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| ADVNA > SEC Filings for ADVNA > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
"Advanta", "we", "us", and "our" refer to Advanta Corp. and its subsidiaries,
unless the context otherwise requires.
OVERVIEW
Income from continuing operations includes the following business segment
results:
Three Months Ended Six Months Ended
($ in thousands, except per share data) June 30, June 30,
2008 2007 2008 2007
Pretax income:
Advanta Business Cards $ 7,474 $ 35,824 $ 18,257 $ 70,635
Other(1) 2 821 18,909 1,286
Total pretax income 7,476 36,645 37,166 71,921
Income tax expense 3,461 13,933 14,789 27,761
Income from continuing operations $ 4,015 $ 22,712 $ 22,377 $ 44,160
Per combined common share, assuming dilution $ 0.10 $ 0.51 $ 0.53 $ 0.99
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(1) The six months ended June 30, 2008 include a $13.4 million gain on the redemption of Visa Inc. shares and the benefit of a $5.5 million decrease in Visa indemnification reserves.
Our Advanta Business Cards segment issues (through Advanta Bank Corp.) business
purpose credit cards to small businesses and business professionals in the
United States. Our business credit card accounts provide approved customers with
unsecured revolving business credit lines. The decreases in Advanta Business
Cards pretax income for the three and six months ended June 30, 2008 as compared
to the same periods of 2007 reflect the challenging economic environment and are
due primarily to increases in net principal charge-off and delinquency rates on
owned and securitized receivables and increases in operating expenses, partially
offset by higher interest yields on owned and securitized receivables, lower
off-balance sheet cost of funds rates, higher average securitized receivables
and gains on sales of MasterCard Incorporated shares. Despite our focus on high
credit quality customers, we had higher delinquency and net principal charge-off
rates in the three and six months ended June 30, 2008 as compared to the same
periods of 2007 due primarily to deterioration in the U.S. economy and, to a
lesser extent, continued seasoning of the portfolio, and as a result, we had
higher provisions for credit losses and lower securitization income. Based on
the current economic environment, we expect these negative trends to continue to
affect our provision for credit losses, securitization income and results of
operations in future periods. Additionally, further deterioration in the U.S.
economy could worsen these trends. The average yields earned on business credit
card receivables increased due to our pricing and marketing strategies, the
expiration of introductory pricing periods on many accounts originated in prior
periods, and the lower level of new account originations. The average floating
interest rates earned by securitization noteholders have decreased due to
decreases in short-term market interest rates. Operating expenses have increased
for the three and six months ended June 30, 2008 as compared to the same periods
of 2007 as we have implemented initiatives to manage risk exposures in the
current economic environment and to enhance our competitive position in the
small business market when the economy improves.
Pretax income for the six months ended June 30, 2008 includes a $13.4 million
gain on the redemption of Visa Inc. shares and the benefit of a $5.5 million
decrease in Visa indemnification reserves. See "Contingencies" section of
Management's
Discussion and Analysis of Financial Condition and Results of Operations for
further discussion.
There was no gain or loss on discontinuance of our mortgage or leasing
businesses for the three or six months ended June 30, 2008. For the three and
six months ended June 30, 2007, we recorded an after-tax gain on the
discontinuance of our mortgage and leasing businesses of $1.0 million, or $0.02
per combined diluted common share. See "Discontinued Operations" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion.
In June 2008, FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities. The
FSP concludes that unvested share-based payment awards that contain
nonforfeitable rights to dividends are participating securities under SFAS
No. 128, Earnings Per Share, and should be included in the computation of
earnings per share under the two-class method. The two-class method is an
earnings allocation formula that we currently use to determine earnings per
share for our Class A and Class B Common Stock according to dividends declared
and participation rights in undistributed earnings. The nonvested shares of
Class B Common Stock issued under our stock-based incentive plan are
participating securities with nonforfeitable rights to dividends. FSP
No. EITF 03-6-1 is effective for Advanta on January 1, 2009 and management is
currently evaluating the impact that the adoption will have on our reported
earnings per share. The adoption is not expected to have an impact on our
financial position or net income.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. We have identified accounting for allowance for receivable losses,
securitization income, rewards programs and income taxes as our most critical
accounting policies and estimates because they require management's most
difficult, subjective or complex judgments as a result of the need to make
estimates about the effect of matters that are inherently uncertain. Estimates
are inherently subjective and are susceptible to significant revision as more
information becomes available. Changes in estimates could have a material impact
on our financial position or results of operations. These accounting policies
and estimates are described in our Annual Report on Form 10-K for the year ended
December 31, 2007.
