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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 NO. 0-14120
ADVANTA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1462070
(STATE OR OTHER JURISDICTION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
WELSH & MCKEAN ROADS, P. O. BOX 844,
SPRING HOUSE, PENNSYLVANIA 19477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
CLASS B COMMON STOCK, $.01 PAR VALUE
CLASS A RIGHT
CLASS B RIGHT
(TITLE OF EACH CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K Yes [ ].
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.)
$136,254,626 as of March 15, 2000 which amount excludes the value of all
shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the Company (however, this
does not constitute a representation or acknowledgment that any of such
individuals is an affiliate of the Registrant).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 15, 2000 there were 10,060,888 shares of the Registrant's Class
A Common Stock, $.01 par value, outstanding and 17,178,097 shares of the
Registrant's Class B Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(e) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
DOCUMENT FORM 10-K REFERENCE
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Definitive Proxy Statement relating to the Registrant's 2000 Part III, Items 10-13
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A not later than 120 days following the end of
the Registrant's last fiscal year
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PART I.
ITEM 1. BUSINESS
In this form 10-K, "Advanta", "we", "us", "our" and the "Company" refer to
Advanta Corp. and its subsidiaries, unless the context otherwise requires.
OVERVIEW
Advanta is a nationwide provider of financial services. We offer diverse and
innovative products to consumers and small businesses. Our primary consumer
products are first and second lien non-conforming mortgage loans. Our mortgage
loans are "non-conforming" because we underwrite loans with credit
characteristics that do not meet the underwriting guidelines of federal mortgage
agencies, such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. A loan may be considered non-conforming for a variety
of reasons, including the size of the loan in relation to the value of the
underlying property, the borrower's debt-to-income ratio and the borrower's
prior credit history. We service all of the mortgage loans that we originate. In
our contract servicing business, also known as "subservicing", we also service
the mortgage loans of third parties for a fee. The primary products we offer to
small businesses are business credit cards and equipment leases. Our basic
business card product is an unsecured MasterCard(R)* business credit card. The
majority of our equipment leases are for small-ticket items such as computers,
copiers, fax machines and other office equipment.
We own two depository institutions, or banks, Advanta National Bank and
Advanta Bank Corp. Our banks offer a variety of deposit products, such as retail
and large denomination certificates of deposit, that are insured by the Federal
Deposit Insurance Corporation, also referred to as the "FDIC." We fund and
operate our mortgage, business credit card and leasing businesses primarily
through our banks.
In addition to our lending and leasing businesses, our other businesses
include Advanta Insurance and Advanta Partners. Advanta Insurance offers a
variety of credit related insurance products. Advanta Partners is a private
equity investment firm.
The following table highlights selected information about our lending and
leasing business units. Financial information presented in the table is for the
year ended December 31, 1999.
ADVANTA ADVANTA
($ IN MILLIONS) ADVANTA MORTGAGE BUSINESS CARDS LEASING SERVICES
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REVENUES $325.7 $120.1 $51.7
PERCENT OF TOTAL REVENUES 57% 21% 9%
MANAGED RECEIVABLES $8,384 $1,040 $796
TARGET MARKET Consumer Small Business Small Business
PRIMARY PRODUCTS AND Originating and servicing MasterCard(R) Small ticket
SERVICES non-conforming first and Business credit card equipment leases
second lien closed and
open end home equity
loans; subservicing of
non-conforming mortgage
loans for third parties
In addition to the revenues from our lending and leasing businesses described in
the table above, 13% of our total revenues for the year ended December 31, 1999
were derived from insurance operations, investment income and venture capital
gains.
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* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.
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Prior to February 20, 1998, we also issued consumer credit cards. Under the
terms of a contribution agreement, dated October 27, 1997 and amended on
February 20, 1998, we and Fleet Financial Group, Inc. ("Fleet") each contributed
substantially all of the assets of our respective consumer credit card
businesses, subject to liabilities, to Fleet Credit Card, LLC ("Fleet LLC"), a
newly formed Rhode Island limited liability company controlled by Fleet. We
acquired a 4.99% minority interest in Fleet LLC at the date of the closing of
the transaction. This transaction is referred to throughout this Form 10-K as
the "Consumer Credit Card Transaction."
Advanta currently has over 2,600 employees. At December 31, 1999 we
serviced approximately $24 billion in assets, consisting of approximately $12
billion in managed assets and approximately $12 billion in assets serviced for
third parties.
Advanta Corp. was incorporated in Delaware in 1974 as Teachers Service
Organization, Inc., the successor to a business originally founded in 1951. In
January 1988, we changed our name from TSO Financial Corp. to Advanta Corp. Our
principal executive office is located at Welsh & McKean Roads, P.O. Box 844,
Spring House, Pennsylvania 19477-0844. Our telephone number at our principal
executive office is (215) 657-4000.
STRATEGY
Advanta is a diversified nationwide financial services company that is
well-positioned in sizeable and growing markets. Our principal objectives are to
use our information based strategy to continue to grow each of our businesses
while increasing profitability and improving cash flow. The primary components
of our strategy for accomplishing these objectives are:
Information based strategy. Based on our experience and expertise in
analyzing consumers' credit behavior and characteristics, we have developed an
extensive database of customer information and attributes. We use this
information in conjunction with proprietary credit scoring, targeting and other
sophisticated analytical models we have developed to market our products to the
most profitable prospective customers. We measure expected profitability through
an integrated analysis of a prospect's responsiveness, creditworthiness and
sensitivity to price. We continually validate our models based on actual results
from marketing campaigns, and use this information to refine and improve our
analytical assumptions. We also leverage the information and models we have
developed to market and cross-sell our products to existing customers more
effectively.
The information we gather and analyze allows us to market directly to
specific customer segments, target prospects effectively, anticipate customer
needs and customize our products to meet those needs. There is substantial
opportunity for us to extend our current market positions by further refining
these skills and broadening their application within each of our businesses. We
have entered into strategic alliances with third parties in which we use our
information management and direct marketing tools to market their products. We
believe we can further capitalize on these skills within our own businesses and
through other ventures and strategic alliances with third parties.
Increase direct originations. We are focused on maximizing profitability
by identifying the most profitable origination channels in each of our
businesses. We are able to originate our products directly from customers,
generally referred to as "direct originations," or indirectly through
intermediaries such as brokers, generally referred to as "indirect
originations." We analyze the profitability of the loans we originate, and we
are focused on increasing originations through the origination channels that
produce the most profitable loans. Loans that we originate directly from
customers typically yield higher margins, generate higher positive cash flows
and create stronger customer relationships than loans that we originate
indirectly through third parties. For the year ended December 31, 1999, 61% of
the mortgage loan receivables that we originated were direct originations, as
compared to 32% for the year ended December 31, 1998. Almost all of our business
cards are directly originated. Currently, we acquire the majority of our leases
through indirect origination channels. We plan to use our information based
strategy to change our strategic focus in our leasing business to increase
originations directly from vendors and end users of the equipment based on the
higher profitability of the leases originated through these channels.
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Improve and refine credit scoring and risk-based pricing models. We use
customized credit scoring and risk-based pricing models to balance risk and
profitability. These models also enhance our ability to underwrite loans and
leases that better meet our customers' needs. Using our credit scoring and
pricing models, we are able to provide our customers with a choice among
products and pricing alternatives that are designed to satisfy both the specific
needs of the customers and our profitability goals.
Improve operating efficiencies. We are developing our infrastructure
around technology to make all aspects of our operations more efficient. For
example, we recently developed and are implementing the Advanta Intelligent
Mortgage System, our proprietary automated sales and underwriting system for
nonconforming mortgages. We believe that this and other technology-based
initiatives will reduce costs, increase capacity and improve customer service.
We are also focused on using the Internet as an extension of our existing
infrastructure for direct marketing, customer acquisition, application
processing and customer service. In July 1999, we became one of the first
business card issuers to offer instant credit approval on-line over the
Internet. We plan to capitalize on similar Internet opportunities to strengthen
our capabilities in our other businesses.
Maintain multiple funding sources. We fund our businesses through
diversified sources. We offer a range of retail and institutional FDIC-insured
deposit products through Advanta National Bank and Advanta Bank Corp., our two
FDIC-insured depository institutions. We also fund our businesses through
securitization transactions and at December 31, 1999 we had approximately $1.2
billion in warehouse lines and commercial paper conduit facilities available to
fund our lending and leasing business units. We directly offer unsecured debt of
Advanta Corp. to retail investors through the Advanta Retail Note Program. The
availability of multiple funding sources allows us to use cost-effective funding
strategies that increase both long-term earnings and economic value.
ADVANTA MORTGAGE
OVERVIEW
Advanta Mortgage, a business unit of Advanta, offers a broad range of mortgage
products and services to consumers throughout the country. Advanta Mortgage
originates and services non-conforming credit first and second lien mortgage
loans, including home equity lines of credit. We fund and operate our mortgage
business primarily through our banks, Advanta National Bank and Advanta Bank
Corp.
Advanta Mortgage's portfolio of managed receivables includes owned loans
and securitized loans which we service and in which we retain an interest. At
December 31, 1999, Advanta Mortgage had total owned loans receivables of $1.1
billion and total managed receivables of $8.4 billion.
In addition to servicing and managing the loans we originate, Advanta
Mortgage services the home equity loans of unaffiliated third parties through
our subservicing business. Subserviced loans are not included in our portfolio
of managed receivables and we bear no risk of credit loss on the receivables in
our subserviced portfolio. Advanta Mortgage's portfolio of subserviced loans
totaled approximately $12 billion at December 31, 1999. Our total serviced
portfolio, including the "subserviced" portfolio, was $20.3 billion at December
31, 1999 compared to $16.6 billion at December 31, 1998.
Approximately 87% of the managed mortgage loan portfolio is secured by
first lien position loans and the balance is secured by second lien position
loans. Home equity lines of credit represented 10% of the managed mortgage loan
portfolio at December 31, 1999. During the year ended December 31, 1999, the
United States economy experienced increases in interest rates. As a result we
experienced an increased demand for second lien mortgage loans. Second lien
mortgage loans represented 34% of the mortgage loan receivables originated by us
during the quarter ended December 31, 1999. Substantially all of the second lien
mortgage loan originations during the quarter ended December 31, 1999 consisted
of home equity lines of credit. At December 31, 1999, the combined loan-to-value
ratio for our managed mortgage loan portfolio was approximately 79%. Generally,
there is a higher risk of delinquency and/or loss associated with second lien
home equity loans that have higher loan-to-value ratios. We manage the increased
credit risk associated with these loans through our underwriting and risk-based
pricing.
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At December 31, 1999, approximately 62% of the managed portfolio consisted
of fixed rate loans. The remainder was comprised of adjustable rate loans and
intermediate rate loans which typically bear interest at a fixed rate for a
period of two to five years and an adjustable rate thereafter.
The following table shows the geographic distribution by state for the top
five states of total managed Advanta Mortgage loans at December 31, 1999.
($ IN MILLIONS) TOTAL PERCENT OF
MORTGAGE PORTFOLIO
LOANS BY STATE
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CALIFORNIA $ 997,298 12%
MICHIGAN 654,632 8
PENNSYLVANIA 500,998 6
OHIO 439,359 5
FLORIDA 431,008 5
OTHER 5,360,241 64
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Total $8,383,536 100%
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Geographic concentration carries a risk of increased delinquency and/or
loss if a specific area suffers an economic downturn. Advanta Mortgage monitors
economic conditions in those regions through market and trend analyses. Senior
management of Advanta Mortgage meets throughout the year to update lending
policies based on the results of these analyses.
In 1999, approximately 57% of Advanta's total revenues were derived from
Advanta Mortgage.
ORIGINATION CHANNELS
Currently, Advanta Mortgage generates most of its loans through direct
originations and through our network of more than 600 brokers. Our direct
origination channels consist of our national call center and our 60 loan
production offices located throughout the country. We directly originate
mortgage loans from consumers using targeted direct mail and direct response
television and radio advertising. Using our information based strategy we
identify and market to prospective customers who are most likely to respond and
result in a profitable relationship for Advanta.
In the past, we also relied on indirect originations through our conduit
and corporate finance divisions within Advanta Mortgage to acquire mortgage
loans through correspondent relationships and purchases from other financial
institutions. We curtailed these indirect origination activities during 1999 to
the extent we determined that they were no longer consistent with our strategy
and did not meet our profitability and return goals. For similar reasons, during
the first quarter of 1999, we exited our auto finance business through which we
formerly engaged in the financing of automobile purchases by consumers with
non-conforming credit characteristics.
Because directly originated loans are more profitable and generally perform
better with respect to delinquencies, prepayments and charge-offs than loans we
originate through indirect channels, we are focused on increasing direct
originations as a percentage of our mortgage loan portfolio. Our portfolio of
directly originated mortgage loans increased by 37.1% for the year ended
December 31, 1999 as compared to the year ended December 31, 1998, and
represented 42.4% of the managed loan portfolio at December 31, 1999 as compared
to 31.8% at December 31, 1998. Our broker portfolio increased by 21.2% for the
year ended December 31, 1999 as compared to the year ended December 31, 1998,
and represented 15.2% of the managed mortgage loan portfolio at December 31,
1999 as compared to 12.9% at December 31, 1998.
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The following table sets forth the volume of originations, broken out by
origination channel, for the years ended December 31, 1999 and December 31,
1998.
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) ----------------------------------------------------
1999 1998
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LOAN NUMBER OF LOAN NUMBER OF
ORIGINATION CHANNELS RECEIVABLES LOANS RECEIVABLES LOANS
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DIRECT $1,621,037 35,515 $1,655,399 29,846
BROKER 542,115 6,200 475,427 5,856
CONDUIT 449,848 5,843 1,752,968 22,656
CORP. FINANCE 37,939 528 1,325,447 17,430
AUTO 5,103 375 104,350 8,531
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TOTAL ADVANTA MORTGAGE LOANS $2,656,042 48,461 $5,313,591 84,319
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UNDERWRITING
We have been lending to non-conforming borrowers since 1986. We believe that our
knowledge of the non-conforming mortgage industry, together with our expertise
in analyzing and predicting consumer behavior, affords us an advantage in our
ability to manage risk through the underwriting process.
We have an experienced staff of underwriters within Advanta Mortgage. The
underwriting guidelines used in our mortgage business are designed to consider
the value and adequacy of the mortgaged property as collateral for the proposed
mortgage loan as well as the borrower's credit standing and repayment ability.
We further tailor these underwriting guidelines to the type of product, for
example whether the loan is a first or second lien, or whether it is a
closed-end mortgage or a revolving home equity line of credit. There are three
major steps in the underwriting process: (1) identify the eligibility and
appropriate credit grade of the mortgagor; (2) evaluate the eligibility and
lendable equity of the mortgaged property; and (3) ensure the loan terms are
acceptable for that credit grade. We have developed standardized underwriting
guidelines for our national call center and our network of 60 loan production
offices.
We have also originated mortgage loans through indirect channels by
purchasing mortgage loans or pools of mortgage loans, in whole or in part, from
correspondents and other unaffiliated third party originators. The underwriting
guidelines used by unaffiliated originators may deviate from our own
underwriting guidelines. In these circumstances, we will reunderwrite a
representative sample of the mortgage loans.
We are implementing the Advanta Intelligent Mortgage System, or AIMS, which
is our proprietary automated sales and underwriting system that is designed to
enable loan officers to structure multiple loan options for customers quickly.
AIMS is designed to rapidly analyze customer-specific information against a set
of criteria, including our underwriting guidelines, and generate a number of
alternative products and pricing structures that will meet our customers' stated
needs, consistent with our profitability objectives. AIMS will automate the
underwriting and pricing functions in our mortgage business. We expect this to
increase our efficiency by reducing the time it takes to structure a product
that is tailored to the needs of a particular customer. We expect AIMS to be
fully operational in our national call center by March 31, 2000 and believe that
it will further increase our effectiveness in direct originations. We intend to
introduce AIMS within our other mortgage origination channels by the end of
2000. Once AIMS has been fully implemented, we expect it will provide us with a
single platform for mortgage loan originations across all channels and create
operating and system efficiencies in our mortgage business.
RISK-BASED PRICING
In conjunction with the underwriting process, we manage risk in our mortgage
business through risk-based pricing. Using our customized models, we analyze
customer-specific data that is housed in our database, including both
credit-related and non-credit customer attributes. Based on the results of this
analysis, we are able to price the mortgage loans that we offer to a potential
borrower to account for that borrower's risk profile.
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This risk-based approach to pricing allows us to offer a variety of products and
pricing structures that meet the customer's needs, consistent with our
profitability goals.
Under applicable federal law, Advanta National Bank and Advanta Bank Corp.,
our bank subsidiaries, may charge interest and assess prepayment penalties at
the levels permitted by the laws of the state where the bank is located and may
"apply" those rates and fees related to those rates on loans to borrowers in
other states. We believe we have a competitive advantage in pricing our mortgage
loan products because we are able to export interest rates and prepayment
penalties on any of the loans that we originate through our bank subsidiaries.
This provides us with greater flexibility in pricing and structuring mortgage
loans. For the year ended December 31, 1999, 82% of our mortgage loan
originations were originated and funded through Advanta National Bank and
Advanta Bank Corp.
SERVICING AND COLLECTIONS
Advanta Mortgage performs the servicing for its mortgage loans.
Our servicing activities consist principally of:
- collecting and posting all payments;
- responding to inquiries of customers or federal, state or local
government authorities;
- investigating delinquencies;
- initiating contact with borrowers who are delinquent in payment of a loan
installment;
- supervising foreclosures and property dispositions in the event of
unremedied defaults;
- reporting tax information to mortgagors;
- accounting for collections;
- furnishing monthly and annual statements to the trustee for our
securitization trusts; and
- with respect to securitization transactions, making payment advances when
required.
In addition, Advanta Mortgage services the home equity loans of
unaffiliated third parties for a fee through its subservicing business. Advanta
Mortgage's subservicing portfolio totaled approximately $11.9 billion at
December 31, 1999, as compared to $8.3 billion at December 31, 1998. We bear no
risk of credit loss on the receivables in this portfolio of subserviced loans,
and these loans are not included in our portfolio of managed assets.
ADVANTA BUSINESS CARDS
OVERVIEW
Advanta Business Cards, a business unit of Advanta, is one of the nation's
leading providers of business credit cards to small businesses. Advanta Business
Cards offers MasterCard(R) business credit cards to small businesses using
targeted direct mail and the Internet. The "Advanta Business Card" is issued and
funded by Advanta Bank Corp. MasterCard licenses banks and other financial
institutions, such as Advanta Bank Corp., to issue business credit cards using
its trademark and to use its interchange network. Advanta Bank Corp. receives an
interchange fee as compensation for the funding and credit and fraud risk it
assumes when its cardholders use the Advanta Business Card. MasterCard sets the
interchange fee as a percentage of each credit card transaction (currently
averaging approximately 2.17%).
Our standard product is a MasterCard business credit card that provides our
customers with access, through merchants, banks and ATMs, to an instant
unsecured revolving business credit line. Under the terms
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of our cardholder agreements, our business cards may be used for business
purposes only. We offer a number of benefits that we believe are important to
small business owners including:
- personalized company checks, which can be used at the same interest rate
as credit card purchases;
- additional cards for employees at no fee with the ability to set
individual spending limits;
- detailed quarterly and annual expense management reports that categorize
purchases and itemize charges for record keeping and tax purposes; and
- access to cash advances up to the full credit line at the same interest
rate as credit card purchases.
Our business credit card also offers free auto rental insurance, free purchase
protection service for a specified time period and several free emergency
assistance and referral services.
On a limited basis, we also offer a bonus miles program for an annual fee.
Under this program, the cardholder receives credit toward the purchase of
airline tickets with each card purchase. Additionally, we offer a travel card.
Use of the travel card entitles the cardholder to discounts at various hotels
and restaurants along with all of the benefits described above. We expect to
continue to expand our business credit card product offerings and look for
innovative ways to tailor products to the unique needs of small businesses.
The interest rate and credit line size we offer vary, and are ultimately
determined based upon the credit history and creditworthiness of the borrower.
At December 31, 1999, the average credit line was approximately $10,000. The
interest rate, which is based on a LIBOR (London Interbank Offered Rate) index,
will typically range from approximately 12% to 20%. In most cases, the rate will
change with changes in LIBOR and is subject to a minimum below which the rate
cannot fall.
Advanta Business Cards generates interest and other income through finance
charges assessed on outstanding loans, interchange income, and cash advance and
other credit card fees.
The managed portfolio of Advanta Business Cards grew from $815 million at
December 31, 1998 to $1.04 billion at December 31, 1999. In 1999, approximately
21% of Advanta's total revenues were derived from Advanta Business Cards.
ORIGINATIONS
Advanta Business Cards originates substantially all of its accounts using direct
marketing techniques. The primary sources of new accounts are direct mail
advertising to prospective customers and the Internet. The Advanta Business
Cards marketing program is the result of extensive ongoing testing of various
marketing campaigns that target different segments of the small business market.
The success of each campaign is measured by both the cost of acquisition of new
business and the credit performance of the resulting business. Advanta Business
Cards originated over 140,000 new accounts during the year ended December 31,
1999.
During 1999, we successfully applied our information based strategy in this
business to expand the universe of potential business card customers.
Additionally, in July 1999 Advanta Business Cards became one of the first
business card issuers to offer instant credit decisions over the Internet. We
believe that many of our business card customers will prefer to receive their
statements and other customer service activities over the Internet. Therefore,
we plan to strengthen our Internet capabilities in this business during 2000. We
believe that developing our Internet capabilities can decrease both the account
acquisition and servicing costs for this business.
UNDERWRITING AND RISK-BASED PRICING
Advanta Business Cards has developed sophisticated modeling techniques for
assessing the creditworthiness of potential cardholders. Because the owner or
other authorized officer of our small business customer is a co-obligor on our
business credit card account, we consider credit-related and other relevant data
about both the business and the individual in our assessment of the
creditworthiness of potential cardholders. Through the application process, we
verify the applicant's demographic information and collect current sales and
income statistics. This information, coupled with credit reports received from
external credit reporting agencies, forms
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the basis for our decision to extend credit. Using a proprietary scoring system,
we rank our prospective cardholders based upon their expected creditworthiness
and profitability potential.
Upon the completion of credit assessment and identification of potential
cardholders that meet our criteria via the initial screening process, we offer a
range of potential interest rates for which the cardholder may be eligible.
These offers are subject to verification of information provided by the
potential cardholder through the application process. If the applicant is
approved, the actual interest rate and credit line size assigned reflects the
level of risk in the cardholder's creditworthiness.
