expense of the quarter ended
September 30, 1998 was not material.
Note 13) 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 September 30, 1998, the Company paid
approximately $28 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 September 30, 1998, the Company paid approximately
$6.9 million of contractual commitments, customer benefits and
termination benefits which were charged against the associated
liabilities for the aforementioned exit plans.
Note 14) 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
<PAGE>
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 six months.
Note 15) Net interest income
The following presents the components of net interest income:
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Interest income
Loans and leases $ 28,080 $ 95,410 $ 99,922 $ 224,994
Investments 22,224 38,231 71,116 107,051
Total interest income 50,304 133,641 171,038 332,045
Interest expense:
Deposits 14,016 44,143 62,747 105,337
Other debt 25,149 44,271 80,189 134,336
Total interest expense 39,165 88,414 142,936 239,673
Net interest income 11,139 45,227 28,102 92,372
Provision for loan losses 6,414 48,243 47,220 158,886
Net interest income after
provision for credit losses $ 4,725 $ (3,016) $ (19,118) $ (66,514)
<PAGE>
Note 16) 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:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net income $ 15,025 $ 42,412 $ 443,282 $ 28,013
less: Preferred "A" dividends 0 0 (141) (141)
less: Preferred "B"
dividends, net (929) (1,602) (2,733) (4,807)
Income available
to common Shareholders 14,096 40,810 440,408 23,065
less: Class A dividends
declared (653) (2,000) (1,961) (5,996)
less: Class B dividends
declared (1,147) (3,435) (3,396) (10,302)
Undistributed Earnings $ 12,296 $ 35,375 $ 435,051 $ 6,767
Shares:
Basic: Combined 24,482 42,875 27,880 42,750
Class A 10,316 18,188 11,780 18,171
Class B 14,166 24,687 16,100 24,579
Options A 4 57 10 78
Options B 28 526 108 611
AMIP B 0 157 156 169
Preferred B 0 2,500 1,622 0
Diluted: Combined 24,514 46,115 29,776 43,608
Class A 10,320 18,245 11,790 18,249
Class B 14,194 27,870 17,986 25,359
Earnings Per Share
Basic: Combined(1) $ .58 $ .95 $ 15.80 $ .54
Class A .57 .94 15.77 .49
Class B .58 .96 15.82 .58
Diluted: Combined(1) $ .58 $ .92 $ 14.88 $ .53
Class A .56 .91 14.87 .48
Class B .58 .92 14.89 .56
(1) Combined represents a weighted average of Class A and Class B.
For the quarters ended September 30, 1998 and 1997 and the nine
months ended September 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 3.0 million
and 2.2 million shares of Class B common stock, respectively, were
outstanding during the three months and nine months ended
September 30, 1998 but were not included in the computation of
diluted EPS because the options' exercise price was greater than
or equal to the average market price of the common shares during
the applicable periods.
<PAGE>
Note 17) 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. The plaintiffs determined not to attempt to amend their
Complaints. Rather, they have appealed the District Court's
decision to the United States Court of Appeals for the Third
Circuit. The Company believes that the District Court's ruling
will be affirmed and that the allegations in the complaints are
without merit. 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 of its 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. 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. On
November 6, 1998, the Company and counsel for plaintiffs in two
of the actions pending in the Superior Court of the State of
Delaware entered into a Settlement Agreement and Stipulation in
the Delaware State Court to settle the claims relating to the
specific program referred to above. Pursuant to the Settlement
Agreement and Stipulation, which is subject to Court approval,
the Company will pay $7.25 million to the plaintiffs. With the
exception of persons who opt-out of the settlement, once the Court
grants final approval of the settlement and that approval becomes
effective, all of the claims in the other lawsuits relating to the
specific program referred to above will be released. While
management believes the allegations are without merit, the Company
recognizes the risk of continued litigation and the additional
expenditure of time, energy and resources and that further
defense of the actions would be potentially protracted and expensive
and that settlement is desirable.
The Company and its subsidiaries are involved in legal
proceedings, claims and litigation, including those arising in
the ordinary course of business. Management believes that the
aggregate liabilities, if any, resulting from such actions would
not have a material adverse effect on the consolidated financial
position of the Company. However, as the ultimate resolution of
these proceedings is influenced by factors outside of the
Company's control, it is reasonably possible that the Company's
estimated liability under these proceedings may change.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
For the quarter ended September 30, 1998, the Company reported net
income of $15.0 million or diluted earnings per share of $.58 for
Class A and Class B shares combined. The net income for the quarter
ended September 30, 1998 includes $10.1 million and $5.1 million for
Advanta Mortgage and Advanta Business Services, respectively. This
represents an increase of $6.0 million, or 65% from the net income of
$9.2 million from Advanta Mortgage and Advanta Business Services that
was reported in the second quarter of this year. Last year, the
Company reported net income of $42.4 million, or diluted earnings per
share of $.92 for Class A and Class B shares combined for the quarter
ended September 30, 1997.
For the nine months ended September 30, 1998 the Company reported net
income of $443.3 million or diluted earnings per share of $14.88 for
Class A and Class B shares combined. In the same period of 1997 the
Company reported net income of $28.0 million or diluted earnings per
share of $.53 for Class A and Class B shares combined.