ADVANTA BUSINESS CARDS
Advanta Business Cards originates new accounts directly and through the use of
third parties. The following table provides key statistical information on our
business credit card portfolio. Credit quality statistics for the business
credit card portfolio are included in the "Provision and Allowance for
Receivable Losses" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2008 2007 2008 2007
Average owned receivables $ 1,164,748 $ 1,248,235 $ 1,081,939 $ 1,266,466
Average securitized receivables $ 5,063,349 $ 4,581,666 $ 5,206,692 $ 4,368,446
Customer transaction volume $ 3,471,711 $ 3,692,780 $ 6,909,824 $ 7,081,845
New account originations 26,269 102,937 93,363 199,718
Average number of active accounts(1) 939,700 894,610 947,042 871,781
Ending number of accounts at June 30 1,305,288 1,255,557 1,305,288 1,255,557
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(1) Active accounts are defined as accounts with a balance at month-end. Active account statistics do not include charged-off accounts. The statistics reported above are the average number of active accounts for the three and six months ended June 30.
In response to the current economic conditions, we reduced mail volume in direct
mail account acquisition campaigns in 2008 and as a result had fewer new account
originations for the three and six months ended June 30, 2008 as compared to the
same periods of 2007. Based on our currently planned marketing strategies and in
continued response to current economic conditions, we expect to originate
substantially fewer new accounts in 2008 as compared to 2007.
The components of pretax income for Advanta Business Cards are as follows:
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2008 2007 2008 2007
Net interest income on owned
interest-earning assets $ 25,399 $ 25,506 $ 43,217 $ 52,749
Noninterest revenues 93,983 90,737 190,184 175,063
Provision for credit losses (30,295 ) (11,806 ) (58,677 ) (21,889 )
Operating expenses (81,613 ) (68,613 ) (156,467 ) (135,288 )
Pretax income $ 7,474 $ 35,824 $ 18,257 $ 70,635
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Net interest income on owned interest-earning assets decreased $107 thousand for the three months ended June 30, 2008 as compared to the same period of 2007 and decreased $9.5 million for the six months ended June 30, 2008 as compared to the same period of 2007. The decreases were due primarily to decreases in average owned receivables and increases in interest expense, partially offset by increases in the average yields earned on receivables. Average owned business credit card receivables decreased $83 million for the three months ended June 30, 2008 and decreased $185 million for the six months ended June 30, 2008, both as compared to the same periods of 2007. The average yields earned on business credit card receivables increased due to our pricing and marketing strategies, the expiration of introductory pricing periods on many accounts originated in prior periods, and the lower level of new account originations. We have increased our liquidity in response to continued turmoil in the capital markets. Interest expense allocated to the Advanta Business Card segment increased for the three and six months ended
June 30, 2008 as compared to the same periods of 2007 due to the costs of
additional liquidity. In addition, net interest income in 2007 includes the
benefit of deposit insurance credit sale gains of $940 thousand in the three
months ended June 30, 2007 and $1.9 million in the six months ended June 30,
2007. For segment reporting purposes, these gains are included in the allocation
of interest expense to Advanta Business Cards.
Noninterest revenues include securitization income, servicing revenues,
interchange income and other revenues, and are reduced by rewards costs.
Noninterest revenues increased $3.2 million for the three months ended June 30,
2008 as compared to the same period of 2007 and increased $15.1 million for the
six months ended June 30, 2008 as compared to the same period of 2007. These
increases were due primarily to investment gains on sales of MasterCard
Incorporated shares of $14.2 million for the three months ended June 30, 2008
and $18.8 million for the six months ended June 30, 2008, higher merchandise
sales transaction volume that resulted in higher interchange income, and
increased volume of securitized receivables that resulted in higher servicing
fees. These increases were partially offset by lower securitization income and
higher rewards costs. Securitization income decreased for the three and six
months ended June 30, 2008 as compared to the same periods of 2007 due primarily
to increases in net principal charge-off and delinquency rates on securitized
receivables and increases in discount rates resulting from the credit market
environment, partially offset by increases in the average yields on securitized
receivables, decreases in the average floating interest rates earned by
noteholders due to decreases in short-term market interest rates, and growth in
average securitized receivables.