When a cardholder is first approved, our profile of that cardholder is
limited and based solely on historical information. As we compile information
regarding each cardholder's behavior over time, we maintain and continually
update our performance database. We believe that the information we gather over
time regarding actual account performance and cardholder behavior becomes a
better indicator of future performance than the criteria initially used to score
the cardholder. Therefore, we periodically re-score the cardholder based on all
of the information we accumulate, and use this information to evaluate and
potentially adjust the interest rate and the credit line size that we make
available to the cardholder.
With 30 days notice, we may reprice any account at our discretion,
typically based upon changes in a cardholder's credit standing. The credit line
size may also be adjusted up or down based on our continual credit monitoring.
To discourage delinquent payments, we use "penalty pricing" and automatically
apply a 3% increase to the interest rate on any account that is two payment
cycles delinquent.
SERVICING AND COLLECTIONS
Advanta Business Cards performs most of the servicing for our business credit
card accounts. Other data processing and administrative functions associated
with the servicing of our business credit card portfolio are outsourced to First
Data Resources, Inc., including: authorizing transactions through the MasterCard
system; performing billing and settlement processes; generating and monitoring
monthly billing statements; and issuing credit card plastics and new account
agreements.
Advanta Business Cards has a collections staff that performs the collection
activities for our business credit cards. Accounts are recognized as delinquent
one day after a monthly cycle in which no payment is received for an account
that had a balance in the prior billing cycle. Collection activity involves
contacting the cardholder and taking other appropriate actions. We continually
monitor the effectiveness of our collection efforts and make process
improvements as we deem necessary.
Advanta Business Cards discourages delinquent payments by assessing a late
fee. In addition, the collections staff aggressively pursues late payments. In
cases where our collection efforts are unsuccessful, the account balance is
"charged-off" 180 days after the payment due date. However, we continue to
pursue recovery over a longer time period in cases where we believe full or
partial payment is probable. For accounts for which we have received a notice of
a bankruptcy of the business, we use a 90-day investigation period to determine
whether we should challenge the bankruptcy petition or the discharge of amounts
owed to us. Following that 90-day period, we charge off the outstanding balance.
ADVANTA LEASING SERVICES
OVERVIEW
Advanta Leasing Services, a business unit of Advanta, offers flexible lease
financing programs to small businesses. The primary products that we offer
through our leasing business consist of leases for small-ticket items such as
computers, copiers, fax machines and other office equipment. Advanta Leasing
Services originates and funds its leases and other equipment financing
arrangements through Advanta Bank Corp. Advanta Leasing Services uses direct
mail and telemarketing to market its products. Repeat business from existing
customers generates additional business.
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Our leases are generally priced on a fixed rate basis. The average lease
size is approximately $13,400 and the average lease term is 47 months.
Managed lease receivables at December 31, 1999 totaled approximately $796
million, compared to approximately $670 million at December 31, 1998. Advanta
Leasing Services originated leases in the amount of approximately $454 million
for the year ended December 31, 1999 and approximately $328 million for the year
ended December 31, 1998. In 1999, approximately 9% of Advanta's total revenues
were derived from Advanta Leasing Services.
ORIGINATIONS
Advanta Leasing Services originates leases through marketing programs, vendors,
brokers and bulk or portfolio purchases. Advanta Leasing Services establishes
both formal and informal relationships with equipment vendors. As a result of
previous transactions with Advanta Leasing Services, vendors may recommend that
prospective customers make a credit application to Advanta Leasing Services for
financing. A more formal program between Advanta Leasing Services and a vendor
may offer prospective customers financing at pre-arranged rates, based upon the
vendor's equipment, and terms and conditions approved by Advanta Leasing
Services. Advanta Leasing Services also originates contracts through the use of
brokers. In a typical broker transaction, the broker refers potential customers
to Advanta Leasing Services and the broker is paid a referral fee. In order to
maximize the profitability of our leasing business, we are leveraging our
information based strategy to change the strategic focus. We are planning to
shift the focus away from those broker sources that do not meet our
profitability objectives to more profitable vendor and direct origination
channels.
UNDERWRITING
In connection with the origination or acquisition of leases, Advanta Leasing
Services performs a thorough credit review of all prospective customers. The
credit review process typically begins when the prospective customer completes a
credit application. We enter the completed credit application into our
computerized application processing system called the Advanced Credit Entry
System, or ACE. We can enter applications into ACE internally, or applications
can be entered externally by third parties, such as brokers or vendors. Our
credit decision is based on several credit-related attributes using our
customized credit scoring model.
Credit applications can be automatically approved or rejected based on the
dollar amount of the application and a credit score falling within a range in
the model. For those credit applications not falling within a specified dollar
amount and/or credit score, we base our credit decision on an analysis by our
credit staff utilizing underwriting criteria developed by Advanta Leasing
Services.
In addition, we have personnel in our credit department who are dedicated
to performing reviews of potential new vendors and brokers to ensure compliance
with our overall credit policies and procedures. In reviewing new relationships
with vendors and brokers, Advanta Leasing Services considers, among other
things, length of time in business, bank, credit and trade references, Dunn &
Bradstreet reports, and credit bureau reports on all of the officers of the
vendor being reviewed.
SERVICING AND COLLECTIONS
Advanta Leasing Services performs collection activities with respect to
delinquent contracts. Each lease contract has a provision for assessing late
charges in the event that a customer fails to make a payment on the contract on
the related due date. We typically initiate telephone contact when an account is
between one and 16 days past due, depending on certain established criteria.
Telephone contact is continued throughout the delinquency period. If the account
continues to be delinquent, Advanta Leasing Services may exercise any remedies
available to it under the terms of the contract, including termination and
acceleration of the lease contract. We evaluate each contract on the merits of
the individual situation taking into consideration the equipment value and the
current financial strength of the customer.
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If collection activities are unsuccessful, we typically charge off the
account at 121 days past due. An account may be charged off prior to 121 days if
we determine that there will be no further payments made.
At the time an account is charged-off, the account is referred to Advanta
Leasing Services' in-house litigation department to determine whether to pursue
the customer or any personal guarantor on the contract through litigation. If we
determine not to pursue an account through litigation it may be referred to a
third party collection agency to enforce the original terms of the contract. In
cases where the customer files for bankruptcy, the Advanta Leasing Services'
legal recovery department follows up with the debtor to determine whether the
debtor intends to assume or reject the contract. In many cases, although the
customer has filed for bankruptcy protection from its creditors, it continues to
make regular payments on its contract.
OTHER BUSINESSES
ADVANTA INSURANCE COMPANIES
Our life/health and property/casualty insurance subsidiaries, Advanta Life
Insurance Company and Advanta Insurance Company, respectively, provide insurance
and related products to two distinct markets, existing Advanta customers and the
public at large.
Together with unaffiliated insurance carriers, we offer specialty
credit-related insurance products and services to our existing mortgage,
business credit card and leasing customers. Advanta Insurance uses direct mail
marketing and telemarketing to enroll customers in these programs. The focus of
these products is on the customers' ability to repay their debt. These products
include coverage for loss of life, disability, involuntary unemployment,
accidental death, and lost or damaged equipment. Our insurance subsidiaries
generally reinsure all or a portion of the risks associated with these products
or services. Under reinsurance agreements our insurance subsidiaries assume a
proportional quota share of the risk from the unaffiliated insurance carriers.
In consideration for assuming these risks, our insurance subsidiaries receive
reinsurance premiums equal to the proportional percentage of the net premiums
collected by the insurance carriers, less a ceding fee as defined by the
reinsurance treaties, and proportional acquisition expenses, premium taxes and
loss payments made by the carriers on these risks.
Advanta Insurance also markets insurance and related products and services
of third parties to the public at large. During 1999 we increased our focus on
this market. Through a strategic alliance with Progressive Casualty Insurance
Company formed in 1996 for an initial term of 5 years, Advanta Insurance
provides its direct marketing expertise to market Progressive's automobile
insurance policies nationwide. Generally, Progressive's automobile policies
provide for automobile liability protection up to $500,000 and automobile
physical damage protection up to $100,000, as defined under specific policy and
customer requirements. As part of the alliance, Advanta Insurance Company and
Progressive have also entered into a quota share reinsurance agreement that
provides that Advanta Insurance Company assumes 50% of all risks and expenses on
automobile policies written by Progressive under the insurance programs being
marketed.
Through other strategic alliances or partnership arrangements, we are
developing and testing the market for a number of new products including
critical illness, term life with no medical exam, and disability insurance. We
are currently testing a product that permits customers to receive discounts on
prescriptions, dental services and certain other health related goods and
services at the point of sale. Each of these efforts is designed to take
advantage of our unique skills in database and information management, analysis
and targeted direct marketing.
In addition, prior to the closing of the Consumer Credit Card Transaction,
we offered credit-related insurance products to our consumer credit card
customers. Our insurance subsidiaries no longer reinsure these insurance risks.
Our insurance subsidiaries are, however, obligated to reimburse the unaffiliated
insurance carriers for losses and loss adjustment expenses paid on losses
incurred on risks assumed on or before February 20, 1998; and our insurance
subsidiaries maintain loss and loss expense reserves for these losses and
expenses.
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ADVANTA PARTNERS
Advanta Partners LP, formed in 1994, is our private equity investment affiliate.
This entity focuses primarily on growth capital financings, restructurings and
management buyouts in the financial services, electronic commerce customer
service, and other consumer and data information management services industries.
The investment objective of Advanta Partners LP is to earn attractive returns by
building the long-term values of the businesses in which it invests. Advanta
Partners LP combines transaction expertise, management skills and a broad
contact base with strong industry-specific knowledge.
DEPOSITORY INSTITUTIONS
We own two depository institutions, Advanta National Bank and Advanta Bank Corp.
Advanta National Bank is a national banking association organized under the laws
of the United States of America with its headquarters and sole branch currently
located in Wilmington, Delaware. Advanta currently conducts a large portion of
Advanta Mortgage's business and, before to February 20, 1998, conducted a large
portion of its consumer credit card business through Advanta National Bank.
Advanta Bank Corp. is an industrial loan corporation organized under the
laws of the State of Utah with its principal executive offices located in Salt
Lake City, Utah. Currently, Advanta Bank Corp.'s principal activities consist of
the issuance of the "Advanta Business Card" credit card, small ticket equipment
lease financing and originating and servicing a portion of Advanta Mortgage's
mortgage loans.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
Deposits with each of our bank subsidiaries are insured by the FDIC. Our banks
offer a range of insured deposit products that are used to fund loan and lease
originations at the banks. Advanta National Bank's deposit products include
money market savings accounts, retail certificates of deposit and large
denomination certificates of deposit of $99,000 or more. Advanta Bank Corp.'s
deposit products include retail certificates of deposit and large denomination
certificates of deposit of $99,000 or more. At December 31, 1999, we had total
deposits of $1.5 billion at our banks, compared to $1.8 billion as of December
31, 1998. The banks generate retail deposits from repeat deposits from existing
customers and from new depositors attracted by direct mail solicitations,
newspaper and other media advertising and over the Internet.
Since 1951, Advanta Corp. and its predecessor Teachers Service
Organization, Inc. have offered unsecured debt securities of Advanta Corp., in
the form of RediReserve Certificates and Investment Notes to retail investors
through Advanta's retail note programs. These debt securities are a secondary
funding source for Advanta Corp. and provide funding diversity. These debt
securities have been sold predominantly on a direct basis by Advanta Corp. in
select states. The RediReserve Variable Rate Certificates are payable on demand
and the maturities on the Investment Notes range from 91 days to ten years. The
RediReserve Certificates and Investment Notes generally require an initial
minimum investment of $5,000 and are obligations of Advanta Corp. that are not
insured or guaranteed by any public or private entity. We change the interest
rates that we offer frequently, depending on market conditions and our funding
needs. The rates also vary depending on the size of each investment. As of
December 31, 1999, $235.3 million of RediReserve Certificates and Investment
Notes were outstanding with interest rates ranging from 6.02% to 11.34%.
GOVERNMENT REGULATION
ADVANTA CORP.
Advanta Corp. is not required to register as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). We own Advanta
National Bank, which is a "bank" as defined under the BHCA as amended by the
Competitive Equality Banking Act of 1987 ("CEBA"). However, under grandfathering
provisions of CEBA, we are not required to register as a bank holding company
because Advanta National Bank, which takes demand deposits but does not make
commercial loans, did not come within the BHCA definition of the term "bank"
prior to the enactment of CEBA. Under CEBA, our other
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banking subsidiary, Advanta Bank Corp., is not considered a "bank" for purposes
of the BHCA. Accordingly, our ownership of it does not impact our exempt status
under the BHCA.
Under CEBA, Advanta National Bank is subject to certain restrictions, such
as limiting its activities to those in which it was engaged prior to March 5,
1987 and not acquiring control of more than 5% of the stock or assets of an
additional "bank" or "savings association," as these terms are defined in the
BHCA. Before September 30, 1996, CEBA also contained restrictions that limited
Advanta National Bank's growth rate to not more than 7% per year. This growth
cap of 7% was eliminated in September 1996 by an amendment to the BHCA, creating
substantial new flexibility for asset liability management at Advanta National
Bank. On November 12, 1999, the Gramm-Leach-Bliley Financial Modernization Act
of 1999 (the "Financial Modernization Act") was adopted and it will become
effective on May 12, 2000. The Financial Modernization Act will further ease
some of the limitations on Advanta National Bank that are imposed by CEBA,
including restrictions that prohibit Advanta National Bank from cross-marketing
products or services of an affiliate that are not permissible products or
services for bank holding companies under the BHCA. The elimination of this
restriction will create additional flexibility for us in the marketing of our
financial services products.
Because we are not a bank holding company, we are not subject to
examination by the Federal Reserve Board, other than for purposes of assuring
continued compliance with CEBA restrictions, as discussed above. Prior to the
enactment of the Financial Modernization Act, if Advanta Corp. or Advanta
National Bank had ceased complying with the restrictions set forth in CEBA,
registration as a bank holding company under the BHCA would be required.
Registration as a bank holding company is not automatic and would subject us and
our subsidiaries to inspection and regulation by the Federal Reserve Board.
Under the Financial Modernization Act, should Advanta Corp. or Advanta National
Bank fail to comply with any of the restrictions applicable to them under CEBA,
there will be a 180-day right to cure period following receipt of a notice from
the Federal Reserve Board. During the cure period we will be required to either
cease or correct the activity that is not in compliance, or submit to the
Federal Reserve Board a plan to cease the activity within a timely manner that
is not in excess of one year and implement procedures that will avoid a
reoccurrence of the activity. The opportunity to cure or remediate an activity
that is out of compliance significantly reduces the risk that Advanta Corp. will
be required to register as a bank holding company under the BHCA.
ADVANTA NATIONAL BANK
Advanta National Bank is subject to regulation and periodic examination,
primarily by the Office of the Comptroller of the Currency (the "OCC"). The
OCC's regulations relate to the maintenance of reserves for certain types of
deposits and other products offered by a bank, the maintenance of certain
financial ratios, the terms on which a bank may engage in transactions with its
affiliates and a broad range of other banking practices. As a national bank,
Advanta National Bank is also subject to provisions of federal law which
restrict its ability to extend credit to its affiliates or pay dividends to
Advanta Corp.
Advanta National Bank is subject to capital adequacy guidelines issued by
the Federal Financial Institutions Examination Council (the "FFIEC"). These
guidelines make regulatory capital requirements more sensitive to differences in
risk profiles among banking organizations and consider off-balance sheet
exposures in determining capital adequacy. Under the rules and regulations of
the FFIEC, at least half of a bank's total capital is required to be "tier I
capital," comprised of common equity, retained earnings and a limited amount of
non-cumulative perpetual preferred stock. The remaining capital, "tier II
capital," may consist of other preferred stock, certain hybrid debt/equity
instruments, a limited amount of term subordinated debt or a limited amount of
the reserve for possible credit losses. The FFIEC has also adopted minimum
leverage ratios for national banks, which are calculated by dividing tier I
capital by total average assets. Recognizing that the risk-based capital
standards address only credit risk, and not interest rate, liquidity,
operational or other risks, many national banks are expected to maintain capital
in excess of the minimum standards.
In addition, pursuant to provisions of the FDIC Improvement Act of 1991
(the "FDICIA") and related regulations with respect to prompt corrective action,
FDIC-insured institutions such as Advanta National
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Bank may only accept brokered deposits without FDIC permission if they meet
specified capital standards, and are subject to restrictions with respect to the
interest they may pay on deposits unless they are "well-capitalized." To be
"well-capitalized," a bank must have a ratio of combined tier I and tier II
capital to risk-weighted assets of not less than 10%, tier I capital to
risk-weighted assets of not less than 6%, and a tier I leverage ratio of not
less than 5%.
Advanta National Bank's ratio of combined tier I and tier II capital to
risk-weighted assets was 14.86% as of December 31, 1999, and 12.12% as of
December 31, 1998. In each case, Advanta National Bank had capital levels that
met the definition of "well-capitalized" under the regulatory framework for
prompt corrective action.
ADVANTA BANK CORP.
Advanta Bank Corp., a Utah-chartered industrial loan corporation, is a
depository institution subject to regulatory oversight and examination by both
the FDIC and the Utah Department of Financial Institutions. Under its banking
charter, Advanta Bank Corp. may make consumer and commercial loans and may
accept all FDIC-insured deposits other than demand deposits such as checking
accounts. Advanta Bank Corp. is subject to the same regulatory and supervisory
processes as commercial banks.
Advanta Bank Corp. is subject to provisions of federal law which restrict
and control its ability to extend credit and provide or receive services between
affiliates. Advanta Bank Corp. is subject to the same FFIEC capital adequacy
guidelines as Advanta National Bank. See "Business -- Government
Regulation -- Advanta National Bank." In addition, the FDIC has regulatory
authority to prohibit Advanta Bank Corp. from engaging in any unsafe or unsound
practice in conducting its business.
Advanta Bank Corp.'s combined total capital ratio of tier I and tier II
capital to risk-weighted assets was 13.28% as of December 31, 1999 and 14.13% as
of December 31, 1998. In each case, Advanta Bank Corp. had capital levels that
met the definition of "well-capitalized" under the regulatory framework for
prompt corrective action.
LENDING AND LEASING ACTIVITIES
Our lending activities are also subject to regulation under various federal and
state laws including the Truth-in-Lending Act, the Home Ownership and Equity
Protection Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure
Act, the Community Reinvestment Act, the Electronic Funds Transfer Act, the Real
Estate Settlement Procedures Act and the Fair Credit Reporting Act. Provisions
of these statutes and related regulations require disclosure to borrowers of
finance charges in terms of an annual percentage rate, prohibit discriminatory
practices in extending credit, require our FDIC-insured banking institutions to
serve the banking needs of their local communities and regulate the
dissemination and use of information relating to a borrower's creditworthiness.
Certain of these statutes and regulations also apply to our leasing activities.
In addition, some of our direct and indirect subsidiaries that are engaged in
our mortgage business are subject to licensure and regulation in various states
as mortgage bankers, mortgage brokers, and originators, sellers and servicers of
mortgage loans.
DIVIDENDS
There are various legal limitations on the extent to which Advanta National Bank
can supply funds through dividends to Advanta Corp. The prior approval of the
OCC is required if the total of all dividends declared by Advanta National Bank
in any calendar year exceeds its net profits for that year combined with its
retained net profits for the preceding two years, less any required transfers to
surplus accounts. In addition, Advanta National Bank may not pay a dividend in
an amount greater than its undivided profits then on hand after deducting its
losses and bad debts. The OCC also has authority under the Financial
Institutions Supervisory Act to prohibit a national bank from engaging in any
unsafe or unsound practice in conducting its business. It is possible, depending
upon the financial condition of the bank in question and other factors, that the
OCC could claim that a dividend payment might be an unsafe or unsound practice.
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During 1998, in connection with the Consumer Credit Card Transaction, the
OCC approved the payment of a special dividend/return of capital of $1.3 billion
from Advanta National Bank to Advanta Corp. As a result of this extraordinary
dividend and the dividend restrictions described above, Advanta National Bank
will not be eligible to declare any dividends to Advanta Corp. without the OCC's
prior approval until at least the first quarter of 2001.
Although Advanta Bank Corp. is not subject to specific limitations on its
ability to pay dividends, it is possible, depending upon the financial condition
of Advanta Bank Corp. and other factors, that the FDIC could claim that a
dividend payment might be an unsafe or unsound practice. In this event, Advanta
Bank Corp. would be limited in its ability to pay dividends to Advanta Corp.
TRANSFERS OF FUNDS
Sections 23A and 23B of the Federal Reserve Act also impose restrictions on
Advanta National Bank and Advanta Bank Corp. These restrictions limit the
transfer of funds by the depository institution to certain of its affiliates,
including Advanta Corp., in the form of loans, extensions of credit, investments
or purchases of assets. These transfers by any one depository institution to us
or any other single affiliate are limited in amount to 10% of the depository
institution's capital and surplus, and transfers to all affiliates are limited
in the aggregate to 20% of the depository institution's capital and surplus.
These loans and extensions of credit are also subject to various collateral
requirements. Sections 23A and 23B of the Federal Reserve Act also require
generally that the depository institution's transactions with its affiliates be
on terms no less favorable to the bank than comparable transactions with
unrelated third parties. In addition, in order for us to maintain our
grandfathered exemption under CEBA, Advanta National Bank is not permitted to
make any loans to us or any of our subsidiaries.
REGULATION OF INSURANCE
Our insurance subsidiaries are subject to the laws and regulations of, and
supervision by, the states in which they are domiciled or have obtained
authority to transact insurance business. These states have adopted laws and
regulations which govern all insurance policy underwriting, rating, licensing,
marketing, administration and financial operations of an insurance company,
including dividend payments and financial solvency. In addition, our insurance
subsidiaries have registered as an Arizona Holding Company which requires an
annual registration and the approval of certain transactions between all
affiliated entities.
The maximum dividend that any of our insurance subsidiaries can distribute
to Advanta Corp., in any twelve month period without prior approval of the State
of Arizona Department of Insurance is the lesser of:
- 10% of the subsidiary's statutory surplus; or
- for any given twelve-month period, its net income, if it is a life
insurance company; or
- for any given twelve-month period, its net investment income, if it is a
property and casualty insurance company.
In 1999, Advanta Life Insurance Company declared and paid dividends to
Advanta Corp. in the amount of $1.2 million. In 1998, Advanta Insurance Company
declared and paid dividends in the amount of $37.5 million to Advanta Corp., of
which $35.0 million was classified as an extraordinary dividend. Advanta
Insurance Company applied for and received approval from The Arizona Department
of Insurance to pay this extraordinary dividend. Also in 1998, Advanta Life
Insurance Company declared and paid dividends in the amount of $1.2 million to
Advanta Corp.
The State of Arizona has adopted minimum risk-based capital standards as
developed by the National Association of Insurance Commissioners. Risk-based
capital is the quantification of an insurer's investment, underwriting, reserve
and business risks in relation to its total adjusted capital and surplus. The
ratio of an insurer's total adjusted capital and surplus is compared to various
levels of risk-based capital to determine what intervention, if any, is required
by either the insurance company or an insurance department. As of
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December 31, 1999, our insurance subsidiaries met all risk-based capital
standards and required no intervention by any party.