The net income for the nine 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 $22.4 million and $8.3 million, respectively.
Net income for Advanta Mortgage reflects a $51.0 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.
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 two securitizations with an aggregate
principal balance of $1.01 billion for the quarter ended September 30,
1998. In addition, the Company sold $109 million in whole loans and
increased its portfolio of loans held in off-balance sheet Commercial
Paper conduit facilities by approximately $43 million. Total Advanta
Mortgage sales/securitization increased 24.1% and 63.5% over the
comparable three month periods ended June 30, 1998 and September 30,
1997, respectively. The increase in sales/securitizations resulted
primarily from the increase in mortgages originated during this
quarter. Advanta Mortgage originated $1.57 billion in new loans during
the third quarter, an increase of 65.3% over the year-ago quarter and
25.8% over the second quarter of 1998.
The Company recognized $38.5 million in gains resulting from the
securitization and sale of these receivables. This gain, which
<PAGE>
represents approximately 3.7% of the loans sold in this quarter, is
lower than the 4.4% recognized on loans sold last quarter. The
decrease 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. In
addition, due to the significant drop in interest rates this quarter,
the hedge contracts used to manage interest rate risk between
origination and sale of the loans for the current quarter generated
losses of approximately $29 million. These losses served to offset
the higher than normal gains that occur from the sale of loans in a
decreasing rate environment. While this type of hedging activity
impacts the gains recognized from securitization and sale activity, it
does not impact the Company's IO Strip.
In this quarter, in accordance with the Company's practice of
regularly reviewing and, where appropriate, adjusting the retained IO
Strip assumptions for its experience, the Company recognized a pretax
charge against third quarter earnings of $17.3 million. In the
second quarter of 1998, the Company recorded a $23.9 million pretax
charge to adjust the IO Strip. Prepayment rate assumptions used in
valuing the Company's IO Strip were revised to 29% for fixed rate loans,
37% for intermediate rate loans and 43% for ARMs. At the end of the
second quarter the prepayment assumptions were 27% for fixed rate loans,
33% for intermediate rate loans and 39% for ARMs.
The Company announced that beginning in the fourth quarter of this
year, it expects to report income for its mortgage business that is
essentially equal to that of a portfolio lender, rather than the front-
ended income typically reported through gain on sale accounting.
Since gain on sale accounting is required under generally accepted
accounting principles for securitizations structured as sales, the
Company will accomplish this change by increasing its use of on
balance sheet funding over time and decreasing its degree of
reliance on securitizations structured as sales.
Advanta Business Services recognized $12.8 million in securitization
income. This includes approximately $3.6 million in gains from the
securitization of $77.7 million of leases. The remainder represents
gains on the sale of new business card receivables which are sold to
the trust on a continuous basis to replenish the investors' interest
in trust receivables which have been repaid by the cardholders.
The FASB is currently addressing several implementation issues
relating to SFAS No. 125. One of these issues relates to an exception
SFAS No. 125 currently makes for FDIC-insured institutions. The FDIC,
upon reclamation of assets from an FDIC-insured institution, would not
be required to pay interest between the date of reclamation and the
date of payment, which could indicate that they would not meet the
isolation from creditors criterion established in SFAS No. 125. In
January 1998, the FASB staff announced that it would study the issue
and said that, in the interim, FDIC-insured institutions need not
conclude that the FDIC receivership powers preclude sale accounting.
An exposure draft of proposed amendments is expected in late 1998, but
the timing of such draft is still uncertain, and the effective date would
likely not be prior to January, 1999.
<PAGE>
Originations for Advanta Mortgage were as follows ($ in Thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Direct $ 483,290 $219,837 $1,148,580 $ 614,404
Broker 162,531 62,096 347,142 192,285
Conduit 584,418 332,460 1,364,374 844,954
Corporate Finance 320,871 292,500 994,770 832,981
Auto 18,593 42,633 98,052 95,883
$1,569,703 $949,526 $3,952,918 $2,580,507
Total third quarter originations for Advanta Mortgage increased 65.3%
over the comparable 1997 period. Direct mortgage originations for the
third quarter increased 119.8% and indirect mortgage originations
increased 48.9% from the comparable period of the prior year. Total
year-to-date originations for Advanta Mortgage increased 53.2% from
the comparable nine month period of the prior year. Direct mortgage
originations increased 86.9% and indirect mortgage originations
increased 42.6% from the comparable period of the prior year. The
increase in direct originations reflects the Company's focus on
capitalizing on its direct marketing experience and centralized
telemarketing and processing capabilities.
<PAGE>
Originations for Advanta Business Services were as follows ($ in
Thousands):
Three Months Ended Nine Months Ended
September. 30, September 30,
1998 1997 1998 1997
Leases $ 95,344 $ 84,567 $ 232,347 $ 247,367
Business card 349,645 294,001 987,267 777,636
$444,989 $378,568 $1,219,614 $1,025,003
Total originations for business cards and leases increased 17.5% in
the third quarter of 1998 when compared to the third quarter of 1997.