The increases in provision for credit losses for the three months and six months
ended June 30, 2008 as compared to the same periods of 2007 were due primarily
to increases in delinquency and net principal charge-off rate trends, partially
offset by a decrease in average owned business credit card receivables. The
increases in delinquency and net principal charge-off rates are the result of
deterioration in the U.S. economy and, to a lesser extent, continued seasoning
of the portfolio. See "Provision and Allowance for Receivable Losses" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for more detailed discussion and a table of credit quality data.
Operating expenses for the three and six months ended June 30, 2008 increased as
compared to the same periods of 2007 due primarily to expenses associated with
our initiatives to manage risk exposures in the current economic environment and
to enhance our competitive position in the small business market when the
economy improves. These activities included marketing, profitability and
receivable collection initiatives. In the first quarter of 2008, we decided to
move forward with offshoring certain business processes, which we expect will
result in significant operating expense savings related to those business
processes by the latter part of 2009. We expect costs from current and planned
marketing, profitability and collection initiatives, in combination with costs
associated with the implementation of offshoring and other outsourcing
activities, including severance and related costs associated with a reduction in
workforce, to result in higher operating expenses in the third and fourth
quarters of 2008 as compared to the second quarter of 2008 and the comparable
periods of 2007.
INTEREST INCOME AND EXPENSE
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2008 2007 2008 2007
Interest income $ 55,269 $ 47,558 $ 101,316 $ 95,913
Interest expense 30,037 23,633 58,181 46,195
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Total interest income increased $7.7 million for the three months ended June 30,
2008 as compared to the same period of 2007 and $5.4 million for the six months
ended June 30, 2008 as compared to the same period of 2007. The increases in
total interest income were due primarily to increases in the average yield
earned on our business credit card receivables, higher average balances of
investments and increases in yields earned on retained interests in
securitizations due to the credit market environment, partially offset by
decreases in average business credit card receivables and average yields earned
on our investments. The average yields earned on business credit card
receivables increased due to our pricing and marketing strategies, the
expiration of introductory pricing periods on many accounts originated in prior
periods, and the lower level of new account originations. We expect the average
yield earned on business credit card receivables to continue to increase in 2008
based on these same factors. The decreases in the average yields earned on our
investments were due to the interest rate environment.
Total interest expense increased $6.4 million for the three months ended
June 30, 2008 as compared to the same period of 2007 and increased $12.0 million
for the six months ended June 30, 2008 as compared to the same period of 2007.
The increases in total interest expense were due primarily to increases in our
average deposits outstanding, partially offset by decreases in the average cost
of funds on deposits resulting from the interest rate environment. Average
deposits increased $692 million for the three months ended June 30, 2008 and
$560 million for the six months ended June 30, 2008 as compared to the same
periods of 2007.
The following tables provide an analysis of interest income and expense data,
average balance sheet data, net interest spread and net interest margin. The net
interest spread represents the difference between the yield on interest-earning
assets and the average rate paid on interest-bearing liabilities. The net
interest margin represents net interest earnings divided by total
interest-earning assets. Interest income includes late fees on business credit
card receivables.
INTEREST RATE ANALYSIS AND AVERAGE BALANCES
Three Months Ended June 30,
2008 2007
Average Average Average Average
($ in thousands) Balance Interest Rate Balance Interest Rate
Interest-earning
assets:
Owned receivables:
Business credit
cards(1) $ 1,164,748 $ 37,662 13.01 % $ 1,248,235 $ 33,976 10.92 %
Other receivables 7,739 88 4.55 7,567 94 5.02
Total receivables 1,172,487 37,750 12.95 1,255,802 34,070 10.88
Investments(2) 1,361,904 7,956 2.31 665,063 8,812 5.25
Retained interests in
securitizations 217,629 9,565 17.58 228,231 4,679 8.20
Total interest-earning
assets(3) 2,752,020 $ 55,271 8.05 % 2,149,096 $ 47,561 8.85 %
Noninterest-earning
assets 463,773 302,064
Total assets $ 3,215,793 $ 2,451,160
Interest-bearing
liabilities:
Deposits $ 2,058,064 $ 23,600 4.61 % $ 1,365,927 $ 17,361 5.10 %
Debt 220,235 3,482 6.36 225,831 3,953 7.02
Subordinated debt
payable to preferred
securities trust 103,093 2,317 8.99 103,093 2,317 8.99
Other borrowings 26,543 638 9.51 110 2 5.27
Total interest-bearing
liabilities 2,407,935 $ 30,037 5.01 % 1,694,961 $ 23,633 5.59 %
Noninterest-bearing
liabilities 208,683 166,296
Total liabilities 2,616,618 1,861,257
Stockholders' equity 599,175 589,903
Total liabilities and
stockholders' equity $ 3,215,793 $ 2,451,160
Net interest spread 3.04 % 3.26 %
Net interest margin 3.69 % 4.47 %
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(1) Interest income includes late fees for owned business credit card receivables of $2.1 million for the three months ended June 30, 2008 and $2.3 million for the same period of 2007.
