Advanta Corp.Q4 2007 Earnings Call Transcript

Advanta Corp. (ADVNB)

Q4 2007 Earnings call

January 30, 2008 9:00 am ET

Executives

Amy Holderer - VP of IR

Dennis Alter - Chairman and CEO

Bill Rosoff - Vice Chairman and President

Phil Browne - SVP and CFO

Analysts

Sameer Gokhale - KBW

Christine Atonno - FBR Capital markets

James Fotheringham - Goldman Sachs

James Kenny - Pacific Investment Capital

Everett Reveley - Davenport & Company

Doug Kendall - Spear Capital

Mark Mohan - Matthew Twenty Five Front

Brian Hagler - Kennedy Capital

Gary Smalley - Brown Brother

Neal Bradsher - Broadwood Capital

Presentation

Operator

Good day everyone and welcome to the Advanta Corporation's fourth quarter 2007 earnings results conference call. Just to remind today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Vice President, Investor Relations, Amy Holderer. Please go ahead, Ma'am.

Amy Holderer

Thank you. Good morning and welcome to our conference call today. This is Amy Holderer. Joining me today are Dennis Alter, Chairman and CEO; Bill Rosoff, President; and Phil Browne, CFO. During our call this morning, we will share comments regarding our 2007, fourth quarter and full year results and we'll then take your questions from analysts and institutional investors. (Operator Instructions).

Our discussion today will include the use of managed receivable data and other non-GAAP financial measures. Our press releases and statistical supplements are available at our website, at advanta.com, in the Corporate Info section. These documents provide a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and a description of why we believe the non-GAAP financial measures are useful to investors.

In addition, some of our comments today are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements involve risks and uncertainties, which may affect the company's business and prospects, including economic, environmental, competitive, governmental, technological, social, political, and other factors discussed in the company's press releases, as well as in the company's 10-K, 10-Qs, and other documents filed with the Securities and Exchange Commission.

Now, I will turn the call over to Dennis.

Dennis Alter

Thanks Amy. Good morning and thanks for joining us. Today we reported that for '07 we earned $1.61 per combined diluted share from continuing operations, including an after-tax charge of $0.17 per share, relating to contingency reserves associated with Visa’s litigation with third parties. Fourth quarter earnings were $0.17 per share, which again included a $0.11 per share after-tax charge also associated with the Visa litigation matters.

In addition, the fourth quarter earnings incorporated $0.39 per share of after-tax balance sheet charges and reserve build resulting primarily from our recent credit trends. Consistent with the duration of other credit card issuer's statistics, our managed credit losses for '07 increased to 3.71% of average receivables and we ended the year with a managed 30 day plus delinquency rates of 4.29% and a 90 day plus delinquency rate of 1.97%.

As we said on the last call, in light of the unusual economic environment, we believe it's prudent for us not to give guidance at this time. As events later in the year indicate stabilization of the economy and the environment, we would give guidance. On the plus side managed receivables grew by 22% in '07 to $6.3 billion and transaction volumes increased to 17% to $14.4 billion. We added a little over 335,000 new customers during the year and we continue to see low portfolio attrition rates.

Needless to say, our earnings this quarter and for the full year were disappointing. The negative movement in our delinquency rates was greater than we anticipated. And this, coupled with greater macro market movements, caused us to have earnings lower than our expectations.

We're moving through this economy carefully and making prudent decisions that are good for 2008, as well as for the long haul. Small business market continues to be rich in opportunity for us and we won't lose sight of that. However, our goal is to balance our business decisions with the sharp focus on solidity and minimizing risk.

I'll now turn the call over to Phil. Phil?

Phil Brown

Thanks Dennis. For the year Advanta Business Cards earned pretax income of $126.5 million, which includes pre-tax earnings for the fourth quarter of $19.9 million. Included in Business Cards fourth quarter results are three specific items that, I'd like to elaborate on for you.

Fist, we increased our allowance for credit loses by $10 million. This reflects higher estimated risk against owned principle receivables, due to the increased delinquencies that Dennis discussed earlier. This eluded after-tax, earnings for combined share equivalent for this charge was $0.14.