Total year-to-date originations for the business cards and leases
increased 19.0% from the comparable period of the prior year.
Interest Income and Expense
Interest income on receivables and investments decreased $67.0 million
and $16.0 million, respectively, for the third quarter of 1998 from
the same period of 1997 and interest expense decreased $49.2 million
during the same comparative period. For the nine month period ended
September 30, 1998 interest income on receivables and investments
decreased $124.2 million and $35.9 million, respectively, as compared
to the nine months ended September 30, 1997, and interest expense
decreased $96.7 million during the same comparative period. The
decreases in interest income and interest expense were mainly
attributable to the decrease in interest bearing assets and
liabilities in connection with the Fleet Transaction and Tender Offer.
Also impacting interest income on receivables during the nine months
ended September 30, 1998 were consumer credit card securitization
transactions prior to the Fleet Transaction as well as the mix of
receivables. Both periods reflect suppressed margins as a result of
carrying high investment balances as a percent of owned assets.
The following tables provide an analysis of both owned and managed
interest income and expense data, average balance sheet data, net
interest spread (the difference between the yield on interest earning
assets and the average rate paid on interest bearing liabilities), and
net interest margin (the difference between the yield on interest
earning assets and the average rate paid to fund interest earning
assets) for the three month and nine month periods ended September 30,
1998 and 1997. Average owned loan and lease receivables and the
related interest revenues include certain loan fees.
<PAGE>
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
Three Months Ended September 30,
1998 1997
Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate
On-balance sheet
Consumer credit
cards $ 0 $ 0 0.00% $1,711,826 $68,981 15.99%
Advanta Mortgage
loans 866,759 20,650 9.45 711,034 16,000 8.93
Leases and business
cards 263,072 8,149 12.32 345,420 10,378 11.95
Other loans 17,704 574 12.87 37,450 1,003 10.64
Gross receivables
(2) 1,147,535 29,373 10.16 2,805,730 96,362 13.63
Trading
investments 314,143 4,864 6.19 0 0 0.00
Investments(2) 1,072,933 17,394 6.45 2,697,379 38,256 5.63
Total interest
earning assets $2,534,611 $51,631 8.10% $5,503,109 $134,618 9.71%
Interest-bearing
liabilities $2,475,703 $39,135 6.28% $5,528,703 $ 88,414 6.35%
Net interest
spread 1.82% 3.36%
Net interest
margin 1.96% 3.33%
Off-balance sheet
Consumer credit
cards $ 0 $ 9,190,092
Advanta Mortgage
loans 6,218,600 3,522,496
Leases and
business cards 1,117,123 790,383
Total average securitized
receivables $7,335,723 $13,502,971
Total average managed
receivables $8,483,258 $16,308,701
(1) Includes assets held and available for sale and nonaccrual loans
and leases.
(2) Interest and average rate for tax-free securities, loans and
leases computed on a tax equivalent basis using a statutory rate
of 35%.
<PAGE>
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
Nine Months Ended September 30,
1998 1997
Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate
On-balance sheet
Consumer credit
cards $ 514,338 $ 23,457 6.10% $ 1,684,932 $154,490 12.26%
Advanta Mortgage
loans 715,060 53,268 9.96 567,086 41,300 9.74
Leases and business
cards 286,155 25,897 12.09 325,470 30,213 12.40
Other loans 15,002 1,288 11.48 28,700 2,100 9.78
Gross receivables
(2) 1,530,555 103,910 9.08 2,606,188 228,103 11.69
Trading
investments 120,471 5,556 6.15 0 0 0.00
Investments(2) 1,460,181 65,669 5.99 2,508,087 107,124 5.69
Total interest
earning assets $ 3,111,207 $175,135 7.52% $ 5,114,275 $335,227 8.75%
Interest-bearing
liabilities $ 3,014,661 $142,936 6.30% $ 5,124,867 $239,673 6.23%
Net interest spread 1.22% 2.52%
Net interest margin 1.41% 2.49%
Off-balance sheet
Consumer credit
cards $ 1,953,903 $ 9,918,540
Advanta Mortgage
loans 5,595,171 3,022,539
Leases and business
cards 1,042,220 683,030
Total average securitized
receivables $ 8,591,294 $13,624,109
Total average managed
receivables $10,121,849 $16,230,297
(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%.
<PAGE>
Servicing Revenues
Servicing revenues decreased to $30.7 million for the three months
ended September 30, 1998 as compared to $63.4 million for the three
months ended September 30, 1997. For the nine months ended September
30, 1998, servicing revenues were approximately $113.9 million as
compared to $185.5 million for the nine months ended September 30,
1997. The 1997 and first quarter 1998 amounts include consumer credit
card servicing income, which activities were transferred in connection
with the Fleet Transaction. The Company's contract servicing portfolio
was $7.6 billion at September 30, 1998 versus $8.3 billion at June 30,
1998 and $8.9 billion at September 30, 1997. The decrease in contract
servicing volume since the first quarter resulted from the previously
announced withdrawal of business by certain customers who have begun
servicing their own portfolios, and from higher prepayments in
contract servicing portfolios.