(2) Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and nonaccrual receivables.
Six Months Ended June 30,
2008 2007
Average Average Average Average
($ in thousands) Balance Interest Rate Balance Interest Rate
Interest-earning
assets:
Owned receivables:
Business credit
cards(1) $ 1,081,939 $ 66,693 12.40 % $ 1,266,466 $ 69,419 11.05 %
Other receivables 7,535 187 4.98 7,619 218 5.78
Total receivables 1,089,474 66,880 12.34 1,274,085 69,637 11.02
Investments(2) 1,283,034 17,890 2.76 630,508 16,494 5.21
Retained interests in
securitizations 219,315 16,550 15.09 229,517 9,785 8.53
Total interest-earning
assets(3) 2,591,823 $ 101,320 7.83 % 2,134,110 $ 95,916 9.04 %
Noninterest-earning
assets 483,092 301,634
Total assets $ 3,074,915 $ 2,435,744
Interest-bearing
liabilities:
Deposits $ 1,914,739 $ 45,519 4.78 % $ 1,355,056 $ 33,898 5.04 %
Debt 217,955 6,923 6.39 226,661 7,660 6.81
Subordinated debt
payable to preferred
securities trust 103,093 4,634 8.99 103,093 4,634 8.99
Other borrowings 25,881 1,105 8.45 111 3 5.27
Total interest-bearing
liabilities 2,261,668 $ 58,181 5.17 % 1,684,921 $ 46,195 5.52 %
Noninterest-bearing
liabilities 218,033 169,151
Total liabilities 2,479,701 1,854,072
Stockholders' equity 595,214 581,672
Total liabilities and
stockholders' equity $ 3,074,915 $ 2,435,744
Net interest spread 2.66 % 3.52 %
Net interest margin 3.35 % 4.70 %
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(1) Interest income includes late fees for owned business credit card receivables of $3.9 million for the six months ended June 30, 2008 and $4.8 million for the same period of 2007.
(2) Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and nonaccrual receivables.
PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES
Three Months Ended Six Months Ended
($ in thousands) June 30, June 30,
2008 2007 2008 2007
Provision for credit losses $ 30,327 $ 11,806 $ 58,709 $ 21,889
Provision for interest and fee losses 6,057 2,581 10,418 5,027
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Provision for credit losses on a consolidated basis increased $18.5 million for
the three months ended June 30, 2008 as compared to the same period of 2007, and
increased $36.8 million for the six months ended June 30, 2008 as compared to
the same period of 2007. The provision for interest and fee losses increased
$3.5 million for the three months ended June 30, 2008 as compared to the same
period of 2007, and increased $5.4 million for the six months ended June 30,
2008 as compared to the same period of 2007. The increases in the provisions for
both periods were due primarily to increases in delinquency and net principal
charge-off rate trends, partially offset by a decrease in average owned business
credit card receivables of $83 million for the three months ended June 30, 2008
and $185 million for the six months ended June 30, 2008 as compared to the same
periods of 2007. The deterioration in credit performance is broad-based across
industries, geographic regions and origination vintages in our receivable
portfolio. The increasing delinquency and charge-off rates reflect deterioration
in the U.S. economy and, to a lesser extent, continued seasoning of the
portfolio. While we remain focused on initiatives to reduce credit losses to the
extent possible in the current economic environment, additional deterioration in
the U.S. economy could cause these trends to worsen.
The allowance for receivable losses on business credit card receivables was
$84.6 million as of June 30, 2008, or 9.94% of owned receivables, which was
higher as a percentage of owned receivables than the allowance of $67.4 million,
or 6.53% of owned receivables, as of December 31, 2007. The increase in the
allowance for receivable losses reflects an increase in the estimate of losses
inherent in the portfolio based on increases in delinquent receivables as of
June 30, 2008, recent trends in net principal charge-off rates, the economic
environment and the current composition of the portfolio.
The following table provides credit quality data as of and for the periods indicated for our owned business credit card receivable portfolio, including a summary of allowances for receivable losses, delinquencies, nonaccrual . . .
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