In addition, we reduced our retained interest in securitization by $17.2 million to reflect higher credit risks related to our secured clients receivables and higher market credit spreads. Stated on an earnings per share basis this charge reduced after-tax earnings by $0.25.

Lastly, Advanta Business Cards pre-tax results for the fourth quarter include a $3.3 million gain, associated with the saleable portion of our MasterCard shares. This is equivalent to $0.5 per combined diluted share on an after-tax basis.

Before I move forward with details on Business Cards results, let me mention that we recorded pre-tax charges totaling $12 million in the third and fourth quarters, which were unrelated to Business Cards segment. As Dennis, stated this reflects our contingent obligations related to certain Visa litigation matters.

As disclosed in our 8-K $0.06 per combined diluted share was recorded as of the end of the third quarter. The other $0.11 per share was recorded in the fourth quarter. Visa numbers could be impacted by new information on this matter. Now back to business cards.

Management interest deals continue to expand modestly during the fourth quarter, in fact this is the first quarter in recent time that year-over-year net yields of increase.

The underpinning to this extension over the third quarter includes several moving parts. Certain customers were required in 2006 and took an introductory rate offer were priced to their bill two rates during the fourth quarter and customers, who visited additional risk to Advanta will reprice. While setting the portion this extension were interest yield reductions related to reserve delinquent accounts and charge-off is on collected interest.

Year-over-year transaction volume in the fourth quarter grew by 8%, included in a 20% growth in purchase volume. As a result of the significant increase as well as the higher interchange rate and lower rewards costs per purchase dollar, we had sizeable growth in our net interchange revenue. Although the average fourth quarter growth rate for the portfolio was strong, we saw a slowdown in December's year-over-year growth rate for purchases for growth active customer compared to the same measures for earlier month of the quarter.

Our management charge-off for the quarter was 12.1%, which is higher than last quarter and a year ago. Operating expenses for the year were 4.7% of average owned and securitized receivables, which was about 120 basis points lower in our 2006 ratio. Our 2007 rate demonstrates the leverage we gained this year, with 22% growth in managed receivables.

Turning now for liquidity and capital resources, I want to point we have increasing net of cash in investment's liquidity to almost $1.2 billion. This is approximately $100 million increase from the third quarter and $400 million increase from the end of last year.

In addition at year end, we have $1.2 billion of AAA capacity in our securitization structure and $260 million of committed commercial paper conduit with capacity. As you know, pricing (inaudible) securitization and other difficulty have widened and are well above this spread we realized in our last securitization in November.

We continue to evaluate our funding options, which include the items I just mentioned as well as rating deposits through our bank and offering notes to our retail note program.

Now I'd like to turn the call over to Bill.

Bill Rosoff - President

Thanks, Phil. I just have two points. First, during the fourth quarter, we completed the stock repurchase that was authorized by the board in April 2007. Some of you are told I say-- you would like us -- you would like to see an additional buyback authorized. And this is something that we are reviewing and will be addressing with our board.

Second I want to emphasize, one point that Dennis alluded to. You all know this is a tough environment, we can't change that. What we can do is to make the most thoughtful and sounds steps we can, in this environment. And in addition that position ourselves for the future. That is what we are seriously doing.

Now let's take your question.

Question-and- Answer Session

Amy Holderer

During the Q&A session, the Operator will be closing the line after you ask your question. If you have more than one question, please state all of your questions first and then management will respond. After management's response, if you have additional questions or follow-ups, please signal the Operator, so that you can re-enter the queue. Operator, will you please remind the participants how to signal that they have a question?

Operator

(Operator Instructions). We will go first to Sameer Gokhale with KBW.

Sameer Gokhale - KBW

Hi, good morning, I had a couple of questions; the first one, what was your reserve ratio at the end of the quarter with significant loss provisioning? And, the second question I had was, you mentioned the possibility of having the retail note program to gain additional funding, I think it’s been a pretty successful program for you in the past, how much do you have in notes outstanding and in the credit program how much could you potentially issue in that program going forward? Thank you.