Imputed Interest is Comprised of The Following ($ in Thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Cash received on IO $ 29,720 $ 20,789 $ 88,936 $ 58,145
Amortization and
charge-offs (24,825) (15,336) (73,253) (41,886)
Imputed interest, net $ 4,895 $ 5,453 $ 15,683 $ 16,259
Gain on Transfer of Consumer 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 includes 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 $20 million.
<PAGE>
Other Revenues ($ in Thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Equity securities
(losses)/gains $ (50) $(4,320) $(43,039) $(10,035)
Mortgage other revenues 1,291 276 3,836 4,025
Leasing other revenues 5,883 12,644 17,414 30,695
Business card other
revenues 2,117 (2,166) 6,761 (3,108)
Insurance revenues, net (8) (3,342) 1,623 (8,139)
Other 898 15,945 13,419 32,148
Total other revenues,net $ 10,131 $19,037 $ 14 $ 45,586
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 $80.2 million,
or 3.7% of average managed receivables. The ratio of operating
expenses to average managed receivables decreased from 3.9% last
quarter due to the continued leveraging of the Company's fixed cost
base. As the Company's managed portfolio continues to grow during the
remainder of 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 $22.1 million for the three
months ended September 30, 1998 as compared to the same period of
1997. This reduction reflects the decrease in the number of employees
associated with the Fleet Transaction as well as workforce reductions
and exit and disposition plans associated with business and product
offerings not directly associated with the Company's mortgage and
business services units.
<PAGE>
Other Operating Expenses ($ in Thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Marketing $13,569 $14,277 $ 37,931 $ 37,928
Equipment expense 4,511 8,491 18,153 26,759
External processing 3,740 4,126 18,263 29,572
Credit and collection
expense 3,381 5,121 11,455 15,155
Occupancy expense 3,243 5,369 11,694 16,765
Telephone expense 2,361 5,450 9,811 15,667
Professional fees 1,606 13,533 8,150 29,638
Postage 1,211 6,489 7,477 21,232
Amortization of credit card
deferred origination
costs, net 1,175 14,395 21,108 47,916
Credit card fraud losses 100 4,554 3,000 17,730
Other 3,434 3,135 10,141 19,323
Total other operating
expenses $38,331 $84,940 $157,183 $277,685
Other operating expenses decreased $46.6 million to $38.3 million for
the three months ended September 30, 1998 from $84.9 million for the
three months ended September 30 1997. For the nine months ended
September 30, 1998, other operating expenses decreased $120.5 million
to $157.2 million from $277.7 million for the nine months ended
September 30, 1997. The decreases in these expenses reflect the
decrease in operating expenses resulting from the Fleet Transaction.
Provision for Credit Losses
For the third quarter of 1998 the provision for credit losses
decreased to $6.4 million from $48.2 million for the same period of
1997 and charge-offs on owned receivables decreased to $5.4 million in
the third quarter of 1998 from $40.0 million during the same period of
1997. For the nine months ended September 30, 1998 the provision for
credit losses decreased to $47.2 million from the $158.9 million
recorded for the same period of 1997. Charge-offs for the same nine
month period decreased to $47.3 million in 1998 from the $116.5
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 September 30, 1998 decreased to $343.8
million from the $456.6 million at the comparable period of 1997. The
levels of managed loans 30 days or more delinquent also decreased to
$616.9 million from the $940.6 million at September 30, 1997. Impaired
assets include both nonperforming assets (mortgage, auto and credit
cards and leases past due 90 days or more; real estate owned; and
bankrupt, decedent and fraudulent credit 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.
<PAGE>
The consolidated managed charge-off rate for the third quarter of 1998
was 1.4%, down from 1.5% for the second quarter of 1998 and 5.4% for
the third quarter of 1997. The following represents the quarterly
results by product:
Managed
Receivables
For the Quarter Ended 9/30/98
9/30/98 6/30/98 9/30/97 (In Millions)
Mortgage only 0.56% 0.61% 0.61% $7,216
Auto 7.11 6.54(1) 8.01 239
Business rd 5.79 6.57 3.53 778
Leases 2.29 2.26 2.92 637
(1) Reflects an impact due to the timing of auto loan charge-offs.
The second quarter's rate comparable to the current 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 third quarter 1998.The Company expects
the charge-off rate for auto loans to increase moderately by the end
of the year.
The allowance for credit losses is maintained for on-balance sheet
receivables. This allowance is intended to cover anticipated 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 gain on sale
of receivables, business card and lease securitization income,
retained interest only strip 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
$19.2 million or 2.2% of owned receivables at September 30, 1998
compared to $137.8 million or 4.1% of receivables at December 31, 1997
and $126.6 million or 4.8% of receivables at September 30, 1997. The
percentage 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 $343.8 million or
3.9% of receivables at September 30, 1998, as compared to $532.0
million or 3.0% of receivables at December 31, 1997 and $456.6 million
or 2.8% of receivables at September 30, 1997. On the total owned
portfolio, impaired assets were $38.6 million or 4.4% of receivables
at September 30, 1998, compared to $100.6 million or 3.0% of
receivables at December 31, 1997, and $74.2 million or 2.8% of
receivables at September 30, 1997.