Our insurance subsidiaries reinsure risks using underwriting insurance
practices and rates which are regulated in part or fully by state insurance
departments. State insurance departments continually review and modify these
rates based on prior historical experience. Any modifications may impact the
future profitability of our insurance subsidiaries.
LEGAL DEVELOPMENTS
Because the banking and finance businesses in general are the subject of the
extensive regulation described above at both the state and federal levels, and
because numerous legislative and regulatory proposals are advanced each year
which, if adopted, could affect our profitability or the manner in which we
conduct our activities, we cannot predict the extent of the impact of any new
laws or regulations.
Various legislative proposals and initiatives relating to the banking and
finance businesses have been or will be introduced in Congress. Recently, an
FDIC discussion draft proposal has been made public relating to capital
requirements of subprime lenders. Under the proposal, regulatory capital
required to be held for certain mortgage or other loans that are considered
subprime would be increased. We are primarily in the lending and leasing
businesses. At this time we have not yet quantified the amount of our mortgage,
business credit card and lease receivables that could be categorized as
"subprime" under the FDIC's proposal. If a substantial portion of our loan and
lease receivables were to meet the FDIC's proposed definition of "subprime" and
the draft proposal were to be adopted, the increased regulatory capital
requirements could have a negative impact on our financial results. This is one
of several regulatory and legislative initiatives focused on the subprime
mortgage business that potentially could impact the manner in which we conduct
our business and our financial results. Other federal legislative proposals and
initiatives that could impact our businesses include financial privacy
initiatives that would restrict the permissible use of customer-specific
financial and other credit information, and statutory changes to the Real Estate
Settlement Procedures Act, the Truth in Lending Act and the Home Ownership
Equity Protection Act. Additionally, a number of states are considering, and
others likely will consider, legislative and regulatory initiatives related to
subprime mortgage lending and financial privacy. It is impossible to determine
whether any of these proposals or initiatives will be adopted or occur and, if
so, the magnitude of any impact they will have on the manner in which we conduct
our business and our financial results.
COMPETITION
As a marketer of financial services and credit products, we face intense
competition from numerous financial services providers. Many of these companies
are substantially larger and have more capital and other resources than we do.
Competition among lenders can take many forms, including convenience in
obtaining a loan, customer service, size of loans, interest rates, prepayment
penalties and other types of finance or service charges, duration of loans, the
nature of the risk the lender is willing to assume and the type of security, if
any, required by the lender. Although we believe we are generally competitive in
most of the geographic areas in which we offer our services, there can be no
assurance that our ability to market our services successfully or to obtain an
adequate yield on our loans will not be impacted by the nature of the
competition that now exists or may develop.
In seeking investment funds from the public, we face competition from
banks, savings institutions, money market funds, mutual funds, credit unions and
a wide variety of private and public entities that sell debt securities, some of
which are publicly traded. Many of our competitors are larger and have more
capital and other resources than we have. Competition relates to matters such
as: rate of return, collateral, insurance or guarantees applicable to the
investment, if any; the amount required to be invested; convenience and the cost
to and conditions imposed upon the investor in investing and liquidating the
investment, including any commissions which must be paid or interest forfeited
on funds withdrawn; customer service; service charges, if any; and the
taxability of interest.
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EMPLOYEES
As of December 31, 1999, we had 2,643 employees. We believe that we have good
relationships with our employees. None of our employees are represented by a
collective bargaining unit.
CAUTIONARY STATEMENTS
Information or statements provided by the Company from time to time may contain
certain "forward-looking information" including information relating to
anticipated earnings per share, anticipated returns on equity, anticipated
growth in loans outstanding and credit card accounts, anticipated net interest
margins, anticipated operations costs and employment growth, anticipated
prepayment rates of outstanding loans, anticipated marketing expense or
anticipated delinquencies and charge-offs. The cautionary statements provided
below are being made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act") and with the intention of obtaining
the benefits of the "safe harbor" provisions of the Act for any such
forward-looking information.
We caution readers that any forward-looking information provided by us is
not a guarantee of future performance and that actual results may differ
materially from those in the forward-looking information as a result of various
factors, including but not limited to:
- Increased credit losses and collection costs associated with a worsening
of general economic conditions, rising interest rates, declining real
estate values, shifts in product mix within our portfolio of loans,
rising delinquency levels, increases in the number of customers seeking
protection under the bankruptcy laws, resulting in accounts being charged
off as uncollectible, and the effects of fraud by third parties or
customers.
- Intense and increasing competition from numerous providers of financial
services who may employ various competitive strategies. We face
competition from national, regional and local originators of
non-conforming mortgages, business credit cards and business equipment
leases, some of which have greater resources than we do.
- The effects of interest rate fluctuations on our net interest margin and
the value of our assets and liabilities; the continued legal or
commercial availability of techniques (including interest rate swaps and
similar financial instruments, loan repricing, hedging and other
techniques) that we use to manage the risk of such fluctuations and the
continuing operational viability of those techniques and the accounting
and regulatory treatment of such instruments.
- Difficulties or delays in the securitization of our receivables and the
resulting impact on the cost and availability of such funding. Such
difficulties and delays may result from changes in the availability of
credit enhancement in securitizations, the current economic, legal,
regulatory, accounting and tax environments and adverse changes in the
performance of the securitized assets.
- The amount, type and cost of financing available to us, including secured
financing, and any changes to that financing including any impact from
changes in the current economic, legal, regulatory, accounting and tax
environments, adverse changes in the performance of our owned loan
portfolio, any impact from changes in our debt ratings and the activities
of parties with which we have agreements or understandings, including any
activities affecting any investment.
- Changes in our aggregate accounts, loan balances or subserviced
receivables volume, and the growth rate thereof, including changes
resulting from factors such as shifting product mix, amount of actual
marketing investment made by us, prepayment of loan balances, changes in
relationships with significant customers and general economic conditions
and other factors beyond our control.
- The impact of "seasoning" (the average age of a lender's portfolio) on
our level of delinquencies and losses which may require a higher
allowance for loan losses for on-balance sheet assets and may adversely
impact mortgage and business loan and lease securitization income. The
addition of account originations or balances and the attrition of such
accounts or balances could significantly impact the seasoning of our
overall portfolio.
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- The amount of, and rate of growth in, our expenses (including employee
and marketing expenses) as our businesses develop or change and we expand
into new market areas; the acquisition or disposition of assets
(interest-earning, fixed or other); the effects of changes within our
organization or in our compensation and benefit plans; and the impact of
unusual items resulting from the ongoing evaluation of our business
strategies, asset valuations and organizational structures.
- Difficulties or delays in the development, production, testing and
marketing of products or services, including, but not limited to, a
failure to implement new product or service programs when anticipated,
the failure of or delay in customers' acceptance of these products or
services, losses associated with the testing of new products or services
or financial, legal or other difficulties as may arise in the course of
such implementation.
- The effects of, and changes in, tax laws, rates, regulations and
policies.
- The effects of, and changes in, social conditions and general economic
conditions, including inflation.
- The effects of, and changes in, the level of scrutiny, regulatory
requirements and regulatory initiatives resulting from the fact that our
banking and finance businesses are highly regulated and subject to review
and examination by federal and state regulators, including the Office of
the Comptroller of the Currency and the Federal Deposit Insurance
Corporation.
- The effects of, and changes in, monetary and fiscal policies, federal and
state laws and regulations (financial, consumer, regulatory or
otherwise), and other activities of governments, agencies and other
similar organizations, including the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation.
- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims and changes in those
items, developments or assertions by or against us or any of our
subsidiaries; adoptions of new, or changes in existing, accounting
policies and practices and the application of such policies and
practices.
ITEM 2. PROPERTIES.
At December 31, 1999, Advanta owned two buildings in Horsham, Pennsylvania
totaling 198,000 square feet. These buildings are primarily used by Advanta
Mortgage and Advanta Business Cards. Advanta leased 109,511 square feet in
Spring House, Pennsylvania for its principal executive offices as well as some
of its Advanta Mortgage operations. Advanta leased an additional 39,203 square
feet in two buildings in the Pennsylvania suburbs of Philadelphia that are used
to support certain corporate staff functions. In the adjoining state of New
Jersey Advanta owned one building consisting of 56,196 square feet and leased
24,090 square feet of office space in 2 buildings for its Advanta Leasing
Services and Advanta Business Cards operations. In Delaware, Advanta leased
36,589 square feet of office space for Advanta National Bank. In New York,
Advanta leased 4,873 square feet of office space for Advanta Partners. Advanta
also leased an additional 164,650 square feet of office space located in 2
buildings in California for Advanta Mortgage and 50,625 square feet of office
space in Utah for Advanta Bank Corp.
In addition to these principal locations in Pennsylvania, New Jersey, New
York, Delaware California and Utah, Advanta leased 76,843 square feet of office
space in twenty-three states to support its Advanta Mortgage loan production
offices. Advanta leased an additional 7,151 square feet of office space in seven
states to support Advanta Mortgage and Advanta Leasing Services.
Advanta leased a total of 5,995 square feet of surplus office space in four
states as a result of office relocations related to Advanta Mortgage. Advanta
sublets 5,112 square feet of this surplus office space to third parties and 883
square feet remain vacant.
At December 31, 1999, the total leased and owned office space was 773,726
square feet.
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ITEM 3. LEGAL PROCEEDINGS.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court.
Fleet's allegations, which Advanta denies, center around Fleet's assertions that
Advanta has failed to complete certain post-closing adjustments to the value of
the assets and liabilities Advanta contributed to the Fleet LLC in connection
with the Consumer Credit Card. Fleet seeks damages of approximately $141
million. Advanta has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that Advanta contributed $1.8
million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities Advanta has already assumed. Advanta also
has filed a countercomplaint against Fleet for approximately $101 million in
damages Advanta believes have been caused by certain actions of Fleet following
closing of the Consumer Credit Card Transaction. Formal discovery has begun and
is ongoing. Management expects that the ultimate resolution of this litigation
will not have a material adverse effect on the financial position or future
operating results of Advanta.
On or about March 26, 1999, a complaint was filed by John Uphaus,
individually and on behalf of a class, against Household Bank (Nevada) N.A.
("Household") and Advanta National Bank in the United States District Court for
the Northern District of Illinois. Uphaus alleges that he had a credit card
account with Household, which account was purchased by Advanta National Bank. He
further alleges that the annual percentage rate on a portion of his account was
increased in a manner contrary to the promotional material he received.
Advanta's preliminary investigation suggests that if a change in interest rate
took place, as alleged by Uphaus, that change occurred after the contribution of
Advanta's consumer credit card portfolio, and it was made by Fleet LLC. In any
event, Fleet LLC is obligated to defend and indemnify Advanta pursuant to the
Contribution Agreement and the Licensing Agreement between the parties. Advanta
National Bank's response to this complaint was originally due on June 21, 1999.
The court has extended this deadline several times to allow the parties to
exchange information; thus, no response has been filed by either defendant.
Advanta and its subsidiaries are involved in other legal proceedings,
claims and litigation, including those arising in the ordinary course of
business. Management believes that the aggregate liabilities, if any, resulting
from those actions will not have a material adverse effect on the consolidated
financial position or results of operations of Advanta. However, as the ultimate
resolution of these proceedings is influenced by factors outside of Advanta's
control, it is reasonably possible that Advanta's estimated liability under
these proceedings may change.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers of Advanta Corp. and its subsidiaries listed
below was elected by the applicable Board of Directors, to serve at the pleasure
of the Board in the capacities indicated.
NAME AGE OFFICE DATE ELECTED
- ------------------------------------------------------------------------------------------------------
Dennis Alter 57 Chairman of the Board and Chief Executive 1972
Officer
William A. Rosoff 56 Vice Chairman of the Board and President 1996
Philip M. Browne 40 Senior Vice President and Chief Financial 1998
Officer
George O. Deehan 57 Chief Executive Officer, Advanta Leasing 1998
Services
James L. Shreero 39 Vice President and Chief Accounting Officer 1999
Mr. Alter became Executive Vice President and a Director of Advanta Corp.'s
predecessor organization in 1967. He was elected President and Chief Executive
Officer in 1972, and Chairman of the Board of Directors in August 1985. Mr.
Alter has remained as Chairman of the Board since August 1985. In February 1986,
he relinquished the title of President, and in August 1995 he relinquished the
title of Chief Executive Officer. In October 1997, Mr. Alter reassumed the title
of Chief Executive Officer. Mr. Alter is a director of Next Left, Inc. a
privately held internet service company.
Mr. Rosoff joined Advanta Corp. in January 1996 as a Director and Vice
Chairman. In October 1999, Mr. Rosoff became President as well as Vice Chairman
of the Board of Advanta Corp. Prior to joining Advanta Corp., Mr. Rosoff was a
long time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen LLP,
Advanta Corp.'s outside counsel, where he advised Advanta Corp. for over 20
years. While at Wolf, Block, Schorr and Solis-Cohen LLP he served as Chairman of
its Executive Committee and, immediately before joining Advanta Corp., as a
member of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff
is a Trustee of Atlantic Realty Trust, a publicly held real estate investment
trust.
Mr. Browne joined Advanta Corp. in June 1998 as Senior Vice President and
Chief Financial Officer. Prior to joining Advanta Corp., he was an Audit and
Business Advisory Partner at Arthur Andersen LLP where, for over sixteen years,
he audited public and private companies and provided business advisory and
consulting services to financial services companies. Mr. Browne had served as
the Arthur Andersen engagement partner for Advanta Corp. since 1994.
Mr. Deehan was elected President and Chief Executive Officer of Advanta
Leasing Services in December 1998. Prior to joining Advanta Leasing Services,
Mr. Deehan served AT&T Capital a company. Mr. Deehan served AT&T
Capital in various capacities, including serving as President of Information
Technology Services for AT&T Capital, President and Chief Operating Officer of
NCR Credit Corporation, and Senior Vice President of Marketing and Sales of AT&T
Capital, Canada. Prior to joining AT&T Capital, Mr. Deehan held numerous
positions with financial services companies.
Mr. Shreero was elected Vice President and Chief Accounting Officer of
Advanta Corp. in April 1999. Mr. Shreero has served as Senior Vice President of
Advanta Corp.'s subsidiary, Advanta Mortgage Corp. USA since 1993. Prior to
joining Advanta Corp., Mr. Shreero served as Senior Manager at Deloitte &
Touche, a public accounting firm, from 1989 to 1993, where he performed audits
of and provided business consulting services to financial services companies.
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21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market System of The
Nasdaq Stock Market, Inc. under the symbols ADVNB (Class B non-voting common
stock) and ADVNA (Class A voting common stock).
Following are the high, low and closing sale prices and cash dividends
declared for the last two years as they apply to each class of stock:
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- -------------- ------ ------ ------ ---------
CLASS B:
March 1998 $31.25 $19.69 $21.00 $.0756
June 1998 24.25 17.50 19.88 .0756
September 1998 20.56 8.25 10.50 .0756
December 1998 12.00 5.25 11.06 .0756
March 1999 $12.31 $ 7.75 $ 8.94 $.0756
June 1999 14.75 7.59 13.56 .0756
September 1999 19.13 11.38 11.75 .0756
December 1999 15.88 10.44 14.06 .0756
CLASS A:
March 1998 $32.75 $21.00 $22.50 $.0630
June 1998 26.25 19.25 21.94 .0630
September 1998 22.75 9.38 12.88 .0630
December 1998 14.88 7.13 13.25 .0630
March 1999 $15.19 $10.31 $11.06 $.0630
June 1999 18.25 9.63 18.06 .0630
September 1999 23.94 14.63 14.63 .0630
December 1999 20.38 14.63 18.25 .0630
At December 31, 1999, the Company had approximately 805 and 315 holders of
record of Class B and Class A common stock, respectively.
Although the Company anticipates that comparable cash dividends will
continue to be paid in the future, the payment of future dividends by the
Company will be at the discretion of the Board of Directors and will depend on
numerous factors including the Company's cash flow, financial condition, capital
requirements and such other factors as the Board of Directors deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Summary of Operations(1)
Noninterest revenues $ 326,297 $ 417,392 $ 825,895 $ 799,570 $ 532,380
Interest revenues 246,226 245,340 436,860 354,927 249,566
Interest expense 167,676 184,275 324,558 269,700 166,032
Gain on transfer of consumer credit
card business 0 541,288 0 0 0
Provision for credit losses 42,647 67,193 210,826 96,862 53,326
Minority interest in income of
consolidated subsidiary 8,880 8,880 8,880 222 0
Operating expenses 337,061 379,764 621,961 522,952 350,685
Unusual charges(2) 16,713 125,072 0 0 0
Net income 49,818 447,880 71,625 175,657 136,677
- ----------------------------------------------------------------------------------------------------------
Per Common Share Data
Net Income
Basic
Combined(3) $ 1.99 $ 16.65 $ 1.52 $ 4.15 $ 3.38
Class A 1.95 16.62 1.45 4.08 3.34
Class B 2.02 16.68 1.57 4.19 3.42
Diluted
Combined(3) 1.96 15.71 1.50 3.89 3.20
Class A 1.93 15.69 1.43 3.86 3.18
Class B 1.99 15.73 1.54 3.91 3.22
Cash dividends declared
Class A .252 .252 .440 .380 .290
Class B .302 .302 .528 .456 .348
Book value-combined 23.14 21.26 19.01 18.06 14.35
Closing stock price
Class A 18.25 13.25 26.25 42.75 38.25
Class B 14.06 11.06 25.38 40.88 36.38
- ----------------------------------------------------------------------------------------------------------
Financial Condition -- Year End
Investments and money market
instruments(4) $ 1,387,655 $ 1,662,343 $ 2,092,292 $ 1,653,384 $ 1,089,317
Gross receivables
Owned 1,480,305 1,120,360 3,352,236 2,618,392 2,732,933
Securitized 8,760,918 8,659,797 14,505,968 13,670,801 9,482,422
-------------------------------------------------------------------
Managed 10,241,223 9,780,157 17,858,204 16,289,193 12,215,355
Total serviced receivables(5) 22,142,890 18,058,485 27,039,669 19,981,285 12,838,272
Total assets
Owned 3,689,662 3,721,420 6,655,915 5,583,959 4,524,259
Managed 11,977,045 12,065,183 20,945,748 19,141,467 13,943,506
Deposits 1,512,359 1,749,790 3,017,611 1,860,058 1,906,601
Long-term debt 788,508 1,030,147 2,248,172 2,305,081 1,279,190
Capital securities(6) 100,000 100,000 100,000 100,000 0
Stockholders' equity 589,631 560,304 926,950 852,036 672,964
- ----------------------------------------------------------------------------------------------------------
Selected Financial Ratios
Return on average assets 1.34% 11.95% 1.09% 3.16% 4.06%
Return on average common equity 8.82 82.76 8.47 25.31 26.15
Return on average total equity(7) 8.30 64.81 8.12 22.07 24.75
Equity/managed assets(7) 5.76 5.47 4.90 4.95 4.81
Equity/owned assets(7) 18.69 17.74 15.43 17.05 14.87
Dividend payout 15.67 1.62 33.34 10.75 9.97
As a percentage of managed
receivables:
Total loans 30 days or more
delinquent(8) 8.2 7.7 6.0 5.4 3.3
Net charge-offs(8) 1.6 2.5 5.3 3.2 2.2
Operating expenses 3.3 3.6 3.4 2.9 2.9
- ----------------------------------------------------------------------------------------------------------
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(1) Results through February 1998 include the results of the consumer credit
card unit.
(2) 1999 amounts included charges associated with cost reduction initiatives in
the first quarter and additional costs associated with products exited in
the first quarter of 1998. 1998 amounts included severance and outplacement
costs associated with workforce reduction, option exercises and other
employee costs associated with the Consumer Credit Card Transaction/Tender
Offer; expense associated with exited business/product and asset impairment;
and equity losses related to exited business/product.
(3) Combined represents a weighted average of Class A and Class B (see Note 1 to
Consolidated Financial Statements).
(4) Includes federal funds sold, restricted interest-bearing deposits, trading
investments, investments available for sale and subordinated trust assets.
(5) Represents total managed receivables plus contract servicing receivables.
(6) Represents company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures of Advanta.
(7) In 1999, 1998, 1997 and 1996, return on average total equity, equity/managed
assets and equity/owned assets include capital securities as equity. The
ratios without capital securities for 1999 were 8.82%, 4.92%, and 15.98%,
respectively, for 1998 were 74.75%, 4.64% and 15.06%, respectively, for 1997
were 8.33%, 4.43% and 13.93%, respectively and for 1996 were 22.31%, 4.45%,
and 15.26%, respectively.
(8) Beginning in 1996, charge-off rates reflect the adoption of a new consumer
credit card charge-off methodology. This new policy related to consumer
credit card bankruptcies and provided up to a 90 day investigative period
following notification of the bankruptcy petition prior to charge-off.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW
For the year ended December 31, 1999, we reported net income of $49.8 million or
$1.96 per combined common share, assuming dilution, compared to $447.9 million
or $15.71 per combined diluted common share for the year ended December 31,
1998. For the year ended December 31, 1997, we reported net income of $71.6
million or $1.50 per combined diluted common share. For the year ended December
31, 1999, net income (loss) was ($11.0) million for Advanta Mortgage, $22.8
million for Advanta Business Cards and $3.0 million for Advanta Leasing
Services.
The earnings reported for 1999 include unusual charges, after tax, of $4.1
million for severance and outplacement costs associated with cost cutting
initiatives implemented in the first quarter of 1999 and $6.1 million of
additional costs associated with products exited in the first quarter of 1998.
In addition, in 1999 we recognized non-operating gains of $16.5 million, after
tax, in connection with an investment held by Advanta Partners LP, our private
equity investment affiliate, and other non-operating charges of $10.2 million
related to our exit from the auto finance business. The earnings for the year
ended December 31, 1999 also include a reduction in our retained interest-only
strip of $19.4 million, after tax, reflecting the adoption of more conservative
fair value assumptions, a $7.3 million after tax charge for the write-down of
assets associated with the curtailment of the corporate finance business, and a
tax benefit of $50.0 million related to the former consumer credit card
business.
Our earnings reported for 1998 reflect the $541.3 million gain on the
Consumer Credit Card Transaction (see Note 9 to the Consolidated 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 Consumer Credit Card Transaction/Tender Offer, a $54.1
million pretax charge for expenses associated with exited businesses and
products, $41.8 million of equity securities losses and an $8.7 million pretax
charge for facility impairments.