Bill Rosoff

Good morning, Sameer. This is Bill. I will start with the retail note program. We had about $220 million outstanding on the retail note program today and that program has been in existence since 1950. So, companies had that program a long, long time. I think, off the top of my head, we had that program as high as $500 million at one point, we are trying to recollect. So, there is a lot of available capacity to increase that program; it's a very stable customer base.

The reserve ratio, the reserve at the end of the quarter compared to that; that's one we get that for year in a moment, we will come back to that at the end of another question.

Operator

We will go next to [Christine Atonno] with FBR Capital Market.

Christine Atonno - FBR Capital markets

Hi, thanks for taking my question. Looking at the monthly trust data, it looks like yield hasn't been improving as much as we expect. Is that related to a slowdown at point of sale or more people, is there more attrition after the Visa rate buzz off?

Phil Browne

No. The trust data is impacted by being on a cash basis versus an accrual basis, so for a minute, if I can back up and talk about the net yields for the quarter, we increased about 19, 20 basis points, 19 or 20 basis points. Couple of things-- from the third quarter -- a couple things impacted that obviously, there was a spike in LIBOR in December. The other thing that we mentioned is that we are having favorable impacts on the '06 cards going to flip and re-pricing risk.

We had about a 40 basis point impact this quarter due to provisioning for delinquent interest and charge-off of uncollectible interest, which impacted the trends, compared to what they otherwise would be. And, that, itself, was a sizable impact; it breaks down in dollar amount to about 700,000 or so on balance sheet and about 4.5, 4.7 million off balance sheet, which quite direct that kind of often mentioned in and off balance sheet breakdown. But, other than that, the yields are really moving in the direction that we had anticipated.

Dennis Alter

And, I think, just something with, we have not doing the question of attrition, we have not seen an increase of attrition in these figures from what we have been experiencing at the time people go to their (inaudible).

Operator

And, we'll go next to James Fotheringham with Goldman Sachs.

James Fotheringham - Goldman Sachs

Thank you very much for taking my question. Bill, just a question on capital management in additional to your comments on the buyback; can you discuss your expectations for the dividend this year and more specifically under what circumstances you might expect to cut it? Thanks.

Bill Rosoff

James, we said last time we expect to continue paying the dividend and we don't anticipate circumstances right now where we would change that.

Operator

(Operator Instruction) At this time, over to [James Kenny] with [Pacific Investment Capital].

James Kenny - Pacific Investment Capital

Good morning. You just put a little bit of parameters around where you might be looking for potential cash trapping in securitizations and what kind of liquidity contingency plans you have, if that becomes an issue?

Phil Brown

Yeah, this is Phil. We don't anticipate having a cash trapping issues in the trust. And, let me elaborate a little bit on that. And all this is according to definitions of the trust, you can't really take these numbers and reconcile on directly to the managed income statements, because of what's included and not included. But, we had three month average excess spread of about 6.8% and the cash trapping trigger is at about 4.5%. And, obviously, on a forward basis we've had about 125 to 175 basis points of release in cost of funds that will benefit that excess spread.

So, we don't anticipate trapping any cash. If we do, it's really not a big deal. In the beginning of '07, rating agencies decrease our cash collateral requirements from about 2.25% to 1.5%. It was a good thing that no one was caring in the street that had such a positive impact. And, if, which I don't anticipate, we had a trap cash we can go back up a little bit above the level that we were in the beginning of '07. So, really nice room no one anticipated, and not even a big deal if it happens.

Operator

We will go next to Everett Reveley with Davenport & Company

Everett Reveley - Davenport & Company

Good morning. A few questions for you; first, are you all seeing any geographic concentrations or are you seeing increases in delinquencies?

Dennis Alter

Yes, generally the increase in delinquency certainly is an economic item; it’s impacting across Advanta and across business segments. Geographically, there are some spots that are softer than others. We've had some states that have actually improved over the last three or five months, but some of those states with a real estate issues, service and other issues, we've mentioned, California, Florida, Michigan etcetera, we're seeing a little bit more softness there than in other states.

