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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 27, 1999
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Advanta Corp.
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(Exact name of registrant as specified in its charter)
Delaware 0-14120 23-1462070
- ---------------------------- ---------------- ------------------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 657-4000
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Item 5. Other Events
On July 27, 1999 Advanta Corp. (the "Company" or "Advanta") reported net income
for the second quarter of 1999 of $12.3 million, or $0.49 per share on a diluted
basis for its Class A and Class B shares combined. This net income reflects the
Company's previously announced plan to report income for its mortgage business
that is essentially equal to that of a portfolio lender. The improvement in net
income from the net operating income of $10.2 million, or $0.40 per share,
reported last quarter resulted primarily from continued decreases in operating
expenses at the Company's mortgage and leasing businesses and improved yields in
the business credit card portfolio.
Reported results this quarter included additional pretax gains of $9.3 million
predominantly associated with the previously announced sale by Advanta Partners
of its interest in JDR Holdings. Also impacting results was a reduction in the
Company's Interest Only Strip ("IO Strip") of approximately $10 million which
strengthened the balance sheet.
This quarter, Advanta continued its previously discussed initiatives to increase
profits, and optimize cash flow and returns on invested capital. In addition,
the Company began implementing a new automated sales and underwriting system at
its mortgage business, began pilot testing a new origination and automated
decisioning system to take business credit card applications over the Internet,
and took significant steps to refine processes at Advanta Leasing resulting in
cost efficiencies. Highlights on the Company's operations this quarter follow.
COMPANY ACHIEVES LOWER EXPENSE RATIO
- ------------------------------------
The Company's vigorous implementation of cost reduction measures continues to
yield benefits. Advanta's operating expense ratio for the quarter of 3.25% was
lower than the 3.47% reported in the first quarter of this year and
significantly lower than the 3.90% in the fourth quarter of 1998. Total pretax
operating expenses for the quarter were $82.2 million, approximately 4.9% below
operating expenses of $86.4 million reported last quarter and 11.0% below
operating expenses of $92.4 million reported in the fourth quarter of 1998.
Total managed receivables for the Company's businesses at the end of this
quarter were $10.06 billion, an increase of 1.2% from $9.95 billion at March 31,
1999 and an increase of 25.2% from $8.04 billion at June 30, 1998.
ADVANTA MORTGAGE - LOWER EXPENSES FUEL PROFIT GROWTH
- ----------------------------------------------------
Advanta Mortgage reported pro forma net income from operations of $7.6 million
for this quarter on a basis that is essentially the same as a portfolio lender.
This compares to net income of $5.8 million reported by this business in the
first quarter of 1999 and net income of $2.5 million reported by this business
in the fourth quarter of 1998. The
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increase in net income this quarter was primarily due to lower operating
expenses and higher servicing revenues.
Advanta Mortgage's net income of $1.5 million reported this quarter is
approximately $6.1 million less than a portfolio lender would have reported
because it includes a $10.0 million decrease, before taxes, in the Company's IO
Strip which reduced earnings and strengthened the Company's balance sheet. In
addition, the Company's IO Strip decreased by $21 million as a result of hedging
activities which had no impact on current earnings. The IO Strip and CMSR at
June 30,1999 were $247.1 million compared to $271.9 million reported at the end
of last quarter and $283.5 million reported at December 31, 1998.
Advanta Mortgage maintained the lending margin improvements that were
accomplished last quarter and continued its focus on originating loans from its
direct to consumer and broker channels. The weighted average yield of mortgage
loans originated by the Company's direct to consumer channels this quarter was
12.41% compared to 12.13% last quarter. In addition to benefiting from higher
yields on newly originated loans, the Company's overall portfolio yields are
increasing as loans originated from direct channels, which typically have better
yields, make up a larger portion of the total portfolio. Originations from the
direct to consumer channels represented 56.1% of total originations this quarter
compared to 56.3% in the prior quarter and 30.6% in the second quarter of 1998.
Loans originated through direct to consumer channels represented approximately
37.1% of the total portfolio at June 30, 1999 compared to 28.9% at the same time
last year and 34.6% at the end of the first quarter of this year.
Mortgage loan originations of $727.7 million were slightly higher than
originations of $716.5 million last quarter. Originations from direct to
consumer channels of $407.9 million were relatively flat compared to
originations of $403.2 million in the first quarter, while originations from
brokers increased by 39.3% from the prior quarter. Wholesale originations by the
Company's Conduit and Corporate Finance channels decreased reflecting the
Company's willingness to reduce volume levels in order to purchase loans with
appropriate profitability characteristics.
Advanta Mortgage's sub-serviced portfolio increased to $9.4 billion at the end
of this quarter from $8.9 billion at the end of last quarter.