For the year ended December 31, 1998, net income (loss) was $25.1 million
for Advanta Mortgage, $11.6 million for Advanta Business Cards and ($1.2)
million for Advanta Leasing Services. In addition, included in the net income
for 1998 was $10.2 million contributed by the consumer credit card business unit
before the Consumer Credit Card Transaction. Net income for 1997 was $33.3
million for Advanta Mortgage, $3.0 million for Advanta Business Cards, $11.8 for
Advanta Leasing Services, and $22.9 million for the consumer credit card
business unit.
ADVANTA MORTGAGE
OVERVIEW
Advanta Mortgage makes nonconforming home equity loans directly to consumers and
through brokers. This business unit originates and services first and second
lien mortgage loans, including home equity lines of credit, directly through
subsidiaries of Advanta. In addition to servicing and managing the loans it
originates, Advanta Mortgage contracts with third parties to service their
nonconforming home equity loans on a subservicing basis.
Our decision to grow the on-balance sheet portfolio of mortgage loans and
reduce securitization income, as well as $32.0 million of charges associated
with more conservative fair value assumptions related to our retained interests,
resulted in Advanta Mortgage reporting a net loss of $11.0 million for the year
ended December 31, 1999. This compares to net income of $25.1 million for the
year ended December 31, 1998. During 1999, the retained interest-only strip and
contractual mortgage servicing rights from Advanta Mortgage securitizations
decreased by $75.2 million to $208.3 million at December 31, 1999 as compared to
$283.5 million at December 31, 1998. On a pro forma portfolio lender basis, the
net income of Advanta Mortgage was $30.3 million in 1999 and $15.6 million in
1998. See "Portfolio Lender Analysis."
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25
Net income for Advanta Mortgage was $25.1 million for the year ended
December 31, 1998, compared to $33.3 million for the year ended December 31,
1997. The decrease in net income in 1998 as compared to 1997 was partially a
reflection of our decision to report income for Advanta Mortgage that is
essentially equal to that of a portfolio lender, rather than the front-ended
income typically reported through gain on sale accounting. During 1998, net
income for Advanta Mortgage included a $51.0 million pretax charge recorded to
adjust the retained interest-only strip to fair value reflecting increases in
prepayment speeds experienced during the year. A similar charge of $42.4 million
was recorded in 1997.
SECURITIZATION INCOME
Advanta Mortgage recognized gains of $120.5 million from the securitization and
sale of $2.3 billion of loans in the year ended December 31, 1999, and
recognized gains of $183.3 million from the securitization and sale of $4.9
billion of loans in the year ended December 31, 1998. Total Advanta Mortgage
loan sales/ securitization volume decreased 54% for the year ended December 31,
1999, as compared to the year ended December 31, 1998. The decrease in
sales/securitization volume resulted primarily from our decision to grow the
portfolio of on-balance sheet loans and our decision to report income that is
essentially equal to that of a portfolio lender. Total Advanta Mortgage
sales/securitization volume in the year ended December 31, 1998 of $4.9 billion,
increased 43% over the volume in the year ended December 31, 1997. The increase
in sales/ securitization volume during 1998 resulted primarily from a 45%
increase in mortgages originated.
Gains on the sale of receivables, which represent 5.4% of the loans sold in
the year ended December 31, 1999, are higher as a percentage of loans sold than
the $183.3 million or 3.8% recognized in 1998, and the $114.4 million or 3.4%
recognized in 1997. The increase in gain as a percentage of loans sold for both
periods is primarily due to the higher proportion of loans sold that were
directly originated. Typically, the gain realized from loans directly originated
is higher than the gain from loans that are indirectly originated due to
premiums paid to third parties for indirect loan originations. For the year
ended December 31, 1999, direct originations represented 61% of Advanta
Mortgage's total originations, as compared to 32% in 1998 and 25% in 1997.
During 1999, the shift from indirect to direct originations also resulted in
improved operating cash flow. Origination fees received from direct originations
are a source of cash, whereas, premiums paid on indirect originations are a use
of cash.
For the year ended December 31, 1999, securitization income included a
$32.0 million pretax charge associated with more conservative fair value
assumptions related to retained interests. Securitization income included pretax
charges of $51.0 million for the year ended December 31, 1998 and $42.4 million
for the year ended December 31, 1997 to adjust the retained interest-only strip
to fair value, reflecting increases in prepayment speeds experienced during
those periods.
The FASB is currently addressing several implementation issues relating to
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
One of these issues relates to an exception SFAS No. 125 currently makes for
FDIC-insured institutions. In certain circumstances, the FDIC has the authority
to repudiate contracts and reclaim assets transferred. The FDIC, upon
reclamation of assets from an FDIC-insured institution, would not be required by
law to pay interest between the date of reclamation and the date of payment,
which could indicate that the securitized assets would not meet the isolation
from creditors criterion established in SFAS No. 125. This has potentially
significant implications -- most obviously that many transfers of financial
assets by FDIC-insured institutions would not meet the isolation test and would
therefore be accounted for as secured borrowings. 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. The FDIC recently issued a proposed regulation
addressing this issue. Under the FDIC's proposed regulation, subject to certain
conditions, the FDIC will not seek to reclaim, recover, or re-characterize as
property of an institution or a receivership estate, the financial assets or
undivided interest in a loan transferred by an institution to a special purpose
entity in connection with a securitization. The timing and ultimate resolution
of this matter is uncertain at this time.
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PORTFOLIO LENDER ANALYSIS
Beginning in the fourth quarter of 1998, we began to report income for Advanta
Mortgage 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, we intend to accomplish this
by increasing our use of on-balance sheet funding and decreasing our degree of
reliance on securitizations structured as sales over time. In this regard, we
began to analyze and evaluate Advanta Mortgage's financial results from a
portfolio lender's perspective as well as under generally accepted accounting
principles. The following tables present Advanta Mortgage's reported results
adjusted to approximate the results of a portfolio lender for the years ended
December 31, 1999 and 1998.
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, 1999
- ---------------- ---------------------------------------
ADVANTA PRO FORMA
MORTGAGE PRO FORMA PORTFOLIO
AS REPORTED ADJUSTMENTS LENDER
- -----------------------------------------------------------------------------------------------------
REVENUES:
Securitization income $ 88,548 $ (88,548) $ 0
Interest income 133,367 710,969 844,336
Servicing revenues 99,235 (32,177) 67,058
Other revenues, net 4,538 0 4,538
- -----------------------------------------------------------------------------------------------------
Total revenues 325,688 590,244 915,932
- -----------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 230,088 7,449 237,537
Interest expense 89,619 462,880 552,499
Provision for credit losses 16,731 51,715 68,446
Minority interest in income of consolidated subsidiary 7,482 0 7,482
- -----------------------------------------------------------------------------------------------------
Total expenses 343,920 522,044 865,964
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes (18,232) 68,200 49,968
Income tax (benefit) expense (7,238) 26,939 19,701
- -----------------------------------------------------------------------------------------------------
Net (loss) income $(10,994) $ 41,261 $ 30,267
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
---------------------------------------
ADVANTA PRO FORMA
MORTGAGE PRO FORMA PORTFOLIO
AS REPORTED ADJUSTMENTS LENDER
- -----------------------------------------------------------------------------------------------------
REVENUES:
Securitization income $132,369 $(132,369) $ 0
Interest income 123,550 593,601 717,151
Servicing revenues 86,416 (31,016) 55,400
Other revenues, net 21,581 0 21,581
- -----------------------------------------------------------------------------------------------------
Total revenues 363,916 430,216 794,132
- -----------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 219,131 8,302 227,433
Interest expense 76,056 389,386 465,442
Provision for credit losses 25,577 46,074 71,651
Minority interest in income of consolidated subsidiary 7,395 0 7,395
- -----------------------------------------------------------------------------------------------------
Total expenses 328,159 443,762 771,921
- -----------------------------------------------------------------------------------------------------
Income before income taxes 35,757 (13,546) 22,211
Income tax expense 10,667 (4,064) 6,603
- -----------------------------------------------------------------------------------------------------
Net income $ 25,090 $ (9,482) $ 15,608
- -----------------------------------------------------------------------------------------------------
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With respect to the pro forma portfolio lender results, individual line
items are stated as if the securitized mortgages were still owned by Advanta and
remained on the balance sheet. The pro forma adjustments (1) eliminate the gain
on sale, including the servicing component, (2) reflect interest income,
interest expense and operating expenses as if the sales had not occurred, and
(3) eliminate the impact of valuation adjustments reflected in the reported
results. The pro forma adjustment to provision for credit losses represents the
amount by which the provision would have increased from that reported had the
securitized Advanta Mortgage loans remained on the balance sheet and the
provision for credit losses on the securitized loans been equal to actual
reported charge-offs. The actual provision for credit losses of a portfolio
lender could differ from the recorded charge-offs depending upon the age and
composition of the portfolio and the timing of charge-offs.
The increase in pro forma portfolio lender net income from $15.6 million in
1998 to $30.3 million in 1999 is due to our focus on direct-to-consumer
originations and on profitable loan growth over volume. The increase is also a
result of an increase in subservicing revenues due to the growth of the
subservicing portfolio.
LOAN ORIGINATIONS
Advanta Mortgage generates loans through multiple origination channels. Home
equity loans and lines of credit are originated directly from consumers using
targeted direct mail and direct response television and radio techniques, and
through our 60 loan production offices throughout the country. Mortgage loans
are also originated indirectly through a network of over 600 brokers. In the
past, Advanta Mortgage also generated loans indirectly through correspondent
relationships and purchases from other financial institutions through its
conduit and corporate finance operations. These indirect origination activities
were curtailed during 1999. Prior to exiting the auto finance business in the
first quarter of 1999, auto finance contracts were purchased from correspondent
originators. "Advanta Mortgage loans" include home equity loans, home equity
lines of credit and auto loans and exclude loans which were never owned by us,
but which we service for a fee ("subservicing" or "contract servicing").
Originations for Advanta Mortgage were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
($ IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Direct $1,621,037 $1,655,399 $ 865,001
Broker 542,115 475,427 266,002
Conduit 449,848 1,752,968 1,238,339
Corporate Finance 37,939 1,325,447 1,103,083
Auto 5,103 104,350 194,807
- -----------------------------------------------------------------------------------------------
Total $2,656,042 $5,313,591 $3,667,232
- -----------------------------------------------------------------------------------------------
Number of accounts:
Direct 35,515 29,846 16,172
Broker 6,200 5,856 3,663
Conduit 5,843 22,656 17,279
Corporate Finance 528 17,430 13,272
Auto 375 8,531 16,146
- -----------------------------------------------------------------------------------------------
Total 48,461 84,319 66,532
- -----------------------------------------------------------------------------------------------
The dollar volume of total Advanta Mortgage originations decreased 50% for
the year ended December 31, 1999 as compared to the year ended December 31,
1998. The dollar volume of direct originations decreased 2% for the year ended
December 31, 1999, as compared to 1998; however, the number of loans directly
originated in 1999 increased 19% over the number of loans directly originated in
1998. The dollar volume of indirect mortgage originations decreased 71% for the
year ended December 31, 1999 as compared to 1998, and the number of loans
indirectly originated decreased by 73%. The increase in the number of loans
directly originated reflects our decision to focus on direct-to-consumer
originations using our information based strategy to identify accounts with
enhanced profitability characteristics. The small decrease in the dollar volume
of direct originations in 1999 is due to the decrease in the average loan size
and our focus on profitable loan growth over volume. The decrease in indirect
originations in 1999 over 1998 resulted from our decision to
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28
curtail the purchase of pools of loans through the conduit and corporate finance
channels. Consistent with the strategy of focusing on profitable loan growth
over volume, the decision was based on unfavorable market pricing and
management's commitment to purchasing loans only when the loans exceed certain
profitability characteristics. The decrease in auto loan originations in 1999
was due to our exit from the auto finance business in the first quarter of 1999.
The dollar volume of total 1998 originations for Advanta Mortgage increased
45% as compared to 1997. The dollar volume of direct mortgage originations for
1998 increased 91% from originations for 1997 and the dollar volume of indirect
mortgage originations for 1998 increased 36% as compared to 1997. Direct
originations increased because of our direct marketing experience and
centralized telemarketing and processing capabilities. The increase in indirect
originations in 1998 was the result of our strategy to grow the portfolio.
Advanta Mortgage originated more second lien home equity loans and home
equity lines of credit as a percentage of total originations during the year
ended December 31, 1999 than it originated during 1998 or 1997. This was
primarily due to rising market interest rates that created increased demand for
these types of loans. Second lien home equity loans represented 24% of the
dollar value of originations for the year ended December 31, 1999, compared to
9% for the year ended December 31, 1998 and 7% for the year ended December 31,
1997. Home equity lines of credit represented 10% of the managed mortgage loan
portfolio at December 31, 1999, as compared to 5% at December 31, 1998.
SERVICING REVENUES
Advanta Mortgage earns servicing revenues on securitized receivables and on the
subservicing portfolio. Servicing revenues were $99.2 million for the year ended
December 31, 1999, as compared to $86.4 million for the year ended December 31,
1998 and $61.8 million for the year ended December 31, 1997. The increase in
servicing revenues in both periods is due to an increase in average serviced
receivables of $3.0 billion in 1999 and $3.8 billion in 1998.
Advanta Mortgage's subservicing portfolio was $11.9 billion at December 31,
1999, as compared to $8.3 billion at December 31, 1998 and $9.2 billion at
December 31, 1997. The increase in the subservicing portfolio in 1999 resulted
primarily from growth in existing clients' portfolios. The decrease in
subservicing receivables in 1998 resulted from the withdrawal of business by
certain customers who began to service their own portfolios, and from higher
prepayments in the subservicing portfolio.
Revenues from our subservicing business are subject to volatility related
to increases or decreases in the portfolios of existing clients. Additionally,
this business is highly competitive and clients may elect to contract with other
subservicers or service their own portfolios, or they may seek to renegotiate
the pricing or other terms of their agreements with us. At December 31, 1999,
two clients represented 66% of the portfolio of subservicing receivables.
ADVANTA BUSINESS CARDS
OVERVIEW
Advanta Business Cards offers MasterCard business credit cards to small
businesses using targeted direct mail and the Internet. This product provides
approved customers with access, through merchants, banks and ATMs, to an instant
unsecured revolving business credit line. Advanta Business Cards generates
interest and other income through finance charges assessed on outstanding loans,
interchange income, and cash advance and other credit card fees.
Net income for Advanta Business Cards was $22.8 million for the year ended
December 31, 1999 as compared to $11.6 million for year ended December 31, 1998.
Net income for Advanta Business Cards was $3.0 million for the year ended
December 31, 1997. The increase in net income in 1999 resulted from increased
volume of managed receivables, significant increases in portfolio yields due to
changes in pricing, increased interchange income and a decrease in receivable
charge-offs. The increase in net income in 1998 resulted from increased volume
of managed receivables.
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SECURITIZATION INCOME
Advanta Business Cards recognized securitization income of $33.5 million for the
year ended December 31, 1999, $18.2 million for the year ended December 31,
1998, and $5.7 million for the year ended December 31, 1997. Advanta Business
Cards sells receivables to existing securitization trusts on a continuous basis
to replenish the investors' interest in trust receivables that have been repaid
by the card holders. The increase in securitization income in 1999 was due to
increased yields on the securitized receivables, increased volume of securitized
receivables and a decrease in receivable charge-offs. The increase in
securitization income in 1998 as compared to 1997 was due primarily to increased
volume of receivables.
ORIGINATIONS
Business card accounts are originated through targeted direct marketing
techniques, including direct mail to prospective customers, and the Internet.
Originations for Advanta Business Cards were $2.0 billion for the year ended
December 31, 1999, $1.4 billion for the year ended December 31, 1998 and $1.1
billion for the year ended December 31, 1997. The number of business card
accounts originated were 146 thousand in 1999 and 102 thousand in 1998 and 1997.
The increases in business card originations over prior years resulted from the
successful application of our information based strategy to expand the universe
of potential business card customers.
ADVANTA LEASING SERVICES
OVERVIEW
Advanta Leasing Services offers flexible lease financing programs on
small-ticket equipment to small businesses. The primary products financed
include office machinery, security systems and computers. The commercial
equipment leasing business is generated primarily through third-party referrals
from manufacturers or distributors of equipment, as well as independent brokers,
direct mail marketing and telemarketing. The equipment is leased under
noncancelable leases with initial terms of generally one to five years.
Net income for Advanta Leasing Services was $3.0 million for the year ended
December 31, 1999 as compared to a net loss of $1.2 million for the year ended
December 31, 1998. The increase in net income in 1999 was attributable to a
decrease in operating expenses that resulted from cost reduction measures
implemented during 1999 as well as increased volume. Net income for Advanta
Leasing Services was $11.8 million for the year ended December 31, 1997. The
decrease in net income in 1998, as compared to 1997, resulted from increases in
costs to originate, service and manage Advanta Leasing Services' products and
from a change in the mix of lease receivables originated.
SECURITIZATION INCOME
Advanta Leasing Services recognized $14.8 million in gains on the sale of $414
million of leases for the year ended December 31, 1999, as compared to $11.7
million in gains on the sale of $299 million of leases for the year ended
December 31, 1998. As a percentage of receivables sold, these gains represented
3.6% in 1999 and 3.9% in 1998. The decrease in gain as a percentage of loans
sold in 1999 resulted from an increase in receivable charge-off rates and a
reduction in net interest income spread on securitized receivables. For the year
ended December 31, 1997, Advanta Leasing Services recognized $14.3 million or
5.2% in gains on the sale of $276 million of leases. The gain as a percentage of
loans sold of 3.9% in 1998 decreased as compared to the 5.2% gain in 1997 due to
a reduction in net interest income spread on securitized receivables. The sales
were through a combination of commercial paper conduit programs and a public
lease securitization.
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ORIGINATIONS
Lease originations are generated primarily through third party referrals from
manufacturers, distributors or other vendors of equipment as well as through
independent brokers, direct mail marketing and telemarketing. Originations for
Advanta Leasing Services were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
($ IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
Vendor $204,128 $171,945 $168,655
Broker 232,433 131,776 95,995
Other 16,951 24,042 57,652
- ---------------------------------------------------------------------------------------------
Total $453,512 $327,763 $322,302
- ---------------------------------------------------------------------------------------------
The increase in lease originations over the prior years was due to the growth in
the number of vendor and broker relationships, as well as the expansion of
existing relationships.
ADVANTA CORP.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments, excluding the interest component
of previously discounted cash flows, increased by $3.2 million for the year
ended December 31, 1999 as compared to the year ended December 31, 1998. During
the same period, interest expense decreased by $16.6 million. The increase in
interest income was due to an increase in yields on receivables, partially
offset by a decrease in average interest-earning assets as a result of the
transfer of consumer credit card receivables in the Consumer Credit Card
Transaction in 1998. The decrease in interest expense was due to a decrease in
the cost of funds, as well as a reduction in interest-bearing liabilities in
connection with the Consumer Credit Card Transaction in 1998.
Interest income on receivables and investments, excluding the interest
component of previously discounted cash flows, decreased $195.5 million for the
year ended December 31, 1998 as compared to 1997. During the same period,
interest expense decreased by $140.3 million. The decreases in interest income
and interest expense were mainly attributable to the decrease in our owned
interest-bearing assets and liabilities following the Consumer Credit Card
Transaction/Tender Offer. Also impacting interest income on receivables during
1998 were consumer credit card securitization transactions prior to the Consumer
Credit Card Transaction and the mix of receivables.
Our cost of funds decreased to 5.87% in 1999 from 6.26% in 1998. Our cost
of funds was 6.31% in 1997. The decrease in the cost of funds in 1999 as
compared to 1998 and 1997 was primarily attributable to the increase in the use
of deposits as a funding source. Deposits represented 66% of total average
interest-bearing liabilities for the year ended December 31, 1999 as compared to
50% in 1998 and 48% in 1997.
The following table provides an analysis of owned interest income and
expense data, average balance sheet data, net interest spread, and net interest
margin. Net interest spread represents the difference between the yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Net interest margin represents the difference between the yield on
interest-earning assets and the average rate paid to fund interest-earning
assets. Average owned loan and lease receivables and the related interest
revenues include certain loan fees and costs.
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INTEREST RATE ANALYSIS
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) ----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET
- ---------------------------
Interest-earning assets:
Receivables:
Mortgage loans $ 779,373 $ 73,319 9.41% $ 730,798 $ 69,012 9.44% $ 525,452 $ 48,846 9.30%
Business cards 212,311 35,265 16.61 146,515 21,549 14.71 186,369 26,328 14.13
Leases 109,848 10,880 9.90 102,192 10,768 10.54 105,515 12,034 11.41
Auto loans 14,604 2,166 14.83 47,459 8,300 17.49 60,776 9,858 16.22
Consumer credit
cards(1) 0 0 0.00 384,697 23,457 6.10 1,728,039 179,732 10.40
Other loans 17,450 2,188 12.54 15,724 1,858 11.82 31,810 2,639 8.30
---------- -------- ------ ---------- -------- ------ ----------- -------- ------
Total receivables(2) 1,133,586 123,818 10.92 1,427,385 134,944 9.45 2,637,961 279,437 10.59
Subordinated trust assets 336,254 27,227 8.10 209,043 14,173 6.78 108,653 8,510 7.83
Federal funds sold 272,330 13,535 4.97 203,485 10,933 5.37 345,404 18,659 5.40
Restricted
interest-bearing
deposits 166,490 11,102 6.67 265,915 16,075 6.05 883,311 54,399 6.16
Trading investments 110,565 6,752 6.11 172,084 10,374 6.03 0 0 0.00
Tax-free securities(2) 3,857 319 8.27 4,992 407 8.15 3,926 307 7.82
Taxable investments 798,633 44,842 5.61 673,239 37,850 5.62 1,115,706 58,870 5.28
---------- -------- ------ ---------- -------- ------ ----------- -------- ------
Total interest-earning
assets(3) $2,821,715 $227,595 8.06% $2,956,143 $224,756 7.60% $ 5,094,961 $420,182 8.25%
========== ======== ====== ========== ======== ====== =========== ======== ======
Interest-bearing
liabilities:
Deposits
Savings $ 262,501 $ 13,120 5.00% $ 202,943 $ 10,916 5.38% $ 402,893 $ 22,850 5.67%
Time deposits under
$100,000 1,063,354 60,271 5.67 909,132 54,941 6.04 1,018,163 63,473 6.23
Time deposits of
$100,000 or more 500,268 27,995 5.60 329,001 20,078 6.10 1,035,366 63,841 6.17
---------- -------- ------ ---------- -------- ------ ----------- -------- ------
Total deposits 1,826,123 101,386 5.55 1,441,076 85,935 5.96 2,456,422 150,164 6.11
Debt 893,720 58,441 6.53 1,337,508 87,204 6.52 2,452,166 156,524 6.38
Other borrowings 54,008 3,225 5.92 102,372 7,067 6.90 232,820 17,870 7.68
---------- -------- ------ ---------- -------- ------ ----------- -------- ------
Total interest-bearing
liabilities 2,773,851 163,052 5.87 2,880,956 180,206 6.26 5,141,408 324,558 6.31
Net noninterest-bearing
liabilities 47,864 75,187 (46,447)
---------- ---------- -----------
Sources to fund
interest-earning assets $2,821,715 $163,052 5.78% $2,956,143 $180,206 6.10% $ 5,094,961 $324,558 6.37%
========== ======== ====== ========== ======== ====== =========== ======== ======
Net interest spread 2.19% 1.34% 1.94%
====== ====== ======
Net interest margin(4) 2.29% 1.51% 1.88%
====== ====== ======
OFF-BALANCE SHEET
- ---------------------------
Securitized receivables:
Mortgage loans $7,451,718 $5,777,929 $ 3,251,902
Business cards 680,551 597,677 321,054
Leases 606,672 507,007 450,118
Auto loans 120,898 180,833 80,110
Consumer credit cards(1) 0 1,461,412 9,628,905
---------- ---------- -----------
Total average securitized
receivables $8,859,839 $8,524,858 $13,732,089
========== ========== ===========
Total average managed
receivables $9,993,425 $9,952,243 $16,370,050
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Interest and average rate for tax-free securities, loans, and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and nonaccrual loans and leases.