Operator

We'll go to [Doug Kendall] with Spear Capital

Doug Kendall - Spear Capital

Thanks. I just wonder, wanted to confirm what branch it was to the Goldman Sachs question. You said that, or indicated, that the dividend would be maintained at current levels or simply that you would expect to continue paying a dividend?

Phil Browne

At the same level.

Doug Kendall - Spear Capital

Same level, thank you. And, then in terms of not giving guidance, just going back to other periods of uncertainty, has that been your practice or is this a new practice? I have a follow up on that.

Phil Browne

I think, it appears, in other periods we did continue to give guidance pricing. We view the circumstances and the volatility differently, and to some degree it was in a different business.

Operator

We'll go to Mark Mohan with Matthew Twenty Five Front.

Mark Mohan - Matthew Twenty Five Front

Phil there was a question, if I got it right, you said that it's been roughly like a 40 basis points increase on some of the weaker credits, Is that correct, did I get that right?

Phil Browne

The 40 basis points, Mark, that I mentioned was the net yield equivalent impact of additional provisions for delinquent interest and charge-off interest. So, if you think in terms of our net yields were up 19 [points this] quarter, what was the impact the negative impact along with the positive impact, that was the negative impact, there was some of the positive impacts. That's just a yield impact.

Operator

Over to Brian Hagler with Kennedy Capital

Brian Hagler - Kennedy Capital

Hey, Good morning, guys. First of all, I guess, advantages in that loan loss reserve level would remain as earlier with, if you guys could round that number up. And then, I guess, secondly I just wanted to ask you guys, what impact Denny, you expect this potential government tax refund to have on your business maybe looking back at three those 2001 -- last time we had something similar to that?

Dennis Alter

On the tax refund, I think we have to consult our economic staff or joining economic staff, but I think, hopefully, the stimulus will do some good. I think most people would say, and most things I already said, that by the time it's going to be the middle of the year by the time any kind of tax refunds gets into people's hands and hopefully we will do some good after that with this sum like.

Operator

(Operator Instructions). We will go to the follow up from [Christine Atonno] with FBR Capital Markets.

Christine Atonno - FBR Capital markets

Thanks for talking my call. Have you seen any weakness in specific occupation relative to credit performance, and also, I think you had mentioned some slow downs in spending in December with point of sales. Could you further clarify on that? Thank you.

Phil Browne

We haven't seen the increase in delinquency or loss concentrating in any particular segment or any particular profession; there are obviously some that start out lower and they're still much lower. But, in terms of the increases it has basically set across the board. In terms of the spending Phil do you want to…?

Phil Brown

On the spending, it was really the later part of December, looked like it's a lot in consumer talking in terms of our progress on an active basis. So, a pretty comparable trend and it looks like some of that softness is continuing, and, again, that I certainly feel some of it is like an economic factor to us, as Bill said; now speaking for our new economic department here.

If I could just mention that the questions on the allowance percentage to be [earned], first with the caveat; There are a couple of moving parts that you need to consider. What are the loans outstanding, what are the delinquencies, certain loans that are sold in securitization shortly after the end of the quarter all had impacts. But, with that caveat, the allowance as a percentage of loan receivables is 6.5% at the end of the year.

Christine Atonno - FBR Capital markets

Thank you.

Operator

Okay. The follow-up comes from Sameer Gokhale with KBW.

Sameer Gokhale - KBW

Hi. Actually I had three follow-ups. First one was, the way you correctly on the cost of funds you had mentioned some release of 125 to 175 basis points, is that with the recent reduction in interest rate, the FED fund rates coming down, and also that the fact that you have interest rates lowered, I believe on some of your accounts?

Second question was, could you give us a breakdown of your residual interest allowance with the I/O versus the over collateralization etcetera?

And, then, the third question was, you seem to have a fairly significant number of accounts which have veritably large dollar limits, $25,000 to $50,000 accounts. Are you taking these steps to maybe reduce those credit limits or are you seeing a relatively big increase in brought downs on those credit lines given that it may tend to happen when your customer base is experiencing some weakness? Thank you.