<PAGE>
The following tables provide a summary of impaired assets,
delinquencies and charge-offs, as of and for the year-to-date periods
indicated.
Sept. 30, Dec. 31, Sept. 30,
Consolidated-Managed(1) 1998 1997 1997
Nonperforming assets (2) $343,788 $ 328,835 $272,946
Accruing loans past due
90 days or more 36 203,117 183,651
Impaired assets 343,823 531,952 456,597
Total loans 30 days or more
delinquent 616,858 1,068,183 940,595
As a percentage of gross
receivables:
Nonperforming assets (2) 3.9% 1.8% 1.7%
Accruing loans past due 90
days or more 0.0 1.1 1.1
Impaired assets 3.9 3.0 2.8
Total loans 30 days or
more delinquent 6.9 6.0 5.7
Net charge-offs:
Amount $213,287 $ 860,098 $656,920
As a percentage of average gross
receivables (annualized) 2.8% 5.3% 5.4%
ADVANTA MORTGAGE LOANS - MANAGED
Nonperforming assets (2) $315,415 $ 200,600 $152,887
Total loans 30 days or more
delinquent 533,695 391,929 322,860
As a percentage of gross
receivables:
Nonperforming assets (2) 4.2% 3.8% 3.3%
Total loans 30 days or more
delinquent 7.2 7.4 7.1
Net charge-offs - Mortgage Loans
Amount $ 25,273 $ 19,953 $ 14,172
As a percentage of average
receivables (annualized) .6% .5% .5%
Net charge-offs - Auto Loans $ 13,570 $ 10,212 $ 4,903
As a percentage of average
receivables (annualized) 7.9% 7.3% 5.5%
LEASES AND BUSINESS CARDS - MANAGED
Nonperforming assets (2) $ 28,057 $ 26,782 $ 21,123
Impaired assets 28,063 26,817 21,195
Total loans 30 days or more
delinquent 82,550 81,675 68,502
As a percentage of receivables:
Nonperforming assets (2) 2.0% 2.1% 1.8%
Impaired assets 2.0 2.1 1.8
Total loans 30 days or more
delinquent 5.8 6.5 5.7
Net charge-offs - Leases
Amount $ 11,532 $ 15,074 $ 10,954
As a percentage of average
receivables (annualized) 2.6% 2.7% 2.7%
Net Charge-offs - Business Cards
Amount $ 32,959 $ 18,928 $ 11,783
As a percentage of average
receivables (annualized) 6.0% 3.9% 3.4%
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage, auto and credit cards and
leases past due 90 days or more; real estate owned; and bankrupt,
decedent and fraudulent credit cards.
<PAGE>
Sept. 30, Dec. 31, Sept. 30,
Consolidated-Owned(1) 1998 1997 1997
Allowance for credit losses $ 19,153 $137,773 $126,611
Nonperforming assets (2) 38,561 51,149 37,079
Accruing loans past due
90 days or more 36 49,458 37,116
Impaired assets 38,597 100,607 74,195
Total loans 30 days or more
delinquent 60,928 201,891 159,244
As a percentage of gross receivables:
Allowance for credit losses 2.2% 4.1% 4.8%
Nonperforming assets (2) 4.4 1.5 1.4
Accruing loans past due 90 days
or more .0 1.5 1.4
Impaired assets 4.4 3.0 2.8
Total loans 30 days or more
delinquent 7.0 5.9 5.9
Net charge-offs:
Amount $47,310 $151,222 $116,471
As a percentage of average gross
receivables (annualized) 4.1% 5.6% 5.9%
ADVANTA MORTGAGE LOANS - OWNED
Allowance for credit losses $ 6,235 $ 5,822 $ 5,554
Nonperforming assets (2) 30,858 23,234 11,279
Total loans 30 days or more
delinquent 42,267 42,916 33,862
As a percentage of gross receivables:
Allowance for credit losses 1.1% 1.2% .1%
Nonperforming assets (2) 5.4 4.9 1.9
Total loans 30 days or more
delinquent 7.4 9.0 5.8
Net charge-offs - Mortgage:
Amount $ 2,469 $ 2,310 $ 1,750
As a percentage of average gross
receivables (annualized) .5% .4% .5%
Net charge-offs - Auto:
Amount $ 5,697 $ 3,524 $ 1,692
As a percentage of average gross
receivables (annualized) 15.8% 5.8% 4.5%
LEASES AND BUSINESS CARDS - OWNED
Allowance for credit losses $ 9,184 $ 9,798 $ 10,741
Nonperforming assets (2) 7,387 6,705 6,496
Impaired assets 7,393 6,740 6,568
Total loans 30 days or more
delinquent 18,048 17,799 17,416
As a percentage of receivables:
Allowance for credit losses 3.3% 3.3% 2.8%
Nonperforming assets (2) 2.6 2.2 1.7
Impaired assets 2.6 2.3 1.7
Total loans 30 days or more
delinquent 6.4 6.0 4.5
Net charge-offs - Leases:
Amount $ 3,030 $ 2,170 $ 1,804
As a percentage of average
receivables( annualized) 2.9% 1.5% 1.7%
Net charge-offs - Business Cards:
Amount $ 7,836 $ 6,198 $ 3,990
As a percentage of average gross
receivables (annualized) 7.1% 3.3% 3.0%
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage, auto and credit cards and
leases past due 90 days or more; real estate owned; and bankrupt,
decedent and fraudulent credit cards.