(4) Managed net interest margin was 3.75% in 1999 and 3.32% in 1998,
representing a combination of owned interest-earning assets/owned
interest-bearing liabilities and securitized mortgage and business card
assets/liabilities.
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INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
1999 VS. 1998 1998 VS. 1997
($ IN THOUSANDS) -------------------------------- ----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------------
Interest income from:
Loan and lease receivables:
Mortgage loans $ 4,529 $ (222) $ 4,307 $ 19,417 $ 749 $ 20,166
Business cards 10,652 3,064 13,716 (5,823) 1,044 (4,779)
Leases 784 (672) 112 (370) (896) (1,266)
Auto loans (5,029) (1,105) (6,134) (2,285) 727 (1,558)
Consumer credit cards(1) (23,457) 0 (23,457) (102,016) (54,259) (156,275)
Other loans 212 118 330 (1,642) 861 (781)
Subordinated trust assets 9,890 3,164 13,054 6,938 (1,275) 5,663
Federal funds sold 3,467 (865) 2,602 (7,632) (94) (7,726)
Restricted interest-bearing
deposits (6,491) 1,518 (4,973) (37,369) (955) (38,324)
Trading investments (3,758) 136 (3,622) 10,374 0 10,374
Tax-free securities (94) 6 (88) 86 14 100
Taxable investments 7,059 (67) 6,992 (24,610) 3,590 (21,020)
-------- -------- -------- --------- -------- ---------
Total interest income(2) $ (2,236) $ 5,075 $ 2,839 $(144,932) $(50,494) $(195,426)
-------- -------- -------- --------- -------- ---------
Interest expense on:
Deposits:
Savings $ 3,019 $ (815) $ 2,204 $ (10,814) $ (1,120) (11,934)
Time deposits
under $100,000 8,859 (3,529) 5,330 (6,666) (1,866) (8,532)
Time deposits
of $100,000 or more 9,682 (1,765) 7,917 (43,074) (689) (43,763)
Debt (28,897) 134 (28,763) (72,675) 3,355 (69,320)
Other borrowings (2,954) (888) (3,842) (9,150) (1,653) (10,803)
-------- -------- -------- --------- -------- ---------
Total interest expense $(10,291) $ (6,863) $(17,154) $(142,379) $ (1,973) $(144,352)
-------- -------- -------- --------- -------- ---------
Net interest income $ 8,055 $ 11,938 $ 19,993 $ (2,553) $(48,521) $ (51,074)
- --------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Includes income from assets held and available for sale.
GAIN ON TRANSFER OF CONSUMER CREDIT CARD BUSINESS
In 1998 we recognized a gain of $541.3 million which represented the excess of
liabilities transferred to Fleet Credit Card LLC ("Fleet LLC") over the net
basis of the assets transferred and our retained minority membership interest in
Fleet LLC. At the closing date of the Consumer Credit Card Transaction, the
minority interest was a 4.99% ownership interest in Fleet LLC valued at $20
million. See Note 9 to the Consolidated Financial Statements.
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OTHER REVENUES
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Equity securities gains (losses) $30,391 $(41,750) $(11,426)
Business card interchange income 33,786 20,741 11,617
Consumer credit card interchange income 0 11,881 85,208
Consumer credit card overlimit fees 0 16,233 46,447
Mortgage other (loss) income (9,686) 22,945 4,535
Leasing other revenues 15,399 14,519 25,748
Insurance revenues, net 8,206 14,408 37,816
Other 4,387 1,149 18,021
- ---------------------------------------------------------------------------------------------
Total other revenues, net $82,483 $ 60,126 $217,966
- ---------------------------------------------------------------------------------------------
Other revenues for the year ended December 31, 1999 include equity
securities gains of $30.4 million, representing changes in the fair value and
realized gains on Advanta Partners LP investments. Included in this amount is an
$18 million gain on an investment in a company that was merged with another
entity in exchange for that entity's stock in the first quarter of 1999. The
stock received had a value significantly higher than Advanta Partners' basis in
its investment. In the second quarter of 1999, Advanta Partners sold the
majority of this stock, realizing an additional gain of approximately $10
million. Partially offsetting this gain in the second quarter was the write-down
of another equity investment of approximately $0.8 million. Other revenues for
the year ended December 31, 1998 included equity securities losses of $41.8
million representing changes in the fair value and realized losses of Advanta
Partners investments. Most of the loss in 1998 relates to investments not
publicly traded for which Advanta Partners decided to expedite a disposal plan.
In 1999, mortgage other loss included a write-down of assets associated
with the corporate finance business of $12 million. In 1998, mortgage other
income included an $11.2 million gain on the sale of an investment in affordable
housing partnerships and $6 million from the favorable settlement of certain
prior year claims.
Business card interchange income increased by $13.0 million for the year
ended December 31, 1999, as compared to 1998, and increased by $9.1 million in
1998 as compared to 1997. The increase in 1999 was due to an increase in
interchange rates, as well as an increase in average managed business card
receivables. The increase in 1998 was due to an increase in average managed
business card receivables.
The decline in consumer credit card interchange income, consumer credit
card overlimit fees, insurance revenues and "other" other revenues in 1998 as
compared to 1997 was attributable to the transfer of the consumer credit card
portfolio in the Consumer Credit Card Transaction. Also, the decline in
insurance revenues in 1999 of $6.2 million as compared to 1998 was primarily due
to the absence of premiums related to the consumer credit card portfolio.
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OPERATING EXPENSES
YEAR ENDED DECEMBER 31,
--------------------------------
($ IN THOUSANDS) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Salaries and employee benefits $123,768 $152,706 $219,954
Marketing 58,671 53,109 53,039
Professional/consulting fees 24,244 14,767 38,600
Equipment expense 21,039 23,381 37,712
Credit and collection expense 20,264 15,715 20,017
Occupancy expense 16,347 16,001 23,097
External processing 14,936 21,908 43,256
Telephone expense 11,091 12,428 21,262
Postage 5,958 8,949 29,039
Amortization of credit card deferred origination costs, net 5,863 22,271 69,344
Credit card fraud losses 833 3,194 22,287
Other 34,047 35,335 44,354
- ----------------------------------------------------------------------------------------------
Total operating expenses $337,061 $379,764 $621,961
- ----------------------------------------------------------------------------------------------
At year end:
Number of accounts managed (in thousands) 678 565 6,342
Number of employees 2,643 2,568 4,498
For the year:
Operating expenses as a percentage of average managed
receivables(1) 3.31% 3.59% 3.38%
- ----------------------------------------------------------------------------------------------
(1) Excludes amortization of credit card deferred origination costs, net.
Operating expenses as a percentage of average managed receivables for the
year ended December 31, 1999 decreased as compared to 1998 due to cost reduction
measures implemented during 1999. Operating expenses as a percentage of average
managed receivables increased during 1998 in comparison to 1997 due to lost
economies of scale resulting from the downsizing pursuant to the Consumer Credit
Card Transaction, and our plan to expand certain aspects of our infrastructure
to better position Advanta for the future.
Total operating expenses for the year ended December 31, 1999 decreased by
$42.7 million as compared to 1998 and decreased by $242.2 million in 1998 as
compared to 1997. The decrease in 1999 was due to cost reduction measures, as
well as consumer credit card expenses incurred through February 1998 that are
included in 1998 amounts. The decrease in 1998 as compared to 1997 was the
result of the Consumer Credit Card Transaction as well as the other business and
product dispositions in 1998.
Professional fees increased by $9.5 million for the year ended December 31,
1999 as compared to 1998. This increase was due, in part, to increased legal
activity, as well as consulting and outsourcing costs associated with Advanta's
strategic management of capacity and resources, and costs associated with the
Year 2000 issue.
Salaries and employee benefits decreased $67.2 million for the year ended
December 31, 1998 as compared to 1997. This reduction was due to the decrease in
the number of employees as a result of the Consumer Credit Card Transaction as
well as workforce reductions and other business and product dispositions in
1998.
PROVISION FOR CREDIT LOSSES
For the year ended December 31, 1999, the provision for credit losses decreased
by $24.5 million as compared to 1998. The 1998 provision included a $28.3
million provision related to the consumer credit card business. The decrease in
the consumer credit card provision was partially offset by a $3.8 million net
increase in the provision recorded on other products, including a $4.3 million
decrease in the provision on Advanta Mortgage loans, a $123 thousand increase in
the provision on lease receivables, and a $7.9 million increase in the provision
on business cards. The decrease in the provision on Advanta Mortgage loans was
due to a decrease in
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35
levels of delinquencies and nonperforming assets in owned receivables. The
increase in the provision on business cards was due to a 45% increase in average
on-balance sheet business card receivables in 1999.
The provision for credit losses of $67.2 million in 1998 decreased $143.6
million or 68% from the provision of $210.8 million in 1997. The decrease was
due to the contribution of the consumer credit card business in the Consumer
Credit Card Transaction. This decrease was partially offset by an increase in
the allowance for Advanta Mortgage loan losses resulting from our decision to
increase the level of loans that will remain on the balance sheet in connection
with our change in funding strategy.
CREDIT RISK MANAGEMENT
Management regularly reviews the loan and lease portfolio in order to evaluate
the adequacy of the allowance for credit losses. The evaluation includes such
factors as the inherent credit quality of the loan and lease portfolio, past
experience including frequency of defaults and loss severity, current economic
conditions and changes in the composition of the loan and lease portfolio. The
allowance for credit losses is maintained for on-balance sheet receivables and
is intended to cover all credit losses inherent in the owned loan portfolio.
Anticipated losses on securitized assets are reflected in the calculations of
securitization income and retained interests in securitizations. See Notes 1 and
2 to Consolidated Financial Statements. Such loss estimates are intended to
cover all probable credit losses over the life of the securitized receivables.
Management continually evaluates both its on-balance sheet and off-balance sheet
estimates and, as appropriate, effects changes to these amounts.
At December 31, 1999, the allowance for credit losses on a consolidated
basis was $41.8 million, or 2.8% of owned receivables, compared to $33.4
million, or 3.0%, at December 31, 1998. The Advanta Mortgage allowance for
credit losses was 2.1% at December 31, 1999 as a percentage of owned
receivables, as compared to 2.4% at December 31, 1998. This decrease in the
Advanta Mortgage allowance was due to the improvement in the levels of
delinquencies and nonperforming assets in 1999. The allowance for credit losses
on business card receivables increased from 4.6% as a percentage of owned
receivables at December 31, 1998 to 5.3% at December 31, 1999. The increase was
due to the expansion of the business card customer base during 1999.
At December 31, 1998, the allowance for credit losses of $33.4 million, or
3.0% of owned receivables, had decreased from the allowance of $137.8 million,
or 4.1% of owned receivables, at December 31, 1997. The decrease in the
allowance was primarily related to the Consumer Credit Card Transaction. The
allowance on consumer credit cards was $118.4 million or 4.6% of owned
receivables at December 31, 1997. The allowance as a percentage of receivables
on consumer credit cards was higher in relation to the allowance on the other
products. Since there were no consumer credit cards at December 31, 1998, the
allowance for credit losses decreased in amount and as a percentage of
receivables.
ASSET QUALITY
Nonperforming assets include: Advanta Mortgage loans, credit cards and leases
past due 90 days or more; real estate owned; and bankrupt, decedent and
fraudulent credit cards. We charge losses on nonperforming Advanta Mortgage
loans against the allowance generally at the earlier of foreclosure or when they
have become twelve months delinquent. Losses on lease receivables are generally
charged against the allowance when 121 days contractually delinquent. Our
charge-off policy, as it relates to business credit card accounts, is to
charge-off a receivable, if not paid, at 180 days contractually delinquent.
Consumer credit card accounts, if not paid, were charged-off at 186 days
contractually delinquent. Credit card accounts suspected of being fraudulent are
charged-off after a 90-day investigative period, unless the investigation shows
no evidence of fraud. The carrying value for real estate owned is based on fair
value, net of costs of disposition, and is reflected in other assets.
Loans are put on nonaccrual status when they become 90 days past due. Gross
interest income that would have been recorded for owned nonperforming assets,
had interest been accrued throughout the year in accordance with the assets'
original terms, was $4.9 million in 1999. The amount of interest on
nonperforming assets included in income was $1.5 million in 1999.
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The consolidated managed charge-off rate for the year ended December 31,
1999 was 1.6%, down from 2.5% for 1998 and 5.3% for 1997. The following
represents the annual results by product:
FOR THE YEAR ENDED
---------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
Mortgage 0.78% 0.56% 0.53%
Auto 13.92 9.30 7.25
Business Card 4.96 5.88 3.73
Leases 3.57 2.66 2.71
- -----------------------------------------------------------------------------------
Advanta Mortgage began to emphasize profitability enhancement over loan
growth, and to emphasize the direct-to-consumer channels over indirect channels
for originations in the fourth quarter of 1998. This has resulted in a
significant reduction in the rate of portfolio growth relative to prior periods.
The decline in the growth rate has reduced the proportion of new, unseasoned
loans in the portfolio. This "seasoning" effect results in higher reported
delinquencies and charge-offs consistent with an aging portfolio. The increase
in reported delinquency and charge-off rates is primarily attributable to
seasoning of the managed mortgage loan portfolio.
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CREDIT QUALITY -- MANAGED
The following table provides a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
DECEMBER 31,
----------------------------------------------------------
($ IN THOUSANDS) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED -- MANAGED(1)
Nonperforming assets $511,301 $410,584 $ 328,835 $191,668 $ 82,171
Accruing loans past due 90 days or more 0 30 203,117 228,845 84,892
Total loans 30 days or more delinquent 838,563 753,521 1,068,183 886,717 404,072
As a percentage of gross receivables:
Nonperforming assets 5.0% 4.2% 1.8% 1.2% .7%
Accruing loans past due 90 days or more .0 .0 1.1 1.4 .7
Total loans 30 days or more delinquent:
New methodology(2) 8.2 7.7 6.0 5.4
Prior methodology 5.2(3) 3.3
Net charge-offs:
Amount $155,452 $247,287 $ 860,098 $479,992 $212,865
As a percentage of average gross receivables:
New methodology(2) 1.6% 2.5% 5.3% 3.2%
Prior methodology 3.5(3) 2.2%
- ---------------------------------------------------------------------------------------------------------------
ADVANTA MORTGAGE LOANS -- MANAGED
Nonperforming assets $475,711 $375,520 $ 200,600 $ 93,101 $ 56,743
Total loans 30 days or more delinquent 729,187 656,789 391,929 194,412 106,223
As a percentage of gross receivables:
Nonperforming assets 5.7% 4.5% 3.8% 3.4% 3.2%
Total loans 30 days or more delinquent 8.7 7.9 7.4 7.1 5.9
Net charge-offs -- Mortgage Loans:
Amount 64,303 36,142 19,953 14,970 13,836
As a percentage of average gross receivables 0.8% 0.6% .5% 0.7% 0.9%
Net charge-offs -- Auto Loans:
Amount $ 18,855 $ 21,238 $ 10,212 $ 11 N/A
As a percentage of average gross receivables 13.9% 9.3% 7.3% .1% N/A
- ---------------------------------------------------------------------------------------------------------------
BUSINESS CARDS -- MANAGED
Nonperforming assets $ 23,498 $ 25,231 $ 17,362 $ 2,712 N/A
Total loans 30 days or more delinquent 38,437 35,900 29,340 8,952 N/A
As a percentage of gross receivables:
Nonperforming assets 2.3% 3.1% 2.6% 9.0% N/A
Total loans 30 days or more delinquent 3.7 4.4 4.4 3.0 N/A
Net charge-offs -- Business Cards:
Amount $ 44,309 $ 43,732 $ 18,928 $ 4,210 N/A
As a percentage of average gross receivables 5.0% 5.9% 3.7% 2.6% N/A
- ---------------------------------------------------------------------------------------------------------------
LEASES -- MANAGED
Nonperforming assets $ 11,472 $ 9,595 $ 9,420 $ 6,791 $ 4,912
Total loans 30 days or more delinquent 69,695 60,154 52,335 50,928 35,274
As a percentage of gross receivables:
Nonperforming assets 1.4% 1.4% 1.6% 1.3% 1.3%
Total loans 30 days or more delinquent 8.8 9.0 8.7 9.8 9.3
Net charge-offs -- Leases:
Amount $ 25,586 $ 16,220 $ 15,074 $ 9,567 $ 5,846
As a percentage of average gross receivables 3.6% 2.7% 2.7% 2.2% 1.9%
- ---------------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Beginning in 1996, charge-off rates reflect the adoption of a new consumer
credit card charge-off methodology. This new policy related to consumer
credit card bankruptcies and provided up to a 90 day investigative period
following notification of the bankruptcy petition prior to charge-off.
(3) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
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CREDIT QUALITY -- OWNED
The following table provides a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
DECEMBER 31,
----------------------------------------------------
($ IN THOUSANDS) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED -- OWNED(1)
Allowance for credit losses $41,847 $33,437 $137,773 $89,184 $53,494
Nonperforming assets 45,620 49,568 51,149 29,822 21,856
Accruing loans past due 90 days or more 0 30 49,458 40,597 17,399
Total loans 30 days or more delinquent 62,850 73,755 201,891 145,613 76,859
As a percentage of gross receivables:
Allowance for credit losses 2.8% 3.0% 4.1% 3.4% 1.9%
Nonperforming assets 3.1 4.4 1.5 1.1 .8
Accruing loans past due 90 days or more .0 .0 1.5 1.5 .6
Total loans 30 days or more delinquent:
New methodology(2) 4.3 6.5 5.9 5.5
Prior methodology 5.3(3) 2.8
Net charge-offs:
Amount $27,547 $53,109 $151,222 $70,576 $42,549
As a percentage of average gross receivables:
New methodology(2) 2.4% 3.7% 5.7% 2.3%
Prior methodology 2.5(3) 2.3%
- --------------------------------------------------------------------------------------------------------------
ADVANTA MORTGAGE LOANS -- OWNED
Allowance for credit losses $21,743 $20,092 $ 5,822 $ 8,785 $ 3,360
Nonperforming assets 36,709 38,734 23,234 13,005 18,676
Total loans 30 days or more delinquent 45,263 56,131 42,916 28,546 20,348
As a percentage of gross receivables:
Allowance for credit losses 2.1% 2.4% 1.2% 2.3% 1.0%
Nonperforming assets 3.5 4.6 4.9 3.5 5.8
Total loans 30 days or more delinquent 4.3 6.7 9.0 7.6 6.3
Net charge-offs -- Mortgage:
Amount $ 8,389 $ 3,658 $ 2,310 $ 3,049 $ 5,962
As a percentage of average gross receivables 1.1% .5% .4% 1.3% 3.2%
Net charge-offs -- Auto:
Amount $ 3,732 $ 7,648 $ 3,524 $ 10 N/A
As a percentage of average gross receivables 25.6% 16.1% 5.8% .1% N/A
- --------------------------------------------------------------------------------------------------------------
BUSINESS CARDS -- OWNED
Allowance for credit losses $14,663 $ 6,916 $ 6,899 $ 2,643 N/A
Nonperforming assets 6,408 7,481 4,696 1,591 N/A
Total loans 30 days or more delinquent 10,347 7,207 7,918 1,584 N/A
As a percentage of gross receivables:
Allowance for credit losses 5.3% 4.6% 4.9% 3.7% N/A
Nonperforming assets 2.3 5.0 3.3 2.2 N/A
Total loans 30 days or more delinquent 3.8 4.8 5.6 2.2 N/A
Net charge-offs -- Business Cards:
Amount $10,103 $10,033 $ 6,198 $ 2,169 N/A
As a percentage of average gross receivables 4.8% 6.9% 3.3% 2.5% N/A
- --------------------------------------------------------------------------------------------------------------
LEASES -- OWNED
Allowance for credit losses $ 3,110 $ 2,695 $ 2,899 $ 1,598 $ 1,577
Nonperforming assets 1,883 3,115 2,009 1,336 714
Total loans 30 days or more delinquent 5,996 9,739 9,881 7,878 4,350
As a percentage of gross receivables:
Allowance for credit losses 2.3% 2.2% 1.8% 1.1% 1.7%
Nonperforming assets 1.4 2.5 1.3 0.9 0.8
Total loans 30 days or more delinquent 4.5 7.9 6.2 5.6 4.6
Net charge-offs -- Leases:
Amount $ 2,926 $ 3,491 $ 2,170 $ 833 $ 1,139
As a percentage of average gross receivables 2.7% 3.4% 2.1% .8% 1.4%
- --------------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Beginning in 1996, charge-off rates reflect the adoption of a new consumer
credit card charge-off methodology. This new policy related to consumer
credit card bankruptcies and provided up to a 90 day investigative period
following notification of the bankruptcy petition prior to charge-off.
(3) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
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UNUSUAL CHARGES
EMPLOYEE COSTS ASSOCIATED WITH STAFF REDUCTIONS
In the first quarter of 1999, we recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with cost reduction initiatives and the
consolidation of support functions. There were 121 employees severed who were
entitled to benefits. This staff reduction was substantially complete by June
30, 1999.