Bill Rosoff

Yeah, this Bill. Maybe I can take the last question, and then Phil can talk to the first two. On the last question, we are not seeing significant brought downs of the larger credits rate side-by-side or anything peculiarly relative, it can be related to those. What we are doing among the things, that Dennis alluded to and I alluded to, is trying to go forward as much as possible to say in the circumstances, and in the circumstance and in the economy are there changes we should make in credit lines and changes in some of the underwriting standards and look at the groups and which group we think going forward with the higher risk and we are making changes there.

Phil Browne

Turning to your other question, if you look at the average LIBOR reset rates for the three months in the fourth quarter, we averaged about 4.90%. And hitting near today, and this is using a forward curve as of a couple of days ago, which, I think, is assuming a 25, 50 increased today for our average of January, February, and March LOBOR resets would be 3.46%, a 150 basis points lower, and that I quote, of course, is based on the forward curve, we are not predicting. And that's really just talking to the cost of funds on big chunk of the funding, which is the one month floating rate, securitization, at a nice piece of relief.

The other thing if you alluded to, that's really on the cost of fund side, but on the yield side the premise of your question, is correct, that most of the cards were of course only about 15% of the card balances plus or minus would get yields relief in a declined LIBOR because of the four. So, a big piece of the cost of funds benefit, again the premise to your question does go to the bottom line.

On the IO, mark-to-market adjustment, the largest split piece was attributable to credit. The spreads didn't widen out and contribute about $5 million to $7 million with the total $17 million. So, kind of breaking it out between, what's the increase in spreads versus what credit would break down without like that. And we had about $7 million remaining IO after this mark-to-market.

Dennis Alter

Sameer the fact is -- just go triple back to collections for a minute. We haven't gotten into it and is -- not the form for but, there are scores of initiatives underway across the collection or department all resources, where they might actually sit in the various locations. That, we believe, we will yield, very, very significant positive results for us as the year unfolds.

We haven't booked them. We are not counting on them per se. But, there are a number of tools that we are using now in not only finding people, when they become delinquent, but actually identifying them before they become delinquent with us and taking various actions. So, I would be pretty toward confident incentives, but I would say that there is a lot of progress being made that should result in savings to us of considerable amounts of money.

Operator

We will go to [Mark Mohan] - [Matthew Twenty Five Front].

Mark Mohan - Matthew Twenty Five Front

I shall withdraw that.

Operator

We will go to Brian Hagler with Kennedy Capital

Brian Hagler - Kennedy Capital

Just a follow up; I guess you talked about in the period like this, you guys can -- you still raising and raise pricing the, it helps payments, some increased charge-off and you also said that, the net yield was up 19 to 20 basis points, that was after having 40 basis points impact from higher provision and charge-offs, if I understood that correctly.

I guess, when did you start kind of raising rates, it sounds like you guys did that on some of your higher risk accounts, and do you assume that 40 basis points were actively less in any quarters?

Bill Rosoff

This is Bill. In the first part of the question, that's something that we, there is a re-pricing based on people's risk increasing is something that we do on a regular basis and that is up over a period of years. It’s nothing, the principle is nothing recent to the extend there are more people, who are get into risky or category, of course that's going to result in relatively more repricing on that account.

I think the anticipation and as consistent with what we said in the past is the dynamics of the fund structure of the profitability, the higher origination in '06 or '07. It’s going to cause net interest margin long–term to increase, the movement in interest rates, everything you read about in the economy tends to increase net interest rates also.

And I think as Phil described having more customers, who are being impacted by the economy, is going to get more re-pricing. So, we anticipate and this is consistent what we said in the past, net interest margins to expand notwithstanding the credit offset to reserving that I mentioned and a reasonable good pace.

Bill Rosoff

I also think so it must right. I think it’s worth noting, that just from the simple issue of the promotional rates rolling off proportionally more of those are happening January, February, March then happened in November, December, October.

Bill Rosoff

Absolutely.