<PAGE>
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 Fleet 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.
<PAGE>
Expense Associated With Exited Business/Products
In connection with the Company's restructuring efforts to reduce
expenses associated with business and product offerings which are not
directly associated with its mortgage and business services units,
management approved exit and disposition plans during the 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 nine months of 1998, the
Company, through its subsidiaries, securitized approximately $3.7
billion of Advanta Mortgage loans and $.4 billion of business card
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 card and lease receivable growth. At
September 30, 1998, the Company had approximately $.8 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 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.
After paying down approximately $170 million in long-term debt, the
Company closed the third quarter of 1998 with unrestricted cash, cash
equivalents and marketable securities of approximately $400 million at
the Parent company level and $485 million at the Company's two banks
and equity, including capital securities, was approximately $667
million. Beginning in the fourth quarter of this year, the Company
will increase the use of on balance sheet funding over time and
decrease its degree of reliance on securitizations structured as
sales. This will include greater use of deposit funding through the
Company's two banks and the use of other funding sources which are
accounted for as debt.
Advanta Mortgage Corp. USA and its subsidiaries and ANB are parties to
secured credit facilities. These warehouse lines and Commercial Paper
conduit facilities had $721 million available at September 30, 1998.
In addition, Advanta Business Services and its subsidiaries are
parties to Commercial Paper conduit facilities. These facilities had
$160 million available at September 30, 1998.
<PAGE>
As of September 30, 1998 ANB's total deposits were $1.13 billion after
a significant portion of its deposits were contributed to the LLC in
the first quarter of this year in connection with the Fleet
Transaction, and ABC, a Utah state-chartered, FDIC-insured industrial
loan corporation had total deposits of $153.1 million. Total deposits
increased approximately $400 million and $13 million for ANB and ABC,
respectively, from June 30, 1998.
ANB's combined Tier I and Tier II capital ratio at September 30, 1998
was 12.29%. At December 31, 1997, the combined Tier I and Tier II
capital ratio was 16.39% for ANB. ABC's combined Tier I and Tier II
capital ratios were 20.79% and 17.99% at September 30, 1998 and
December 31, 1997, respectively. In each case, ANB and ABC met the
requirements of the Office of the Comptroller of the Currency and FDIC,
respectively, 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; $7.4 million of Bank Notes that were not tendered remain
outstanding.
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. In August 1998, ANB sold approximately $257
million of these securities.
During the third quarter of 1998, the Board of Directors authorized
the repurchase of shares of the Company's Class A and Class B common
stock and the formation of an Employee Stock Ownership Plan ("ESOP").
Up to 2.5 million shares of the Company's Class A and Class B common
stock will be purchased in connection with the stock repurchase
program and the ESOP.
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
<PAGE>
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 15 to Consolidated Condensed Financial
Statements). The Company estimates that its net interest income over a
twelve month period would approximately increase or decrease by 1.0%,
respectively, if interest rates were to rise or fall by 200 basis
points. Both increasing and decreasing rate scenarios assume an
instantaneous shift in rates and measure the corresponding change in
expected net interest income over one year.
The above estimates of net interest income sensitivity alone do not
provide a comprehensive view of the Company's exposure to interest
rate risk. The quantitative risk information is limited by the
parameters and assumptions utilized in generating the results. Such
analyses are useful only when viewed within the context of the
parameters and assumptions used. The above rate scenarios in no way
reflect management's expectation regarding the future direction of
interest rates, and they depict only two possibilities out of a large
set of possible scenarios.
In addition to interest rate risk, the Company has other financial
instruments, namely capitalized servicing rights and interest-only
strips, that are subject to prepayment risk. Prepayments are principal
payments received 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 more relevant 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 2.9% CPR for fixed
rate loans and 3.6% CPR for variable rate loans. These changes in
prepayment assumptions could result in a $26 million change in fair
value. In addition, changes in the interest rate environment generally
affect the level of loan originations. Prepayment assumptions are not
the only assumptions in the fair value calculation, but they are the
most influential. Other key assumptions are not directly impacted by
market forces as defined earlier. The above prepayment scenarios do
not reflect management's expectation regarding the 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 Company
estimates that the value of these securities would not materially
change assuming a 10% change in market-based investment yields.
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.