EMPLOYEE COSTS ASSOCIATED WITH CONSUMER CREDIT CARD TRANSACTION/TENDER OFFER
In 1998, we accelerated vesting of 43.15% of outstanding options that were not
vested at the time of the closing of the Consumer Credit Card Transaction. In
connection with the Tender Offer (see Note 9 to the Consolidated Financial
Statements), present and former directors and employees who held exercisable
options to purchase Class A and Class B Common Stock tendered these options in
lieu of first exercising the options and tendering the underlying stock. We used
approximately $850 million, before taking into account the exercise price of
options, to repurchase the shares in the Tender Offer. In addition, we also
amended the terms of options granted to employees who became employees of Fleet
LLC or whose employment with us was otherwise terminated in connection with the
Consumer Credit Card 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 as a result
of this amendment. We 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 which
provides benefits to senior management employees in the event of a change of
control of Advanta 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 our 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 Advanta in the strategic
alternatives process. In accordance with our agreement with Fleet, Fleet LLC
agreed to assume Advanta's management severance plan and 50% of the bonus
payments with respect to those Affected Employees who became employees of Fleet
LLC in connection with the Consumer Credit Card 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 or other similar transaction. In
October 1997, we announced that the Chief Executive Officer of Advanta Corp. and
the Chief Executive Officer of the consumer credit card business unit were
leaving Advanta in connection with the Consumer Credit Card Transaction. These
benefits were all contingent upon the consummation of the Consumer Credit Card
Transaction and were recognized upon the closing of the transaction.
In connection with our evaluation of strategic alternatives and the
Consumer Credit Card Transaction, we adopted special retention programs. Under
these programs, certain employees were entitled to receive special payments
based on their targeted bonuses and contingent upon their continued employment
with Advanta or a successor entity. The first payments under the special
retention programs were made in March 1998. Further, in March 1998, we
identified employees that would be terminated in connection with the Consumer
Credit Card Transaction as part of the corporate restructuring to reduce
corporate expenses. During the first quarter of 1998, the Board of Directors
approved the corporate restructuring and affected employees were informed of the
termination benefits they would receive. Substantially all of these employees
ceased employment with Advanta before April 30, 1998.
We recorded a $62.3 million pretax charge to earnings in connection with
the foregoing plans, plan amendments and workforce reduction activities in 1998.
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EXPENSE ASSOCIATED WITH EXITED BUSINESSES/PRODUCTS
In the first quarter of 1999, we implemented a plan to cease the origination of
auto loans and recorded a $3.4 million charge for costs associated with exited
businesses/products. The charges included severance and outplacement costs for
22 employees in the auto origination group, and professional fees associated
with exited businesses/products not directly associated with our mortgage,
business card and leasing units. We completed the closing of the auto loan
origination center and termination of related employees during the second
quarter of 1999. We expect to pay a substantial portion of the remaining costs
during the year ended December 31, 2000.
In connection with our efforts to reduce expenses associated with business
and product offerings which are not directly associated with our mortgage,
business card and leasing units, management approved exit and disposition plans
during the first quarter of 1998 related to certain businesses and products
previously offered. We recorded charges in the quarter ended March 31, 1998
related to costs to be incurred by us 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, we recognized
investment banking, professional and consulting fees that were contingent upon
completion of the Consumer Credit Card Transaction as well as other professional
and consulting fees associated with our corporate restructuring. During the
quarter ended March 31, 1998, we recorded a $54.1 million pretax charge to
earnings in connection with these exit plans. In 1999, an additional charge of
$10.0 million was recorded associated with exited products based on a change in
the estimate of total expected costs. We expect to pay a substantial portion of
these costs over the next 36 months. The actions required to complete these
plans include the settlement of contractual commitments and the payment of
customer benefits.
ASSET IMPAIRMENT/DISPOSAL
In connection with Advanta's plans to reduce corporate expenses and exit certain
business and product offerings, certain assets were identified for disposal and
their carrying costs were written off or written down to estimated realizable
value in 1998 resulting in a charge of $8.7 million. These assets consisted
principally of leasehold improvements and various other assets. The disposal of
these assets has been completed.
INCOME TAXES
The gain on the Consumer Credit Card Transaction in 1998 was not subject to
income tax and no tax provision was recorded. The Consumer Credit Card
Transaction also resulted in additional book/tax differences, which were
quantified during 1999 in connection with the filing of the 1998 tax return.
These book/tax differences, when combined with certain less significant
recurring differences, have resulted in net operating loss carryforwards of
approximately $521 million. This amount is net of $96 million carried back to
prior years, and includes $500 million that pertains to losses incurred on the
consumer credit card portfolio after the date of the Consumer Credit Card
Transaction. Of the total net operating loss carryforwards, $502 million expire
in 2018 and $19 million expire in 2019. A deferred tax asset of $50 million, net
of valuation allowance, resulting from the net operating loss carryforwards was
recorded as an income tax benefit in the fourth quarter of 1999.
In establishing the valuation allowance of $83 million, management
considered (1) the level of expected future taxable income, (2) existing and
projected book/tax differences, (3) tax planning strategies available, and (4)
the general and industry-specific economic outlook. Based on this analysis,
management believes the net deferred tax asset will be realized.
In 1998, we recorded a consolidated income tax benefit of approximately
$9.0 million, as a result of the federal tax treatment of the contribution of
assets associated with the Consumer Credit Card Transaction. Our consolidated
income tax expense was $24.9 million in 1997, or an effective tax rate of 26%.
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ASSET/LIABILITY MANAGEMENT
We manage our financial condition with a focus on maintaining high credit
quality standards, disciplined management of market risks and prudent levels of
leverage and liquidity.
MARKET RISK SENSITIVITY
Market risk is the potential for loss or diminished financial performance
arising from adverse changes in market forces including 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. We regularly evaluate our market risk profile and attempt to minimize
the impact of market risks on net interest income and net income.
Our exposure to equity price risk is immaterial relative to expected
overall financial performance. Fluctuations in interest rates, changes in
economic conditions, shifts in customer behavior, and other factors can,
however, affect our financial performance. Changes in economic conditions and
shifts in customer behavior are difficult to predict, and our financial
performance generally cannot be insulated from these forces.
Financial performance variability as a result of fluctuations in interest
rates is commonly called interest rate risk. Interest rate risk generally
results 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).
We attempt to analyze the impact of interest rate risk by regularly
evaluating the perceived risks inherent in our asset and liability structure,
including securitized instruments and off-balance sheet instruments. Risk
exposure levels vary continuously, as changes occur in our asset/liability mix,
market interest rates, prepayment trends, and other factors affecting the timing
and magnitude of cash flows. Computer simulations are used to generate expected
financial performance in a variety of interest rate environments. Those results
are analyzed to determine if actions need to be taken to mitigate our interest
rate risk.
In managing interest rate risk exposure, we periodically securitize
receivables, sell and purchase assets, alter the mix and term structure of our
funding base, change our investment portfolio and use derivative financial
instruments. Derivative instruments, by Company policy, are not used for
speculative purposes. See discussion in Note 24 to the Consolidated Financial
Statements.
We measure our 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. We estimate that
at December 31, 1999, our net interest income over a twelve month period would
increase or decrease by approximately 2.4%, if interest rates were to fall or
rise by 200 basis points. This compares to an estimate as of December 31, 1998,
of an increase or decrease of 5.0%, if interest rates were to rise or fall by
200 basis points. This change is due to various balance sheet composition
changes including the purchase of fixed rate investments, growth in fixed rate
on-balance sheet loans, and the use of interest rate swaps to convert fixed rate
deposits to a variable rate. 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 our exposure to interest rate risk. The quantitative
risk information is limited by the parameters and assumptions utilized in
generating the results. These 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, we are also subject to prepayment risk
related to other financial instruments, namely servicing rights and retained
interest-only strips. 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, 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
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relationship between them, however, is not precisely determinable. Accordingly,
we believe 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.
Our servicing rights and interest-only strips are derived from both fixed
and variable rate loans, the majority of which are fixed. Fixed and variable
rate loans are currently prepaying at different rates, which is expected to
continue in the future. We have estimated the impact on the fair value of these
assets assuming a 2.5% change in constant prepayment rate for fixed rate loans
and 3.7% change in constant prepayment rate for variable rate loans. We have
estimated that these changes in prepayment assumptions could result in a $30
million change in the combined fair value of these assets as of December 31,
1999. This compares to an estimate of a $32 million change as of December 31,
1998, assuming a 2.9% change in constant prepayment rate for fixed rate loans
and 3.8% change in constant prepayment rate for variable rate loans. These
estimates do not factor in the impact of changes in the interest rate
environment associated with the changes in the prepayment rates. Changes in
interest rates generally affect the level of loan originations. Prepayment
assumptions are not the only assumptions in the fair value calculation for these
assets, 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.
DERIVATIVES ACTIVITIES
We have a number of mechanisms in place that enable us to monitor and control
both market and credit risk from our 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 derivatives and the individuals
authorized to execute derivatives transactions. Our senior management must
approve all derivatives strategies. As part of this approval process, we
complete a market risk analysis to determine the potential impact that would
result from severe negative (i.e., stressed) movements in market rates. By
policy, derivatives transactions may only be used to manage our exposure to
interest rate risk or for cost reduction and may not be used for speculative
purposes. The impact of any derivatives transaction is calculated using our
asset/liability model to determine its suitability.
For each counterparty, the total credit exposure amount is calculated by
aggregating credit exposure from all derivatives and other capital market
transactions with that counterparty. The amount of exposure that we are willing
to accept from any single counterparty is based on that counterparty's credit
rating and is determined as a percentage of our equity. To manage counterparty
exposure, we also use negotiated agreements that establish threshold exposure
amounts for each counterparty above which we have the right to call for and
receive collateral for the amount of the excess, thereby limiting our exposure
to the threshold amount. The threshold levels can be fixed or may change as the
credit rating of the counterparty changes, and in all cases, the threshold
levels are well below the maximum allowable exposure amounts described above.
Similarly, under the terms of the negotiated agreements, counterparties have the
right to call for and receive collateral from us for the amount of the excess of
their credit exposure to us over applicable threshold levels. To date,
substantially all agreements with counterparties have included bilateral
collateral agreements.
We have a treasury middle office that is independent of the trading
function, which measures, monitors, and reports on credit, market, and liquidity
risk exposures from capital markets, hedging and derivative product activities.
The department is responsible for ensuring compliance with our hedging policy,
including the counterparty transaction limits, transaction terms and trader
authorizations. In addition, this department marks each derivatives position to
market on a weekly basis using both internal and external models. These models
have been benchmarked against a sample of derivatives dealers' valuation models
for accuracy. Position and counterparty exposure reports are generated and used
to manage collateral requirements of the counterparty and Advanta.
All of these procedures and processes are designed to provide reasonable
assurance that, before and after the execution of any derivatives strategy,
market, credit and liquidity risks are fully analyzed and incorporated into
Advanta's asset/liability and risk measurement models.
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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 on 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, as amended by SFAS No. 137,
cannot be applied retroactively and will be adopted as required January 1, 2001.
We anticipate that the adoption of SFAS No. 133 will not have a material effect
on the results of operations; however, we continue to monitor potential changes
and implementation guidance to this new accounting standard.
LIQUIDITY AND CAPITAL RESOURCES
Our goal is to maintain an adequate level of liquidity, for both long-term and
short-term needs, through active management of both assets and liabilities.
During the year ended December 31, 1999, we securitized or sold approximately
$2.3 billion of Advanta Mortgage loans, $414 million of leases and $319 million
of business card receivables. We temporarily invested cash generated from these
transactions in short-term, high quality investments at money market rates
pending redeployment to pay down borrowings and to fund future mortgage loan,
business card and lease receivable growth. At December 31, 1999, we had $145
million of federal funds sold, $711 million of loan and lease receivables held
for sale, and $354 million of investments which could be sold to generate
additional liquidity. Equity, including capital securities, was $690 million at
December 31, 1999.
Our funding strategy relies on cash, cash equivalents and investments as
well as deposit gathering activity at Advanta National Bank and Advanta Bank
Corp. (together, the "banks") and securitizations. Advanta and the banks use
both retail and institutional on-balance sheet funding sources and have the
ability to issue a variety of debt and deposit products. As of December 31,
1999, Advanta National Bank's total deposits were $1.3 billion and Advanta Bank
Corp.'s total deposits were $257 million.
After paying down $365 million in long-term debt for the year ended
December 31, 1999, we had unrestricted cash, cash equivalents and marketable
securities in excess of $350 million at the parent company level on December 31,
1999. At December 31, 1999, the parent company's assets include advances to
wholly-owned non-bank subsidiaries to fund $224.9 million in loans, $29.9
million in retained interest-only strips and contractual mortgage servicing
rights, $209.4 million in subordinated trust assets, and $34.4 million of equity
securities accounted for at fair value. Total parent company advances to
non-bank subsidiaries to fund these assets of $498.6 million at December 31,
1999 have decreased by $111.6 million in comparison to advances at December 31,
1998.
At December 31, 1999, we had a $500 million committed warehouse financing
facility and a $250 million committed commercial paper conduit facility both
secured by mortgage loans. At December 31, 1999, we had additional uncommitted
warehouse financing facilities secured by mortgage loans of $550 million. At
December 31, 1999, we had $730 million of committed commercial paper facilities
secured by business credit card receivables and a $360 million committed
commercial paper facility secured by lease contracts and lease residuals. At
December 31, 1999, we had available $1.2 billion in unused warehouse financing
facilities and commercial paper conduit facilities. We also offer unsecured debt
of Advanta Corp. to retail investors through the Advanta Retail Note Program. In
addition, notwithstanding our current liquidity, efforts continue to develop new
sources of funding, both through previously untapped customer segments and
through development of new financing structures.
At December 31, 1999, Advanta National Bank's combined total capital ratio
(combined Tier I and Tier II capital) was 14.86%, and Advanta Bank Corp.'s
combined total capital ratio was 13.28%. At December 31, 1998, Advanta National
Bank's combined total capital ratio (combined Tier I and Tier II capital) was
12.12% and Advanta Bank Corp.'s combined total capital ratio was 14.13%. In each
case, Advanta National Bank and Advanta Bank Corp. had capital levels that met
the definition of "well-capitalized" under the regulatory framework for prompt
corrective action. We intend to maintain capital ratios at both institutions in
order to be "well-capitalized" under current guidelines. Recently, an FDIC
discussion draft proposal has been made
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public regarding capital requirements for subprime lenders. Under the proposal,
regulatory capital required to be held for certain loan classes included in the
institution's portfolio could be increased. The ultimate resolution of this
proposal and its impact on our financial results is uncertain at this time. This
is one of several regulatory and legislative initiatives and proposals that
could impact the manner in which we conduct our business and our financial
results. See "Part I -- Item 1. Business -- Legal Developments."
Advanta National Bank and Advanta Bank Corp. are prevented by regulatory
restrictions from lending to Advanta Corp. and its affiliates unless these
extensions of credit are secured by U.S. Government obligations or other
specified collateral. Further, secured extensions of credit are limited in
amount: (a) as to Advanta Corp. or any affiliate, to 10 percent of each bank's
capital and surplus, and (b) as to Advanta Corp. and all affiliates in the
aggregate, to 20 percent of each bank's capital and surplus. Advanta National
Bank is also subject to various legal limitations on the amount of dividends
that can be paid to its parent, Advanta Corp. Advanta National Bank is eligible
to declare a dividend provided that it is not greater than the current year's
net profits plus net profits of the preceding two years. As a result of a $1.3
billion special dividend/return of capital in 1998, Advanta National Bank will
not be eligible to declare any dividends to Advanta Corp. without prior
regulatory approval until at least the first quarter of 2001. Our insurance
subsidiaries are also subject to certain capital, deposit and dividend rules and
regulations as prescribed by state jurisdictions in which they are authorized to
operate.
Total stockholders' equity of our banking and insurance affiliates was $584
million at December 31, 1999, of which $524 million was restricted. At January
1, 2000, $60 million of stockholders' equity of our banking and insurance
affiliates was available for payment of dividends under applicable regulatory
guidelines.
In addition to dividend restrictions at banking subsidiaries, certain
non-bank subsidiaries are subject to minimum equity requirements as part of
securitization agreements or financing facility agreements. The total minimum
equity requirement of non-bank subsidiaries was $35 million at December 31,
1999. Management believes that these restrictions, for both bank and non-bank
subsidiaries, will not have an adverse effect on the Advanta Corp.'s ability to
meet its cash obligations due to the current levels of liquidity and diversity
of funding sources.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the past five
years.
COMPOSITION OF DEPOSIT BASE
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
Demand deposits $ 5.8 0% $ 4.3 0% $ 41.6 1% $ 28.3 1% $ 91.7 5%
Money market savings 242.4 16 181.5 10 506.8 17 329.7 18 277.5 14
Time deposits of $100,000 or
less 1,046.6 69 1,445.8 83 2,163.0 72 978.6 53 965.5 51
Time deposits of more than
$100,000 217.6 15 118.2 7 306.2 10 523.5 28 571.9 30
- ----------------------------------------------------------------------------------------------------------------
Total deposits $1,512.4 100% $1,749.8 100% $3,017.6 100% $1,860.1 100% $1,906.6 100%
- ----------------------------------------------------------------------------------------------------------------
43
45
COMPOSITION OF DEBT AND OTHER BORROWINGS
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
Subordinated notes and
certificates $ 1.0 0% $ 1.5 0% $ 55.5 2% $ 71.1 3% $ 76.2 4%
Senior notes and
certificates 234.4 20 145.6 14 151.0 7 208.3 8 200.6 11
Short-term bank notes 0.0 0 0.0 0 242.0 11 309.3 13 25.0 1
Medium-term bank notes 7.3 0 7.3 1 669.5 29 835.6 34 322.7 18
5 1/8% notes, due 1996 0.0 0 0.0 0 0.0 0 0.0 0 150.0 8
Medium-term notes 538.0 45 866.5 81 1,099.5 48 880.8 36 504.7 28
Value notes 7.8 1 9.3 1 30.7 1 0.0 0 0.0 0
Term fed funds, fed funds
purchased and FHLB
advances 220.0 18 0.0 0 0.0 0 10.0 0 443.0 25
Securities sold under
agreements to repurchase 104.2 9 0.0 0 0.0 0 0.0 0 0.0 0
Lines of credit and term
funding arrangements 76.4 6 18.5 2 3.9 0 40.0 0 0.0 0
Other borrowings 9.0 1 17.8 1 48.9 2 107.0 6 81.8 5
- ----------------------------------------------------------------------------------------------------------------
Total long-term debt and
other borrowings $1,198.1 100% $1,066.5 100% $2,301.0 100% $2,462.1 100% $1,804.0 100%
- ----------------------------------------------------------------------------------------------------------------
YEAR 2000 READINESS DISCLOSURE
Computer programs that use only two digits to identify a year in the date field
could fail or create erroneous results on or after the year 2000. The "Year
2000" issue affects computer and information technology systems, as well as
non-information technology 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. In order to
address this issue, we implemented a Year 2000 compliance program which
consisted of six phases: (1) awareness; (2) assessment; (3) renovation; (4)
validation; (5) contingency planning; and (6) implementation. We also identified
and evaluated compliance of our significant business relationships, including
without limitation vendors, customers and asset management and funding
counterparties, to assess the potential impact on our operations if those third
parties and/or their products or systems would have failed to become Year 2000
compliant in a timely manner. We completed all six phases of our internal and
external mission-critical systems as of September 30, 1999.
We have not experienced significant problems or issues relating to the Year
2000 issue as of March 15, 2000. We incurred approximately $7.7 million in
operating expenses, exclusive of costs associated with diverted personnel, and
approximately $1.3 million in capital expenditures to address the Year 2000
issue. Funding for the project was provided out of operating revenues, and
operating expenses were expensed as incurred. These costs did not have a
material affect on our financial position or results of operations. We deferred
development on selected business systems due to Year 2000 priorities. These
deferrals are not expected to have a material effect on our financial condition
or results of operations.