Operator

It is Doug Kendall with Spear Capital

Doug Kendall - Spear Capital

Hi, your owned receivables were down a bit, is that because you preferred not to tax a short-term paper markets on your own account or with the some other elements there?

Phil Browne

Hi, we were really positioning at balance sheet at the end of the year or the liquidity positions that we wanted to be in. Obviously, we had reserving, if I can use a very generic term both on and off balance sheet because we IO write-down and their provision, but we wanted to be in a good liquidity position going forward. So, is really all the typical balance sheet positioning consideration reserving liquidity etcetera.

Operator

We'll go to [James Kenny] with [Pacific Investment Capital].

James Kenny - Pacific Investment Capital

Thank you, and good morning again. Can you provide any comment or color surrounding the departure of the two credit officer at the end of last year. And is there anything since that, which has kind of changed the way you're either going to market or looking at some of these accounts going forward. Thanks.

Bill Rosoff

This is Bill. Couple parts to it, the departure of the former Chief Credit Officer had and the most important thing is a nothing whatsoever to do with credit. And the second part the departure also has nothing do with looking at things differently or the only way in which we are looking things differently is in so for as the economy as a continuing issue and in the comments that Dennis and I made earlier about the way we're reviewing approval standards, [client] assignment, [client] reduction in the appropriate places. But that's a continuum that is also going on prior to the change.

Phil Browne

If could just clarify a point, it’s come up a couple of times on the net interest spread that we increased 19 basis points quarter-on-quarter and the impact of the reserve for delinquent interest and charge-off with interest. The 40 basis points is what this increase would have been quarter-on-quarter without that additional provisioning charge-off that I mentioned. So it's not incremental to the 19, it’s what the 19 in fact would have been without that.

James Kenny - Pacific Investment Capital

Thanks.

Operator

And at this time we have no other questions in queue. (Operator Instruction) And we go to [Gary Smalley] with Brown Brother.

Gary Smalley - Brown Brother

Hi. I was wondering, how much of securitization you guys intend to do this year? I know you did one back in November, is one -- are you guys going to do an issue in the first quarter or second quarter?

Phil Browne

We have out there, what the maturity of our securitizations are but we really have ourselves positioned now, so that we can have the securitization if and when we want to or need to. So we are very flexible in that regards, so we don't have any fixed schedule at this time. We've a lot of flexibility and know we are in good position that, obviously the pricings could be more expensive, but we will be able to go when we want to and when we need to.

Dennis Alter

We don't need to securitize this year if we don't want to, is another way of saying it.

Operator

And we have no questions in queue. (Operator Instructions) We'll go back to [Doug Kendall] with Spear Capital.

Doug Kendall - Spear Capital

Hi, what's the -- continuing with the analysis of the times of potential customers you want to address, the market you want to address and so on? Would you anticipate that net new customers in '08 would be down substantially from the previous year?

Dennis Alter

Oh yes in a word, what I am telling you is we won't be if that 335,000, the number that we put on last year, but we are still in the process of evaluating whom to market to and to what degree in the external economic environment. But we will be in the market.

Operator

We have Neal Bradsher with Broadwood Capital.

Neal Bradsher - Broadwood Capital

Yes, you mentioned that you completed your buyback in the fourth quarter. Could you just put some numbers on that? How many shares was that, I forget how many your have authorized, how many you have already done and approximately what price do we buy?

Phil Browne

Let me get these numbers -- the total authorization was a 1.5 million shares and digging through what portion of that went -- fell into the fourth quarter. It was about 200 shares in the fourth quarter. And that will be now the [visible] book value and is 400,000 total shares in the fourth quarter.

Operator

At this time we have no other question; I would like to turn the call back to management for any additional or closing comments.

Amy Holderer

Okay thank you. Let me just remind you that a recording of today's call will be available for the next 90 days at our website, advanta.com, or at investorcalendar.com. In addition after 12 o' clock today you can access the recording or by phones the next week by calling 888-203-1112 and referring to pass code 5054657. And if you have any additional questions I can be reached at 215-444-5335. Thank you for joining us this morning.

Operator

And does conclude today's call and again thanks you for your participation. Have a good day.

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