<PAGE>
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 September 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 September 30, 1998 and December 31, 1997
($ in thousands):
Estimated
Fair Value
Sept. 30,
Sept. 30, Dec. 31, 1998 Asset/
1998 1997 (Liability)
Interest rate swaps $2,046,971 $2,111,711 $ (208)
Interest rate options:
Caps written 298,052 1,018,781 (76)
Caps purchased 298,052 328,781 76
Forward contracts 1,311,000 400,437 (6,511)
$3,954,075 $3,859,710 $(6,719)
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 Readiness Disclosure
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 on or after the Year 2000. The "Year 2000 Issue" affects
computer and information technology ("IT") systems, as well as non-IT
systems which include embedded technology such as micro-processors and
micro-controllers (or micro-chips) that have date sensitive programs
that may not properly recognize the year 2000 or beyond. If the
systems and products used by the Company are not properly equipped to
identify and recognize the year 2000, the Company's IT systems and non-
IT systems could fail or create erroneous results. This could cause
the Company to experience a temporary inability to process
transactions, originate loans or leases, service the loans of third
parties and engage in other normal business activities. Under these
circumstances, the Year 2000 Issue could have a material adverse
<PAGE>
effect on the Company's products, services, operations and financial
results.
In connection with the Year 2000 Issue, the Company has organized a
separate Year 2000 Project Office (the "Project Office") managed by a
team led by a senior information technology manager to assess whether
the computer systems and applications used by the Company are Year
2000 compliant and to implement appropriate responses in the event any
of such systems and applications are not compliant. The Project Office
has developed standards for its work based on work of leading
authorities in the field. The Project Office reports to the Company's
Year 2000 Steering Committee which consists of the head of each of the
Company's business units, the corporate General Counsel, the corporate
Senior Vice President of Administration and other key members of
corporate senior management. In addition, the Company's internal
Audit Department has assigned a senior information technology auditor
to monitor all Year 2000 issues and developments for the Audit
Committee of the Company's Board of Directors. The Company has also
engaged independent consultants to assist in the verification and
validation processes to assure the reliability of the Company's risk
and cost estimates.
The Company is proceeding to implement a Year 2000 compliance program
in accordance with applicable guidelines and regulations of the
Federal Financial Institutions Examination Council ("FFIEC") as
adopted by the Office of the Comptroller of the Currency ("OCC") and
the Federal Deposit Insurance Corporation ("FDIC"). The Company's
compliance program consists of the following phases:
Awareness Define the scope of the Year 2000 problem.
Establish a Year 2000 project team. Develop an
overall strategy to address the Year 2000
problem. Identify all IT and non-IT systems
that may be affected by the Year 2000 Issue.
Assessment Assess the size and complexity of the Year 2000
Issue. Evaluate whether IT and non-IT systems
are Year 2000 compliant. Identify and
prioritize "mission-critical" systems.
Renovation Remediate or replace systems that are not Year
2000 compliant.
Validation Testing of systems to validate that they are
Year 2000 compliant.
Contingency Develop options in the event that any or
Planning all of the IT and non-IT systems fail or cannot
be made Year 2000 compliant.
Implementation Certify that systems are Year 2000 compliant.
Implement contingency plans for any non-
compliant system.
The Company has completed the Awareness and Assessment phases, and is
currently in the Renovation, Validation and Contingency Planning
phases of its Year 2000 compliance program with respect to both IT and
non-IT systems. Each of the Company's business units has completed
the evaluation of its systems, applications and vendor lists,
including identifying and prioritizing "mission-critical" systems, and
is implementing project plans to modify existing computer programs,
convert to new programs or replace systems to the extent necessary to
address the Year 2000 Issue. The Company is also providing customer
awareness training for customer-centered employees which will equip
them to respond to customer inquiries about the Company's Year 2000
readiness. The Company expects that testing of its
internal mission-critical systems and the development of contingency
plans will be substantially complete by the end of 1998.
The Company has identified its significant business relationships,
including without limitation vendors, customers and asset management
and funding counterparties, to assess the potential impact on the
Company's operations if those third parties and/or their products or
systems fail to become Year 2000 compliant in a timely manner.
The Company is mailing questionnaires to third parties with which
it maintains a significant business relationship to help identify
which of those third parties and/or their products or systems will not
be Year 2000 compliant. In addition, the Company reviews Internet
websites to monitor and assess the level of Year 2000 compliance of
vendors, suppliers and other third parties. Risk assessments, action
steps and contingency plans related to significant third party
relationships are expected to be complete within the time frames
established by the FFIEC guidelines as
<PAGE>
adopted by the OCC and FDIC. Non-compliant products are being
evaluated for remediation, replacement or retirement. To date, the
Company is not aware of any material third party business
relationship, product or system with a Year 2000 problem that management
believes would have a material adverse effect on the Company. However,
there can be no assurance that the systems and products 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's Year 2000 compliance program also includes the
development of contingency plans for each of the Company's business
units in the event that remediation or replacement plans are not
successfully implemented. The contingency plans are designed to
protect its business and operations from business interruptions
related to the Year 2000 Issue and, by way of example, may include
back-up procedures or the identification of alternative suppliers,
where practical. Each of the Company's business units is in the
process of developing its contingency plans. Many of the functions
performed by the products and systems used by the Company, which operate
automatically, can be performed manually. Consequently, in the event
these products or systems experience isolated failures as a result of the
Year 2000 problem, the disruption caused by such isolated failures should not
have a material adverse effect on the Company. There can be no
assurances, however, that any of the Company's contingency plans will
be sufficient to anticipate or address all of the problems or issues
that may arise.