44
46
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
($ IN THOUSANDS) ------------------------
1999 1998
- --------------------------------------------------------------------------------------
ASSETS
Cash $ 29,301 $ 16,267
Federal funds sold 144,938 267,400
Restricted interest-bearing deposits 93,688 80,028
Trading investments 0 501,563
Investments available for sale 748,881 521,410
Loan and lease receivables, net:
Held for sale 711,303 527,644
Other 738,321 579,783
------------------------
Total loan and lease receivables, net 1,449,624 1,107,427
Retained interest-only strip 115,641 209,096
Contractual mortgage servicing rights 92,636 74,425
Subordinated trust assets 400,148 291,942
Premises and equipment (at cost, less accumulated
depreciation
of $54,613 in 1999 and $38,377 in 1998) 89,869 84,396
Other assets 524,936 567,466
- --------------------------------------------------------------------------------------
TOTAL ASSETS $3,689,662 $3,721,420
- --------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 5,768 $ 4,324
Interest-bearing 1,506,591 1,745,466
------------------------
Total deposits 1,512,359 1,749,790
Long-term debt 788,508 1,030,147
Other borrowings 409,601 36,301
Other liabilities 289,563 244,878
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,000,031 3,061,116
- --------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
debentures of Advanta 100,000 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding -- 1,010 shares in 1999
and 1998 1,010 1,010
Class B preferred stock, $.01 par value:
Issued -- 0 in 1999 and 14,211 shares in 1998 0 0
Class A voting common stock, $.01 par value;
Authorized -- 214,500,000 shares; Issued -- 10,465,883
shares in 1999 and 10,375,489 shares in 1998 105 104
Class B non-voting common stock, $.01 par value;
Authorized -- 230,000,000 shares; Issued -- 18,256,029
shares in 1999 and 16,294,825 shares in 1998 182 163
Additional paid-in capital 232,585 229,304
Deferred compensation (16,597) (17,214)
Unearned ESOP shares (12,132) (12,550)
Accumulated other comprehensive loss (10,794) (91)
Retained earnings 421,741 382,092
Less: Treasury stock at cost, 405,000 Class A and 972,768
Class B common shares in 1999 and 55,000 Class A and
972,768 Class B common shares in 1998 (26,469) (22,514)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 589,631 560,304
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,689,662 $3,721,420
- --------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
45
47
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
REVENUES:
Interest income $246,226 $ 245,340 $ 436,860
Securitization income 124,514 162,358 106,005
Servicing revenues 119,300 130,112 249,293
Consumer credit card securitization income 0 64,796 252,631
Gain on transfer of consumer credit card business 0 541,288 0
Other revenues, net 82,483 60,126 217,966
------------------------------------
Total revenues 572,523 1,204,020 1,262,755
------------------------------------
EXPENSES:
Operating expenses 337,061 379,764 621,961
Interest expense 167,676 184,275 324,558
Provision for credit losses 42,647 67,193 210,826
Minority interest in income of consolidated subsidiary 8,880 8,880 8,880
Unusual charges 16,713 125,072 0
------------------------------------
Total expenses 572,977 765,184 1,166,225
------------------------------------
Income (loss) before income taxes (454) 438,836 96,530
Income tax (benefit) expense (50,272) (9,044) 24,905
------------------------------------
Net income $ 49,818 $ 447,880 $ 71,625
- ----------------------------------------------------------------------------------------------
Basic earnings per share
Class A $ 1.95 $ 16.62 $ 1.45
Class B 2.02 16.68 1.57
Combined 1.99 16.65 1.52
- ----------------------------------------------------------------------------------------------
Diluted earnings per share
Class A $ 1.93 $ 15.69 $ 1.43
Class B 1.99 15.73 1.54
Combined 1.96 15.71 1.50
- ----------------------------------------------------------------------------------------------
Basic weighted average shares outstanding
Class A 9,057 11,174 18,172
Class B 14,515 15,500 24,635
Combined 23,572 26,674 42,807
- ----------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding
Class A 9,094 11,182 18,235
Class B 14,835 17,313 25,266
Combined 23,929 28,495 43,501
- ----------------------------------------------------------------------------------------------
Cash dividends declared
Class A $ 0.252 $ 0.252 $ 0.440
Class B 0.302 0.302 0.528
- ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
46
48
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
-------------------------------------------------------------------------------------
DEFERRED
CLASS A CLASS B CLASS A CLASS B ADDITIONAL COMPENSATION
COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON PAID-IN & UNEARNED
INCOME STOCK STOCK STOCK STOCK CAPITAL ESOP SHARES
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1996 $1,010 $0 $179 $ 256 $ 350,479 $(41,229)
Net income $ 71,625
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of ($289) 536
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($251) 466
--------
Comprehensive income $ 72,627
========
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 (11,159)
Amortization of deferred
compensation 11,343
Termination benefit --
Benefit plans 5,215 15,692
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $1,010 $0 $182 $ 266 $ 379,543 $(25,353)
Net income $447,880
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of $109 (202)
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($33) 61
--------
Comprehensive income $447,739
========
Tender Offer (79) (113) (160,861)
Preferred and common cash
dividends declared
Exercise of stock options 1 2 3,102
Issuance of stock -- Dividend
reinvestment 89
Benefit plans 13 22,647 (20,605)
Amortization of deferred
compensation 8,193
Termination benefit --
Benefit plans (5) (15,214) 20,551
Stock buyback
ESOP stock purchase (12,569)
ESOP shares committed to be
released (2) 19
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $1,010 $0 $104 $ 163 $ 229,304 $(29,764)
Net income $ 49,818
Other comprehensive income (loss):
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
$5,763 (10,703)
--------
Comprehensive income $ 39,115
========
Conversion of Class B Preferred
Stock 14 (14)
Preferred and common cash
dividends declared
Exercise of stock options 20
Issuance of stock --
Benefit plans 1 9 10,579 (10,589)
Amortization of deferred
compensation 3,781
Termination benefit --
Benefit plans (4) (7,421) 7,425
Stock buyback
ESOP shares committed to be
released 117 418
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1999 $1,010 $0 $105 $ 182 $ 232,585 $(28,729)
- -------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
INCOME (LOSS) EARNINGS STOCK EQUITY
- ---------------------------------- ----------------------------------------------------
Balance at Dec. 31, 1996 $ (952) $ 542,335 $ (42) $ 852,036
Net income 71,625 71,625
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of ($289) 536 536
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($251) 466 466
Comprehensive income
Preferred and common cash
dividends declared (28,301) (28,301)
Exercise of stock options 8,477
Issuance of stock --
Dividend reinvestment 857
Benefit plans 1,297 4,666
Amortization of deferred
compensation 11,343
Termination benefit --
Benefit plans (15,662) 5,245
- ------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $ 50 $ 585,659 $(14,407) $ 926,950
Net income 447,880 447,880
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of $109 (202) (202)
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($33) 61 61
Comprehensive income
Tender Offer (640,553) (801,606)
Preferred and common cash
dividends declared (10,894) (10,894)
Exercise of stock options 3,105
Issuance of stock -- Dividend
reinvestment 89
Benefit plans 2,055
Amortization of deferred
compensation 8,193
Termination benefit --
Benefit plans (3,558) 1,774
Stock buyback (4,549) (4,549)
ESOP stock purchase (12,569)
ESOP shares committed to be
released 17
- ---------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $ (91) $ 382,092 $(22,514) $ 560,304
Net income 49,818 49,818
Other comprehensive income (loss):
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
$5,763 (10,703) (10,703)
Comprehensive income
Conversion of Class B Preferred
Stock 0
Preferred and common cash
dividends declared (10,169) (10,169)
Exercise of stock options 20
Issuance of stock --
Benefit plans 0
Amortization of deferred
compensation 3,781
Termination benefit --
Benefit plans 0
Stock buyback (3,955) (3,955)
ESOP shares committed to be
released 535
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1999 $(10,794) $ 421,741 $(26,469) $ 589,631
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
47
49
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 49,818 $ 447,880 $ 71,625
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity securities (gains) losses (30,391) 41,750 11,426
Noncash charges associated with exit of auto finance
business 16,900 0 0
Depreciation and amortization 18,507 21,480 35,280
Provision for credit losses, excluding auto 37,747 67,193 210,826
Gain on transfer of consumer credit card business 0 (541,288) 0
Noncash expense associated with unusual charges 0 25,539 0
Investment in subordinated trust assets, net (112,378) (113,473) (95,237)
Proceeds from sale of trading investments 185,042 293,413 0
Origination of loans and leases held for sale (3,077,544) (5,772,116) (4,285,632)
Proceeds from sale of loans and leases held for sale 3,138,290 5,760,090 4,309,218
Change in other assets and other liabilities (55,585) (186,317) 68,371
Change in retained interest-only strip, excluding auto
charge 85,627 (25,790) (53,603)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 256,033 18,361 272,274
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Change in federal funds sold and interest-bearing
deposits 108,802 (25,675) 4,541
Purchase of investments available for sale (12,872,622) (44,610,758) (46,510,251)
Proceeds from sales of investments available for sale 812,821 1,707,418 1,736,050
Proceeds from maturing investments available for sale 12,171,704 43,591,658 44,263,776
Purchase of loan and lease portfolios 0 (38,190) (141,687)
Principal collected on Advanta Mortgage loans and leases
not held for sale 177,530 211,444 116,390
Origination of Advanta Mortgage loans and leases not
held for sale (478,805) (498,935) (156,115)
Change in business card receivables and other loans not
held for sale, excluding sales (18,872) 17,974 (113,099)
Change in consumer credit card receivables not held for
sale, excluding sales/transfers 0 (121,845) (571,215)
Purchases of premises and equipment, net (23,683) (41,795) (79,003)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (123,125) 191,296 (1,450,613)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in demand and savings deposits 62,329 70,415 190,493
Proceeds from sales of time deposits 600,747 1,762,747 1,934,081
Payments for maturing time deposits (900,507) (500,447) (967,021)
Change in repurchase agreements, term fed funds and FHLB
advances 324,191 38,195 (10,000)
Proceeds from issuance of long-term debt 123,537 29,857 536,004
Payments on redemption of long-term debt (365,176) (781,051) (536,827)
Change in other borrowings 49,109 (16,473) (92,229)
Tender Offer 0 (801,606) 0
Stock buyback (3,955) (4,549) 0
ESOP stock purchase 0 (12,569) 0
Proceeds from issuance of stock 20 5,249 14,000
Cash dividends paid (10,169) (10,894) (28,301)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (119,874) (221,126) 1,040,200
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13,034 (11,469) (138,139)
Cash at beginning of period 16,267 27,736 165,875
- ----------------------------------------------------------------------------------------------------------
Cash at end of period $ 29,301 $ 16,267 $ 27,736
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Advanta Corp., a Delaware corporation, (collectively with its subsidiaries,
"Advanta") is a financial services company that provides consumers and small
businesses throughout the country with a variety of financial products including
mortgages, business credit cards, equipment leases, insurance and deposit
products. Advanta services approximately 680,000 customers and manages
receivables of approximately $10.2 billion. Advanta also services mortgage loans
for third parties (referred to as "subservicing" or "contract servicing"). Prior
to February 20, 1998, Advanta issued consumer credit cards.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Advanta
Corp. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform with the current year's presentation.
USE OF ESTIMATES
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 securitization income, retained
interest-only strips, contractual mortgage servicing rights, the fair value of
certain financial instruments, the allowance for credit losses, and income
taxes, among others. Actual results could differ from those estimates.
INVESTMENTS
Trading investments are securities that are bought and held principally for the
purpose of selling them in the near term. Trading investments are reported at
fair value, with unrealized gains and losses included in earnings. Investments
available for sale include securities that Advanta sells from time to time to
provide liquidity and in response to changes in the market. Debt and equity
securities classified as available for sale are reported at market value and
unrealized gains and losses on these securities are reported in other
comprehensive income, net of income taxes.
Investments of Advanta's venture capital unit, Advanta Partners, are
included in investments available for sale and carried at estimated fair value
following the specialized industry accounting principles of this unit.
Management makes fair value determinations based on quoted market prices, when
available, and considers the investees' financial results, conditions and
prospects when market prices are not available. The equity method of accounting
for investments is not applied in accordance with venture capital accounting
principles.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Gains and losses on the sale
of securities are recorded on the trade date and are determined using the
specific identification method.
LOAN AND LEASE RECEIVABLES HELD FOR SALE
Loan and lease receivables held for sale represent receivables currently on the
balance sheet that Advanta intends to sell or securitize within the next six
months. These assets are reported at the lower of aggregate cost or fair market
value by loan type. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.
49
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established as losses are estimated to have
occurred through a provision for credit losses charged to earnings. The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management's periodic review of the collectibility in light of
historical experience by loan type, the nature and volume of the loan and lease
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
Loan and lease losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Advanta charges losses on
nonperforming Advanta Mortgage loans against the allowance generally at the
earlier of foreclosure or when they have become twelve months delinquent. Losses
on lease receivables are generally charged against the allowance when 121 days
contractually delinquent. Advanta's charge-off policy, as it relates to business
credit card accounts, is to charge-off a receivable, if not paid, at 180 days
contractually delinquent. Consumer credit card accounts, if not paid, were
charged-off at 186 days contractually delinquent. Credit card accounts suspected
of being fraudulent are charged-off after a 90-day investigative period, unless
the investigation shows no evidence of fraud.
The accrual of interest is discontinued when the related receivable becomes
90 days past due. Interest income is subsequently recognized only to the extent
cash payments are received.
ORIGINATION COSTS AND FEES
Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using a method which
approximates the level yield method. Upon the sale or securitization of Advanta
Mortgage loans or lease receivables, the unamortized portion of net fees or
costs is included in the computation of the gain on sale. Deferred origination
costs include costs of loan origination associated with transactions with
independent third parties and certain costs relating to direct sales and
underwriting activities and preparing and processing loan documents.
Advanta engages third parties to solicit and originate credit card account
relationships. Amounts paid to third parties to acquire credit card accounts are
deferred and netted against any related credit card fee, and the net amount is
amortized on a straight-line basis over the privilege period of one year. Net
deferred costs on business card receivables were $8.1 million at December 31,
1999 and $2.1 million at December 31, 1998.
SECURITIZATION ACTIVITIES
Advanta, through its subsidiaries, sells mortgage loans, business cards and
leases through securitizations, typically with servicing retained. Prior to the
Consumer Credit Card Transaction in 1998, Advanta also securitized consumer
credit card receivables.
The transfer of financial assets in which Advanta surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
Liabilities and derivatives incurred or obtained as part of a transfer of
financial assets are initially measured at fair value, if practicable. Advanta
allocates the previous carrying amount of the receivables securitized between
the assets sold and the retained interests, including the servicing
relationship, interests in the receivables, and an interest-only strip, based on
their relative estimated fair values at the date of sale. A gain is recognized
at the time of the sale, equal to the excess of the fair value of the assets
obtained (principally cash) over the allocated cost of the assets sold and
transaction costs. The retained interest-only strip represents the fair value of
the remaining interest to be collected from the borrowers on the underlying
loans after the payment of interest to the certificate holders and the payment
of a servicing fee to Advanta in its role as servicer reduced by the estimated
fair value of Advanta's obligation for anticipated charge-offs.
50
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the revolving period of each credit card securitization trust,
securitization income is recorded representing gains on the sale of new
receivables to the trusts on a continuous basis to replenish the investors'
interest in trust receivables that have been repaid by the credit card holders.
RETAINED INTEREST-ONLY STRIP
Retained interest-only strips are measured in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Advanta accounts for
the retained interest-only strips from mortgage securitizations as trading
securities. These assets are recorded at estimated fair value and the resulting
unrealized gain or loss from the valuation of the receivable is included in the
results of operations for the period.
Advanta estimates the fair value of retained interest-only strips based on
a discounted cash flow analysis. The cash flows are estimated as the excess of
the weighted average yield on each pool of the receivables sold over the sum of
the interest rate paid to the certificate holder plus the servicing fee, a
trustee fee, credit enhancement costs and an estimate of future credit losses
over the life of the receivables. Cash flows are discounted from the date the
cash is expected to become available to Advanta (the "cash-out" method). These
cash flows are projected over the life of the receivables using prepayment,
default, and interest rate assumptions that management believes would be used by
market participants for similar financial instruments subject to prepayment,
credit and interest rate risk. The cash flows are discounted using an interest
rate that management believes a purchaser unrelated to the seller of the
financial instrument would demand. See Note 23 for discussion of assumptions
used in the estimate of fair value at December 31, 1999 and 1998. As all
estimates used are influenced by factors outside Advanta's control, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change in the near term. Interest income is recognized over the life of
the retained interest-only strip using the discount rate used in the valuation.
SERVICING RIGHTS
Advanta allocates a portion of the book value of receivables securitized to the
retained servicing rights based on relative fair values. Management has
estimated the fair value of servicing rights based on a discounted cash flow
analysis. The cash flows are estimated as the excess of the benefits of
servicing, principally revenues from contractually specified servicing fees,
late charges, prepayment penalties and other ancillary sources, over adequate
market-based compensation. Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125") defines adequate compensation to include the profit
that would be demanded in the marketplace. Servicing rights are amortized in
proportion to, and over the period of, estimated net future servicing fee
income.
Servicing assets associated with credit card securitization transactions
are not material as the benefits of servicing are not expected to be more or
less than adequate compensation to Advanta for performing the servicing.
Advanta periodically evaluates the potential impairment of servicing
rights. Advanta stratifies these rights based on two of the predominant risk
characteristics of the underlying loans, the period of origination and the type
of loan (i.e., fixed or adjustable rate loan). Impairment is recognized through
a valuation allowance for each individual stratum. The amount of impairment
recognized is the amount by which the servicing rights for a stratum exceed
their estimated fair value. See Note 23 for discussion of assumptions used in
the estimate of fair value at December 31, 1999 and 1998.
SUBORDINATED TRUST ASSETS
Subordinated trust assets represent other retained interests in Advanta
Mortgage's securitizations. Ownership of these interests, together with the
related retained interest-only strip, is represented by the subordinate
certificates issued by the securitization trust. These certificates serve as a
form of credit enhancement for the transactions, and excess losses on the
collateral would be absorbed by these amounts. Subordinated trust assets
51
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are allocated a variable rate, risk-adjusted return. These assets are classified
as trading securities and are carried at estimated fair value. In estimating
fair value, management considers the credit enhancement provided by the retained
interest-only strip.
PREMISES AND EQUIPMENT
Premises, equipment, computers and software are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Repairs and
maintenance are charged to expense as incurred.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase are accounted for as secured
borrowings because Advanta maintains effective control over the transferred
assets. Securities sold under agreements to repurchase are reflected at the
amount of cash received in connection with the transaction. Advanta may be
required to provide additional collateral based on the fair value of the
underlying securities.
DERIVATIVE FINANCIAL INSTRUMENTS
Advanta uses various derivative financial instruments, including interest rate
swaps, interest rate caps, options and forward contracts, as part of its risk
management strategy to reduce interest rate risk. Derivatives are not used for
trading or speculative activities. Derivatives are classified as hedges or
synthetic alterations of specific on-balance sheet items, off-balance sheet
items or anticipated transactions. In order for derivatives to qualify for hedge
accounting treatment, the following conditions must be met:
1) the underlying item being hedged must expose Advanta to interest rate
risk;
2) the derivative used serves to reduce Advanta's sensitivity to interest
rate risk; and
3) the derivative used is designated and deemed effective in hedging
Advanta's exposure to interest rate risk.
In addition to meeting these conditions, anticipatory hedges must demonstrate
that the anticipated transaction being hedged is probable to occur and the
expected terms of the transaction are identifiable.
Gains or losses on derivatives designated as hedges of balance sheet items
not carried at fair value are deferred and are ultimately recognized in income
as part of the carrying amount of the related balance sheet item exposing
Advanta to interest rate risk. Accrual accounting is applied for derivatives
designated as synthetic alterations with income and expense recorded in the same
category as the related underlying on-balance sheet or off-balance sheet item
synthetically altered. Gains or losses resulting from early terminations of
derivatives are deferred and amortized over the shorter of the remaining term of
the underlying balance sheet item or the remaining term of the derivative. If
the underlying balance sheet item is sold, matures or is extinguished, or the
anticipated transaction is no longer likely to occur, any unrecognized gain or
loss on the derivative is recognized currently in earnings.
For derivatives designated as hedges of balance sheet items where changes
in fair value are recognized currently in earnings, the related derivative is
included in the balance sheet at fair value, and changes in the fair value of
the derivative are also recognized currently in earnings.
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in operating results. During 1999, 1998 and 1997, all of Advanta's
derivatives qualified as hedges or synthetic alterations. For purposes of
reporting cash flows, cash flows from derivatives accounted for as hedges or
synthetic alterations are classified in the same category as the item being
hedged.
52
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
Insurance premiums are earned ratably over the period of insurance coverage
provided. Reinsurance premiums, net of commissions, on credit life, disability
and unemployment policies, are earned monthly based upon the outstanding balance
of the underlying receivables. The cost of acquiring new reinsurance is deferred
and amortized over the period the related premiums are earned in order to match
the expense with the anticipated revenue.
Insurance loss reserves are based on estimated settlement amounts for both
reported losses and incurred but not reported losses.
STOCK-BASED COMPENSATION
Advanta has elected to account for stock-based compensation following Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" as
permitted by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). Advanta has adopted the disclosure-only provisions of SFAS 123.
INCOME TAXES
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various assets and liabilities and gives
current recognition to changes in tax rates and laws.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Income available to common stockholders is computed by deducting
Class A and Class B Preferred Stock dividends from net income. Diluted earnings
per share is computed by dividing income available to common stockholders,
increased by dividends on dilutive Class B Preferred Stock for the period, by
the sum of average common shares outstanding plus dilutive common shares for the
period. Potentially dilutive common shares include stock options, restricted
stock issued under incentive plans and Class B Preferred Stock. Since the cash
dividends declared on Advanta's Class B Common Stock were higher than the
dividends declared on the Class A Common Stock, basic and diluted 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. Advanta has also presented combined earnings per share,
which represents a weighted average of Class A and Class B earnings per share.
CASH FLOW REPORTING
Cash paid for interest was $161.0 million during 1999, $218.3 million during
1998, and $304.0 million during 1997. Cash paid (refunds received) for taxes was
$8.9 million during 1999, $28.2 million during 1998, and $(6.1) million during
1997. See Note 9 for discussion of noncash transfer of assets and liabilities in
the Consumer Credit Card Transaction. Noncash transactions in 1998 also included
the retention of $795 million of trust certificates at the time of receivable
securitization. These securities were classified as trading investments. In
1999, $315 million of these securities were reclassified from trading to
available-for-sale securities.
RECENT ACCOUNTING PRONOUNCEMENTS
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
53
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, as amended by SFAS No. 137,
cannot be applied retroactively and will be adopted as required January 1, 2001.
Advanta anticipates that the adoption of SFAS No. 133 will not have a material
effect on the results of operations; however, Advanta continues to monitor
potential changes and implementation guidance to this new accounting standard.
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. Before the issuance of SFAS No. 134, Advanta 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. Advanta adopted SFAS No. 134 on January 1,
1999, and reclassified approximately $315 million of retained mortgage-backed
securities related to mortgage loan securitizations from trading to
available-for-sale securities based on Advanta's intent with respect to these
securities. Advanta continues to classify its retained interest-only strips and
subordinated trust assets from mortgage loan securitizations as trading
securities.
NOTE 2. INVESTMENTS
Investments available for sale consisted of the following:
DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury & other
U.S. Government
securities $145,112 $0 $ (4,668) $140,444 $435,953 $178 $ (33) $436,098
State and municipal
securities 3,473 0 (85) 3,388 4,636 182 0 4,818
Collateralized
mortgage obligations 456,288 0 (8,220) 448,068 12,278 0 (18) 12,260
Mortgage-backed
securities 98,190 0 (3,634) 94,556 4,265 0 (203) 4,062
Equity securities(1) 60,892 0 0 60,892 61,006 0 (250) 60,756
Other 1,531 2 0 1,533 3,411 5 0 3,416
- -----------------------------------------------------------------------------------------------------------------------
Total investments
available for
sale $765,486 $2 $(16,607) $748,881 $521,549 $365 $(504) $521,410
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------
1997 1997
---------- ------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------- ------------ ------------------------------------
U.S. Treasury & other
U.S. Government
securities $1,083,848 $ 82 $(184) $1,083,746
State and municipal
securities 5,195 123 0 5,318
Collateralized
mortgage obligations 15,639 0 (151) 15,488
Mortgage-backed
securities 47,387 150 0 47,537
Equity securities(1) 69,092 0 (250) 68,842
Other 1,344 0 (3) 1,341
- -----------------------------------------------------------------------------
Total investments
available for
sale $1,222,505 $355 $(588) $1,222,272
- -----------------------------------------------------------------------------
(1) Includes investments of the venture capital unit, Advanta Partners LP. The
amount shown as amortized cost represents carrying value for these
investments. See Note 1.
54
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of investments available for sale at December 31, 1999 were as
follows:
AMORTIZED MARKET
COST VALUE
- -----------------------------------------------------------------------------------
Due in 1 year $ 17,698 $ 17,662
Due after 1 but within 5 years 128,794 124,168
Due after 5 but within 10 years 1,140 1,093
Due after 10 years 953 909
- -----------------------------------------------------------------------------------
Subtotal 148,585 143,832
Mortgage-backed securities 98,190 94,556
Collateralized mortgage obligations 456,288 448,068
Equity and other securities 62,423 62,425
- -----------------------------------------------------------------------------------
Total investments available for sale $765,486 $748,881
- -----------------------------------------------------------------------------------
Net realized gains on the sale of investments are included in other
revenues in the Consolidated Income Statements. Realized gains and losses on
sales of investments available for sale were as follows for the years ended
December 31:
1999 1998 1997
- -----------------------------------------------------------------------------------------
Gross realized gains $30,697 $7,457 $3,867
Gross realized losses (64) (176) (181)
- -----------------------------------------------------------------------------------------
Net realized gains $30,633 $7,281 $3,686
- -----------------------------------------------------------------------------------------
Investment securities deposited with insurance regulatory authorities to
meet statutory requirements or held by a trustee for the benefit of primary
insurance carriers were $7.3 million at December 31, 1999 and $5.8 million at
December 31, 1998. At December 31, 1999, the carrying amount of securities
pledged to secure repurchase agreements was $111.3 million and the carrying
value of securities pledged to secure Federal Home Loan Bank ("FHLB") advances
was $276.2 million. At December 31, 1998, no securities were pledged in
connection with repurchase agreements or FHLB advances
Trading investments at December 31, 1998 consisted of AAA rated classes of
Advanta Mortgage Loan Trust 1998-2 and Advanta Mortgage Loan Trust 1998-4
securities. There were no investments classified as trading at December 31,
1999. Net realized and unrealized gains on trading investments were $1,471
thousand in 1998, and were included in other revenues.