Credit quality trends remain consistent with the Company's experience. However,
due to the increase in the average age of the portfolio from 14 months at the
end of the prior quarter to 17 months at June 30, 1999, the Company experienced
increases in charge-off and delinquency rates. This seasoning of the Company's
portfolio is associated with slower portfolio growth. The net managed charge-off
rate for home equity loans was 0.66% this quarter compared to 0.51% reported
last quarter and the over 30 day delinquency rate was 8.54% compared to 8.00%
reported last quarter.
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ADVANTA BUSINESS CARDS REPORTS HIGHER YIELDS
- --------------------------------------------
Advanta Business Cards reported net income of $5.6 million this quarter compared
to $4.0 million last quarter. The increase resulted from significant
improvements in portfolio yields. The average yield on the Company's business
credit card portfolio, including fee income, increased this quarter to 21.72%
from 20.36% last quarter due to increases in rates and higher fee income. A
decrease in the net managed charge-off rate on business credit card loans from
5.61% last quarter to 5.22% this quarter also contributed to the increase in net
income. Managed receivables for Advanta Business Cards at the end of the quarter
were $886 million, up 6.5% from last quarter and 16.4% from the same quarter
last year.
ADVANTA LEASING SERVICES - EXPENSE REDUCTION LEADS TO HIGHER PROFITS
- --------------------------------------------------------------------
Advanta Leasing Services reported net income of $1.5 million this quarter, a
significant increase from net income of $0.8 million that was reported last
quarter. The increase in net income was caused primarily by a decrease in
operating expenses resulting from the Company's ongoing program to improve
processes at the leasing business and from expense reduction measures that were
implemented toward the end of the first quarter. Operating expenses decreased
from $8.81 million last quarter to $7.47 million this quarter. The Company
originated $113.4 million in lease receivables this quarter and closed the
quarter with a managed portfolio of leases of $744 million. This represents an
increase of 6.1% from managed lease receivables of $701 million last quarter.
Over 30-day delinquencies improved considerably this quarter to 7.33% from 8.38%
last quarter. The net managed charge-off rate for Advanta Leasing Services of
3.23% this quarter was slightly higher than the 2.94% reported last quarter.
ADVANTA REPORTS CONTINUED POSITIVE OPERATING CASH FLOW
- ------------------------------------------------------
Advanta had positive operating cash flow of approximately $26.8 million this
quarter after considering key non-cash income and expense items and the cash
impact of loan originations. This positive cash flow is largely attributable to
increases in operating income and the proportion of mortgage loans originated
from direct channels. This quarter, origination fees collected by the Company
exceeded premiums and broker fees paid by approximately $13.5 million. This
positive cash flow was offset by a net investment in subordinated trust assets
of $37.9 million. This investment is consistent with the structure of the
Company's securitizations and results primarily from the growth in the Company's
managed receivables during 1998.
The Company's use of deposit funding at its two FDIC-insured banks for its
lending activities continues to bolster liquidity at the parent and at the
Company's banks. After paying down approximately $47 million of Medium Term
Notes and other parent debt this quarter, the Company had approximately $437
million in unrestricted cash and equivalents at the parent compared to $429
million at March 31, 1999. At the end of the quarter, the Company had
approximately $934 million of unrestricted cash and
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equivalents at its two banks. In addition, the Company had financed, with parent
and bank funds, loan receivables on its books totaling $1.1 billion and had
available approximately $1.4 billion in unused warehouse lines and Commercial
Paper conduit facilities.
Advanta is a highly focused financial services company with over 2,400
employees, approximately $12.4 billion in managed assets and approximately $9.4
billion in assets serviced for third parties. Advanta provides consumers and
small businesses with innovative products and services including mortgages,
equipment leases, business credit cards, insurance and deposit products. The
Company also provides a full range of loan purchasing, contract servicing and
securitization services to the mortgage industry.
This Current Report on Form 8-K contains forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. The most significant among these risks
and uncertainties are: (1) factors that affect consumer debt; (2) competitive
pressures; (3) the level of delinquencies and charge-offs; (4) the rate of
prepayments; (5) the level of expenses; (6) the timing of the securitizations of
the Company's receivables; and (7) the ratings on the debt of the Company and
its subsidiaries. Additional risks that may affect the Company's future
performance are detailed in the Company's filings with the Securities and
Exchange Commission, including its most recent Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q.
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Form 8-K Advanta Corp.
July 27, 1999
Item 7. Financial Statements and Exhibits.
----------------------------------
(c) Exhibits:
The following exhibits are filed as part of this Report on Form 8-K.
99 Selected Summary Financial Data.
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Form 8-K Advanta Corp.
July 27, 1999
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Advanta Corp.