The Company has established a budget of approximately $9.4 million in
1998, and $11.5 million in 1999, including capital expenditures, to address
the Year 2000 Issue. This budget includes approximately $2.8 million
and $2.5 million for 1998 and 1999, respectively, to cover the costs
associated with diverted personnel. Of the total budget, the Company
has allocated approximately $1.0 million in 1998 and $8.5 million in 1999
for contingencies. Based on current information, the Company believes
that the budget will be sufficient to cover its expenditures associated
with the Year 2000 Issue. As of September 30, 1998, exclusive of costs
associated with diverted personnel, the Company has spent approximately
$2.5 million in operating expenses and approximately $550,000 in capital
expenditures. Funding for the project is being provided out of
operating revenues. 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. Therefore, except for the cost of replacement
systems or other items that have a future use, the Company will expense
the cost of the Year 2000 project as incurred. The Company has deferred
development on selected business systems due to Year 2000 priorities.
These deferrals are not expected to have a material effect on the financial
condition and results of operations of the Company.
The Company believes that the Year 2000 Issue will not pose
significant operational problems for it and will not have a material
adverse effect on its future financial condition, liquidity or results
of operations during 1998 and in future periods. The projected costs and
expenditures and project completion dates are based on management's best
estimates, are subject to the performance of third parties over which the
Company has no control and may be updated from time to time as additional
information becomes available. This section discussing Year 2000
issues contains forward-looking statements. See "Overview".
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 30, 1997, purported shareholders of the Company who are
represented by a group of law firms filed a putative class action
complaint against the Company and several of its current and former
officers and directors in the United States District Court for the
Eastern District of Pennsylvania. A second, similar complaint was
filed in the same court a few days later by a different group of 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. The plaintiffs determined not to
attempt to amend their Complaints. Rather, they have appealed the
District Court's decision to the United States Court of Appeals for
the Third Circuit. The Company believes that the District Court's
ruling will be affirmed and that the complaints are without merit.
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 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. 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. On
September 3, 1998, a tag-along action was filed in the United States
District Court for the Eastern District of Tennessee. Effective
October 30, 1998, the tag-along action was consolidated into the
consolidated multidistrict proceeding. On November 5, 1998, the Company
and counsel for plaintiffs in two of the actions pending in the Superior
Court of the State of Delaware entered into a Settlement Agreement and
Stipulation in the Delaware State Court to settle the claims relating to
the specific program referred to above. Pursuant to the Settlement Agreement
and Stipulation, which is subject to Court approval, the Company will
pay $7.25 million to the plaintiffs. With the exception of persons who
opt-out of the settlement, once the Court grants final approval of the
settlement and that approval becomes effective, all the claims in the other
lawsuits relating to the specific program referred to above will be released.
While management believes the allegations are without merit, the Company
recognizes the risk of continued litigation and the additional expenditure
of time, energy and resources and that further defense of the actions
would be potentially protracted and expensive and that settlement
is desirable.
<PAGE>
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. 2, dated as of September 10, 1998, to the
Rights Agreement dated as of March 14, 1997, as amended,
by and between the Company and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent (incorporated by
reference to Exhibit 1 to the Company's Amended
Registration on Form 8-A/A, dated September 23, 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
October 27, 1998 filed the same date.
(b) Reports on Form 8-K.
(b)(1) A Current Report on Form 8-K, dated October 27,
1998 was filed by the Company setting forth the
financial highlights of the Company's results of
operations for the period ending September 30, 1998.
(2) A Current Report on Form 8-K, dated August 27, 1998
was filed by the Company relating to the announcement by
the Company of a stock repurchase program.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereto duly authorized.
Advanta Corp.
(Registrant)
November 15, 1998 By /s/Philip M. Browne
Senior Vice President and
Chief Financial Officer
November 15, 1998 By /s/John J. Calamari
Vice President, Finance and
Principal Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit Description
2 Inapplicable
3 Inapplicable
4 Amendment No. 2, dated as of September 10, 1998, to the
Rights Agreement dated as of March 14, 1997, as amended, by
and between the Company and ChaseMellon Shareholder
Services, L.L.C. as Rights Agent (incorporated by reference
to Exhibit 1 to the Company's Amended Registration on Form 8-
A/A, dated September 23, 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
<PAGE>
<PAGE> 1
Exhibit 12
ADVANTA CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
1998 1997 1998 1997
Net Earnings $ 15,025 $ 42,412 $443,282 $28,013
Federal and state income
taxes 6,439 14,748 (11,013) 9,741
Earnings before income
taxes 21,464 57,160 432,269 37,754
Fixed charges:
Interest 39,165 88,414 142,936 239,673
One-third of all rentals 583 746 2,006 2,572
Preferred stock dividend
of subsidiary trust 2,248 2,248 6,743 6,743
Total fixed charges 41,996 91,408 151,685 248,988
Earnings before income taxes
and fixed charges $63,460 $148,568 583,954 286,742
Ratio of earnings to fixed
charges (A) 1.51x 1.63x 3.85x 1.15x
(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.
<PAGE>
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