By: /s/ Elizabeth H. Mai
----------------------------------------
Elizabeth H. Mai, Senior Vice President,
Secretary and General Counsel
July 27, 1999
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Form 8-K Advanta Corp.
July 27, 1999
Index to Exhibits
-----------------
Exhibit Number Per
Item 60l of
Regulation S-K Description of Document
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99 Selected Summary Financial Data
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Exhibit 99
ADVANTA CORP.
HIGHLIGHTS
SUPPLEMENTAL CONSOLIDATING INCOME STATEMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
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ADVANTA ADVANTA
ADVANTA LEASING BUSINESS
MORTGAGE SERVICES CARDS OTHER (a) TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES:
Gain on sale of receivables $ 28,416 $ 4,942 $ 7,758 $ $ 41,116
Interest income 30,534 2,725 7,785 18,157 59,201
Servicing revenues 25,001 1,526 3,522 30,049
Other 861 4,489 8,528 11,306 25,184
-------- -------- -------- -------- --------
Total revenues 84,812 13,682 27,593 29,463 155,550
-------- -------- -------- -------- --------
EXPENSES:
Operating expenses 56,133 7,465 11,148 7,433 82,179
Interest expense 21,820 2,689 2,851 15,957 43,317
Provision for credit losses 2,364 908 4,135 7,407
Minority int. in inc. of consolidated sub 1,865 155 200 2,220
-------- -------- -------- -------- --------
Total expenses 82,182 11,217 18,334 23,390 135,123
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,630 2,465 9,259 6,073 20,427
Income tax expense 1,122 979 3,694 2,320 8,115
-------- -------- -------- -------- --------
NET INCOME, AS REPORTED $ 1,508 $ 1,486 $ 5,565 $ 3,753 $ 12,312
======== ======== ======== ======== ========
PRO FORMA NET OPERATING INCOME, WITH
RESULTS OF ADVANTA MORTGAGE
REPORTED AS A PORTFOLIO LENDER $ 7,558 (b) $ 1,486 $ 5,565 $ (1,887)(c) $ 12,722
======== ======== ======== ======== ========
</TABLE>
(a) Other includes the insurance and venture capital divisions.
(b) Adjusted to reflect the after-tax effect on earnings of the decrease in
the Interest Only Strip.
(c) Adjusted to reflect the after-tax gain associated with the sale of an
Advanta Partners investment.
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ADVANTA CORP.
HIGHLIGHTS
RECONCILIATION TO PORTFOLIO LENDER EARNINGS FORMAT
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
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ADVANTA PROFORMA
ADVANTA MORTGAGE AS REMAINING
MORTGAGE AS PRO FORMA PORTFOLIO BUSINESSES PRO FORMA
REPORTED ADJUSTMENTS LENDER [f] CONSOLIDATED
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Gain on sale of receivables $ 28,416 $ (28,416)[a] $ $ 12,700 $ 12,700
Interest income 30,534 175,799 [b] 206,333 28,667 235,000
Servicing revenues 25,001 (8,846)[c] 16,155 5,048 21,203
Other 861 861 15,001 [f] 15,862
------- ------- -------- ------- --------
Total revenues 84,812 138,537 223,349 61,416 284,765
------- ------- -------- ------- --------
EXPENSES:
Operating expenses 56,133 1,883 [d] 58,016 26,046 84,062
Interest expense 21,820 114,970 [b] 136,790 21,497 158,287
Provision for credit losses 2,364 11,684 [e] 14,048 5,043 19,091
Minority interest in income of
consolidated subsidiary 1,865 1,865 355 2,220
Unusual charges
------- ------- -------- ------- --------
Total expenses 82,182 128,537 210,719 52,941 263,660
------- ------- -------- ------- --------
INCOME BEFORE INCOME TAXES 2,630 10,000 12,630 8,475 21,105
Pro forma income taxes 1,122 3,950 5,072 3,311 8,383
------- ------- -------- ------- --------
PRO FORMA NET INCOME $ 1,508 $ 6,050 $ 7,558 $ 5,164 $ 12,722
------- ------- -------- ------- --------
</TABLE>
FOOTNOTES FOR PRO FORMA ADJUSTMENTS:
[a] Represents the reclassification of net gains recognized on the sale of
mortgage loans for the period.
[b] Represents the adjustment to interest income and interest expense as if
the securitized mortgage loans were still owned by the Company and
remained on the balance sheet for the period presented.
[c] Represents the reclassification of servicing revenues on securitized
mortgage loans for the period presented.
[d] Represents the reclassification of securitization costs incurred by the
Company.
[e] Represents the amount by which the provision for credit losses would
have increased had the securitized mortgage loans remained on the
balance sheet and the provision for credit losses on securitized
receivables been equal to actual reported charge-offs.
[f] Adjusted to exclude the gain associated with the sale of an Advanta
Partners investment.
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ADVANTA CORP.
HIGHLIGHTS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
PERCENT CHANGE
JUNE 30, MARCH 31, JUNE 30, FROM
ORIGINATIONS 1999 1999 1998 PRIOR QUARTER
- ------------ -------- --------- -------- --------------
<S> <C> <C> <C> <C>
Direct $ 407,880 $ 403,204 $ 382,242 1.2%
Broker 152,533 109,538 106,188 39.3
Conduit 153,575 181,835 376,145 -15.5
Corp. Finance 13,701 16,773 324,484 -18.3
Auto 0 5,103 58,356 -100.0
----------- ----------- -----------
Total Advanta Mortgage loans $ 727,689 $ 716,453 $ 1,247,415 1.6
Leases $ 113,384 $ 109,836 $74,352 3.2%
Business cards 471,239 400,428 348,222 17.7
SECURITIZATION/SALES VOLUME
- ---------------------------
Advanta Mortgage $ 635,896 $ 634,147 $ 1,215,097 0.3%
Leases 105,909 95,574 72,636 10.8
Business cards 0 24,248 62,790 -100.0
----------- ----------- -----------
Total securitization/sales volume $ 741,805 $ 753,969 $ 1,350,523 -1.6
AVERAGE MANAGED RECEIVABLES
- ---------------------------
Mortgage loans $ 8,263,300 $ 8,114,144 $ 6,021,777 1.8%
Auto loans 140,560 198,321 220,477 -29.1
Leases 693,921 671,118 601,283 3.4
Business cards 866,732 822,852 739,654 5.3
Other loans 17,019 17,820 14,784 -4.5
----------- ----------- -----------
Total average managed receivables 9,981,532 9,824,255 $ 7,597,975 1.6
Total average serviced receivables $19,182,200 $18,404,342 $15,898,544 4.2
----------- ----------- -----------
ENDING MANAGED RECEIVABLES
- --------------------------
Mortgage loans $ 8,293,166 $ 8,212,797 $ 6,394,835 1.0%
Auto loans 122,836 185,621 251,166 -33.8
Leases 744,121 701,178 615,740 6.1
Business cards 886,237 832,086 761,576 6.5
Other loans 17,187 17,093 17,649 0.5
----------- ----------- -----------
Total managed receivables $10,063,547 $ 9,948,775 $ 8,040,966 1.2
Total serviced receivables $19,503,442 $18,859,606 $16,213,193 3.4
IO AND CMSR ROLLFORWARD
- -----------------------
Beginning Balance (A) $ 271,876 $ 283,521
Retained IO on sales, net 38,529 31,297
Hedge impact (20,819) (3,614)
Write-down related to auto loans 0 (7,828)
Transaction expenses 2,507 1,472
Interest income 7,970 11,118
Additional reserves (10,000)
Cash received (42,966) (43,217)
Other, net (26) (873)
----------- -----------
Ending balance 247,071 271,876
</TABLE>
(A) Includes reclassification of amounts due from Trustee
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ADVANTA CORP.
HIGHLIGHTS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
PERCENT CHANGE
JUNE 30, MAR. 31, JUNE 30, FROM
1999 1999 1998 PRIOR QUARTER
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
EARNINGS
- --------
As a % of average managed receivables:
Operating expenses 3.25% 3.47% 3.73% -6.3%
Charge-offs 1.46 1.36 1.49 7.4
Earnings per common share $ 0.49 $ 0.25 $ 0.35 96.0
Diluted earnings per share 0.49 0.25 0.35 96.0
Return on average common equity 8.94% 4.54% 6.37% 96.9
COMMON STOCK DATA
- -----------------
Weighted average common shares
Used to compute:
Earnings per common share 23,163 23,087 24,523 0.3%
Diluted earnings per share 23,373 23,178 24,702 0.8
Ending shares outstanding 25,445 25,310 25,368 0.5%
Stock price:
Class A
High $18.250 $15.188 $26.250 20.2%
Low 9.625 10.313 19.250 -6.7
Closing 18.063 11.063 21.938 63.3
Class B
High $14.750 $12.313 $24.250 19.8%
Low 7.594 7.750 17.500 -2.0
Closing 13.563 8.938 19.875 51.7
Cash dividends declared
Class A $ 0.063 $ 0.063 $ 0.063 0.0%
Class B 0.076 0.076 0.076 0.0
Book value per common share (A) $ 22.51 $ 22.41 $ 21.26 0.4%
</TABLE>
(A) Assumes conversion of the Class B Preferred Stock.
-Statistical Supplement Available Upon Request-