55
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. LOAN AND LEASE RECEIVABLES
Loan and lease receivables on the balance sheet, including those held for sale,
consisted of the following:
DECEMBER 31,
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
Advanta Mortgage loans(1) $1,050,478 $ 829,819
Business cards(2) 275,095 150,022
Leases(3) 132,802 122,657
Other loans 21,930 17,862
- --------------------------------------------------------------------------------------
Gross loan and lease receivables 1,480,305 1,120,360
- --------------------------------------------------------------------------------------
Add: Deferred origination costs, net of deferred fees, and
unamortized purchase premiums 11,166 20,504
Less Allowance for credit losses:
Advanta Mortgage loans (21,743) (20,092)
Business cards (14,663) (6,916)
Leases (3,110) (2,695)
Other loans (2,331) (3,734)
- --------------------------------------------------------------------------------------
Total allowance (41,847) (33,437)
- --------------------------------------------------------------------------------------
Net loan and lease receivables $1,449,624 $1,107,427
- --------------------------------------------------------------------------------------
(1) Includes Advanta Mortgage loan receivables held for sale of $510.9 million
in 1999 and $459.5 million in 1998.
(2) Includes business cards held for sale of $152.4 million in 1999 and $28.1
million in 1998.
(3) Includes leases held for sale of $43.3 million in 1999 and $40.0 million in
1998, and is net of unearned income of $20.8 million in 1999 and $19.4
million in 1998. Also includes residual interests of $78.7 million in 1999
and $67.1 million in 1998.
Securitized receivables consist of the following:
DECEMBER 31,
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
Advanta Mortgage loans $7,333,058 $7,447,502
Business cards 765,019 664,712
Leases 662,841 547,583
- --------------------------------------------------------------------------------------
Total $8,760,918 $8,659,797
- --------------------------------------------------------------------------------------
Advanta Mortgage loans include home equity loans, home equity lines of
credit and auto loans, and exclude subservicing loans which were never owned by
Advanta, but which Advanta services for a fee. Subservicing receivables were
$11.9 billion at December 31, 1999 and $8.3 billion at December 31, 1998.
Advanta bears no risk of credit loss on the receivables in our subservicing
portfolio and subserviced loans are not included in the Company's managed
portfolio of receivables. At December 31, 1999, two clients represented 66% of
the subservicing receivables portfolio.
At December 31, 1999, approximately 87% of Advanta Mortgage managed
receivables represented first lien position loans and the balance was second
lien position loans. At December 31, 1998, approximately 92% of Advanta Mortgage
managed receivables represented first lien position loans. Home equity lines of
credit represented 10% of the managed mortgage loan portfolio at December 31,
1999 and 5% at December 31, 1998. Advanta Mortgage managed receivables were
comprised of approximately 62% of fixed rate loans at December 31, 1999 and 65%
of fixed rate loans at December 31, 1998. Lease receivables are priced on a
fixed rate basis. Business card receivables have variable rates based on the
LIBOR (London Interbank Offered Rate) index.
56
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic concentration of managed receivables (owned receivables and
securitized receivables) was as follows:
DECEMBER 31,
- -------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
California $ 1,246,632 12% $1,246,394 13%
Michigan 707,978 7 816,971 8
Pennsylvania 588,386 6 517,369 5
Florida 572,187 6 541,501 6
New York 552,502 5 510,187 5
All other 6,573,538 64 6,147,735 63
- -------------------------------------------------------------------------------------------------
Total managed receivables $10,241,223 100% $9,780,157 100%
- -------------------------------------------------------------------------------------------------
In the normal course of business, Advanta makes commitments to extend
credit to its business card and home equity line of credit customers.
Commitments to extend credit are agreements to lend to a customer subject to
certain conditions established in the contract. Advanta does not require
collateral to support credit card commitments. Advanta had commitments to extend
credit outstanding for which there was potential credit risk of $4.4 billion at
December 31, 1999 and $3.3 billion at December 31, 1998. Advanta believes that
its customers' utilization of these lines of credit will continue to be
substantially less than the amount of the commitments, as has been Advanta's
experience to date. Unused commitments were $2.6 billion at December 31, 1999
and $2.1 billion at December 31, 1998.
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
The following table displays five years of allowance history:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Balance at January 1 $ 33,437 $ 137,773 $ 89,184 $ 53,494 $ 41,617
Provision for credit losses 42,647 67,193 210,826 96,862 53,326
Transfer from recourse reserves 0 0 0 3,000 1,100
Allowances on receivables (sold)
purchased (6,690) (118,420) (11,015) 6,404 0
Gross charge-offs:
Advanta Mortgage loans (15,132) (14,313) (6,825) (3,473) (6,038)
Business cards (11,341) (11,126) (6,403) (2,230) N/A
Leases (4,429) (4,992) (3,180) (1,214) (1,413)
Consumer credit cards 0 (30,999) (155,528) (73,466) (41,779)
Other loans (2,404) 0 (4) (13) (38)
- ----------------------------------------------------------------------------------------------
Total gross charge-offs (33,306) (61,430) (171,940) (80,396) (49,268)
Recoveries:
Advanta Mortgage loans 3,011 3,007 991 414 76
Business cards 1,238 1,093 205 61 N/A
Leases 1,503 1,501 1,010 381 274
Consumer credit cards 0 2,719 18,511 8,945 6,354
Other loans 7 1 1 19 15
- ----------------------------------------------------------------------------------------------
Total recoveries 5,759 8,321 20,718 9,820 6,719
- ----------------------------------------------------------------------------------------------
Net charge-offs (27,547) (53,109) (151,222) (70,576) (42,549)
Balance at December 31 $ 41,847 $ 33,437 $ 137,773 $ 89,184 $ 53,494
- ----------------------------------------------------------------------------------------------
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SECURITIZATION ACTIVITIES
The following table presents activity in the retained interest-only ("IO") strip
and contractual mortgage servicing rights ("CMSR") asset related to Advanta
Mortgage loan securitizations:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
1999 1998(1)
- --------------------------------------------------------------------------------------
Beginning balance IO Strip $209,096 $183,306
Beginning balance CMSR $ 74,425 $ 24,546
IO activity:
Retained IO on sales, net 50,462 181,425
Interest income 19,354 21,674
Cash received and used to acquire subordinated trust
assets (111,600) (96,455)
Cash received and released to Advanta (25,760) (29,874)
Fair value adjustments (20,731) (50,980)
Fair value adjustment related to auto exit (7,828) 0
Other 2,648 0
CMSR activity:
Servicing rights retained 54,124 71,131
Amortization (39,134) (12,977)
Valuation provision 3,221 (8,275)
Ending balance IO Strip $115,641 $209,096
Ending balance CMSR $ 92,636 $ 74,425
- --------------------------------------------------------------------------------------
(1) In 1999, Advanta reclassified $25.3 million from IO strip to CMSR to better
reflect the deal structures. In addition, Advanta reclassified from IO strip
$7.4 million as subordinated trust assets and $5.6 million as due from
trustee, as these amounts had already been collected by the trust. These
reclassifications had no impact on earnings. The 1998 balances have been
reclassified to conform to this presentation.
Securitized Advanta Mortgage loans outstanding were $7.3 billion at
December 31, 1999 and $7.4 billion at December 31, 1998. The retained
interest-only strip is net of estimated liabilities for anticipated charge-offs
of $191.4 million at December 31, 1999 and $149.0 million at December 31, 1998.
The balance in the valuation allowance for contractual mortgage servicing
rights was $5.1 million at December 31, 1999 and was $8.3 million at December
31, 1998. During 1999, 1998 and 1997, there were no direct write-downs or other
reductions to the valuation allowance.
The following table presents activity in subordinated trust assets related
to Advanta Mortgage loan securitizations:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
Beginning balance $291,942 $178,469
Initial collateral deposits 45,717 38,907
Subordinated trust assets acquired with excess cash flows 111,600 96,455
Interest income 27,227 14,173
Valuation adjustment related to auto loans (4,172) 0
Valuation adjustment related to mortgage loans (11,269) 0
Excess cash flows released to Advanta (60,481) (50,044)
Net change associated with off-balance sheet warehouse
facilities (416) 13,982
- --------------------------------------------------------------------------------------
Ending balance $400,148 $291,942
- --------------------------------------------------------------------------------------
58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to subordinated trust assets, there were also restricted
interest-bearing deposits of $35.8 million at December 31, 1999 and $25.3
million at December 31, 1998 relating to Advanta Mortgage loan securitizations.
These deposits, the subordinated trust assets and the retained interest-only
strip serve as credit enhancements for the securitization transactions.
Securitized business cards outstanding were $765 million at December 31,
1999 and $665 million at December 31, 1998. Advanta had retained interests from
business card securitizations of $39.3 million at December 31, 1999 and $31.2
million at December 31, 1998. These retained interests serve as credit
enhancements for the securitization transactions and include the retained
interest-only strip, subordinated trust assets and restricted cash reserves.
These assets are included in other assets and restricted interest-bearing
deposits on the balance sheet. The business card retained interest-only strip is
net of estimated liabilities for anticipated charge-offs of $26.5 million at
December 31, 1999 and $25.5 million at December 31, 1998.
Securitized lease receivables outstanding were $663 million at December 31,
1999 and $548 million at December 31, 1998. Advanta had net retained interests
from leasing securitizations of $50.9 million at December 31, 1999 and $29.6
million at December 31, 1998. These retained interests serve as credit
enhancements for the securitization transactions and include the retained
interest-only strip, servicing assets, subordinated trust assets and restricted
interest-bearing deposits. These assets are included in other assets and
restricted interest-bearing deposits on the balance sheet. The leasing retained
interest-only strip is net of estimated liabilities for anticipated charge-offs
of $19.1 million at December 31, 1999 and $15.7 million at December 31, 1998.
Total interests in equipment residuals for securitized leases that serve as
credit enhancements for the securitization transactions were $46.5 million at
December 31, 1999 and $40.6 million at December 31, 1998. Interests in equipment
residuals are included in loan and lease receivables.
NOTE 6. SELECTED BALANCE SHEET INFORMATION
Other assets consisted of the following:
DECEMBER 31,
--------------------
- ----------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------
Servicing advances $105,302 $141,389
Current and deferred federal and state income taxes, net
(see Note 19) 89,788 31,243
Accrued interest receivable 32,410 27,184
Other real estate(A) 9,560 6,622
Goodwill 3,323 3,600
Other 284,553 357,428
- ----------------------------------------------------------------------------------
Total other assets $524,936 $567,466
- ----------------------------------------------------------------------------------
(A) Carried at the lower of cost or fair market value less selling costs.
Other liabilities consisted of the following:
DECEMBER 31,
- ----------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 98,423 $ 66,852
Accrued interest payable 36,554 38,035
Current and deferred state income taxes 0 2,445
Other 154,586 137,546
- ----------------------------------------------------------------------------------
Total other liabilities $289,563 $244,878
- ----------------------------------------------------------------------------------
59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of over one
year. The composition of long-term debt at December 31, 1999 and 1998, was as
follows:
DECEMBER 31,
- ------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------
SENIOR DEBT
12 month senior notes (8.39%-9.40%) $ 86,647 $ 48,948
18 month senior notes (7.42%-9.21%) 8,344 6,565
24 month senior notes (7.14%-9.71%) 50,571 32,360
30 month senior notes (6.95%-9.44%) 13,852 13,609
48 month senior notes (5.97%-9.49%) 8,427 8,454
60 month senior notes (6.02%-9.67%) 28,863 20,779
Value notes, fixed (7.00%-7.85%) 7,779 9,300
Medium-term notes, fixed (6.54%-7.50%) 490,650 703,460
Medium-term notes, floating 47,400 163,000
Medium-term bank notes, fixed (6.45%-7.12%) 7,347 7,338
Other senior notes (6.77%-11.34%) 37,670 14,844
- ------------------------------------------------------------------------------------
Total senior debt 787,550 1,028,657
Subordinated notes (7.00%-11.34%) 958 1,490
- ------------------------------------------------------------------------------------
Total long-term debt $788,508 $1,030,147
- ------------------------------------------------------------------------------------
Advanta has priced its floating rate medium-term notes based on a spread
over LIBOR. At December 31, 1999, the rates on these notes varied from 6.05% to
6.91%. At December 31, 1999 and 1998, Advanta used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR-based
variable rate (see Note 24).
The annual maturities of long-term debt at December 31, 1999 for the years
ending December 31 are as follows: $353.8 million in 2000; $338.2 million in
2001; $78.6 million in 2002; $7.4 million in 2003; and $10.5 million in 2004.
The average interest cost of Advanta's long-term debt was 6.53% during 1999,
6.52% during 1998, and 6.38% during 1997.
NOTE 8. OTHER BORROWINGS
The composition of other borrowings was as follows:
DECEMBER 31,
- ---------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------
Securities sold under repurchase agreements $104,191 $ 0
FHLB advances 220,000 0
Warehouse facility 76,435 18,517
Other borrowings 8,975 17,784
- ---------------------------------------------------------------------------------
Total $409,601 $36,301
- ---------------------------------------------------------------------------------
Advanta has secured warehouse financing facilities and secured commercial
paper conduit facilities totaling $2.4 billion at December 31, 1999. Of the
total, $1.8 billion was committed. These commitments can be withdrawn under
certain conditions, including the failure of Advanta to make payments under the
terms of the agreements. Advanta pays a monthly facility fee on the unused
commitments of up to 35 basis points. These facilities provide for on-balance
sheet and off-balance sheet funding. At December 31, 1999, Advanta
60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
had $1.2 billion available under these facilities, as there was $1.2 billion of
loans funded through these facilities, $76.4 million of which were accounted for
as secured borrowings. These facilities are generally renewable annually. Upon
the expiration of these facilities, management expects to obtain the appropriate
levels of replacement funding under similar terms and conditions. At December
31, 1998, Advanta had secured warehouse financing facilities and secured
commercial paper conduit facilities totaling $1.5 billion. There were $536.1
million of loans funded through these facilities at December 31, 1998; $18.5
million of which were accounted for as secured borrowings.
Advanta is subject to loan covenants related to the maintenance of certain
equity levels at the borrowing subsidiaries, limitations on mergers and
acquisitions, limitations on transactions with affiliates, and maintenance of
adequate investment base and interest rate protection agreements. Management
believes that at December 31, 1999, Advanta was in compliance with all such loan
covenants.
The following table displays information related to selected types of
short-term borrowings:
1999 1998 1997
- -----------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -----------------------------------------------------------------------------------------------
At year end:
Securities sold under repurchase
agreements $104,191 5.78% $ 0 0% $ 0 0%
FHLB advances 220,000 5.53 0 0 0 0
- -----------------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase
agreements $ 24,647 5.39% $ 69,916 6.05% $ 9,796 5.66%
Term fed funds, fed funds purchased and
FHLB advances 11,432 5.57 272 5.61 11,925 5.71
- -----------------------------------------------------------------------------------------------
Total $ 36,079 5.43% $ 70,188 6.05% $ 21,721 5.69%
- -----------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under repurchase
agreements $104,191 $259,643 $149,130
Term fed funds, fed funds purchased and
FHLB advances 220,000 1,700 65,000
- -----------------------------------------------------------------------------------------------
The weighted average interest rates were calculated by dividing the
interest expense for the period by the average amount of short-term borrowings
outstanding during the period, calculated as an average of daily amounts.
NOTE 9. DISPOSITION OF CONSUMER CREDIT CARD ASSETS
In accordance with the terms of the contribution agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between Advanta and Fleet
Financial Group, Inc. ("Fleet"), Advanta 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 ("Fleet LLC") in exchange for an ownership interest in Fleet LLC.
Subsequent to February 20, 1998, Fleet Credit Card Services LP became the
successor in interest to Fleet LLC. References to Fleet LLC include its
successor in interest, Fleet Credit Card Services LP. Advanta recognized a gain
on the transfer of the consumer credit card business (the "Consumer Credit Card
Transaction") representing the excess of liabilities transferred to Fleet LLC
over the net basis of the assets transferred. The gain also included Advanta's
ownership interest in Fleet LLC. The gain on the transfer was not subject to
income tax and no tax provision was recorded. The contribution agreement
provides for the parties to make a final determination of the transferred assets
and liabilities. As further described in Note 10, Advanta and Fleet are parties
to a lawsuit concerning disputes regarding the final determination of the
transferred assets and liabilities. It is possible that the outcome of the
litigation will result in an increase or decrease to the gain recorded.
61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advanta retained certain immaterial assets of its consumer credit card
business, which are not required in the operation of that business, and certain
liabilities related to its consumer credit card business. These retained assets
and liabilities include 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 Advanta's consumer credit card receivables as of February 20, 1998.
The assets and liabilities retained have been classified in other assets and
other liabilities.
The contribution was accounted for as: (1) the transfer of financial assets
(cash, loans, and other receivables) and an extinguishment of financial
liabilities (deposits, debt and other borrowings and other liabilities)
following SFAS 125; and (2) the sale of non-financial assets and liabilities
(principally property and equipment, prepaid assets, deferred costs and certain
contractual obligations). The financial assets, non-financial assets and
liabilities of Advanta's consumer credit card business that were contributed
were removed from the balance sheet. Advanta was legally released as primary
obligor under all of the financial liabilities contributed and, accordingly,
they were removed from the balance sheet.
Concurrently with the Consumer Credit Card Transaction, Advanta purchased
7,882,750 shares of its Class A Common Stock and 12,482,850 of its Class B
Common Stock, each at $40 per share net, and 1,078,930 of its depositary shares
each representing one one-hundredth interest in a share of 6 3/4% Convertible
Class B Preferred Stock, Series 1995 Stock Appreciated Income Linked Securities
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 approved the payment of a special dividend/return of capital from
Advanta National Bank to Advanta Corp., its parent company, to effect the
purchase of the shares.
NOTE 10. COMMITMENTS AND CONTINGENCIES
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's
allegations, which Advanta denies, center around Fleet's assertions that Advanta
has failed to complete certain post-closing adjustments to the value of the
assets and liabilities Advanta contributed to Fleet LLC in connection with the
Consumer Credit Card Transaction. Fleet seeks damages of approximately $141
million. Advanta has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that Advanta contributed $1.8
million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities Advanta has already assumed. Advanta also
has filed a countercomplaint against Fleet for approximately $101 million in
damages Advanta believes have been caused by certain actions of Fleet following
the closing of the Consumer Credit Card Transaction. Formal discovery has begun
and is ongoing. Management expects that the ultimate resolution of this
litigation will not have a material adverse effect on the financial position or
future operating results of Advanta.
On or about March 26, 1999, a complaint was filed by John Uphaus,
individually and on behalf of a class, against Household Bank (Nevada) N.A.
("Household") and Advanta National Bank in the United States District Court for
the Northern District of Illinois. Uphaus alleges that he had a credit card
account with Household, which account was purchased by Advanta National Bank. He
further alleges that the annual percentage rate on a portion of his account was
increased in a manner contrary to the promotional material he received.
Advanta's preliminary investigation suggests that if a change in interest rate
took place, as alleged by Uphaus, that change occurred after the contribution of
Advanta's consumer credit card portfolio, and it was made by Fleet LLC. In any
event, Fleet LLC is obligated to defend and indemnify Advanta pursuant to the
contribution agreement and the licensing agreement between the parties. Advanta
National Bank's response to this complaint was originally due on June 21, 1999.
The court has extended this deadline several times to allow the parties to
exchange information; thus, no response has been filed by either defendant. Some
formal discovery has begun.
Advanta and its subsidiaries are involved in other legal proceedings,
claims and litigation, including those arising in the ordinary course of
business. Management believes that the aggregate liabilities, if any, resulting
62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from those actions will not have a material adverse effect on the consolidated
financial position or results of operations of Advanta. However, as the ultimate
resolution of these proceedings is influenced by factors outside of Advanta's
control, it is reasonably possible that Advanta's estimated liability under
these proceedings may change.
Advanta leases office space in several states under leases accounted for as
operating leases. Total rent expense for all of Advanta's locations was $9.4
million in 1999, $7.9 million in 1998, and $11.3 million in 1997. The future
minimum lease payments of all non-cancelable operating leases are as follows:
Year Ended December 31,
2000 $ 6,807
2001 6,339
2002 5,446
2003 5,064
2004 5,040
Thereafter 10,126
NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1996, Advanta Capital Trust I (the "Trust"), a newly formed
statutory business trust established and wholly-owned by Advanta, issued $100
million of capital securities, representing preferred beneficial interests in
the assets of the Trust (the "capital securities"). Advanta used the proceeds
from the sale for general corporate purposes. The assets of the Trust consist of
$100 million of 8.99% junior subordinated debentures issued by Advanta due
December 17, 2026. The capital securities will be subject to mandatory
redemption under certain circumstances. These circumstances include the optional
prepayment by Advanta of the junior subordinated debentures at any time on or
after December 17, 2006 at an amount per capital security equal to 104.495% of
the principal amount plus accrued and unpaid distributions. This amount declines
ratably on each December 17 thereafter to 100% on December 17, 2016. The
obligations of Advanta with respect to the junior subordinated debentures, when
considered together with the obligations of Advanta under the indenture relating
to the junior subordinated debentures, the Amended and Restated Declaration of
Trust and the capital securities guarantee issued by Advanta will provide, in
the aggregate, a full and unconditional guarantee of payments of distributions
and other amounts due on the capital securities. Dividends on the capital
securities are cumulative, payable semi-annually in arrears, and are deferrable
at Advanta's option for up to ten consecutive semi-annual periods. Advanta
cannot pay dividends on its preferred or common stocks during deferments.
Dividends on the capital securities have been classified as minority interest in
income of consolidated subsidiary in the Consolidated Income Statements. The
Trust has no operations or assets separate from its investment in the junior
subordinated debentures. Separate financial statements of the Trust are not
presented because management has determined that they would not be meaningful to
investors.
NOTE 12. CAPITAL STOCK
Class A Preferred Stock is entitled to 1/2 vote per share and a non-cumulative
dividend of $140 per share per year, which must be paid prior to any dividend on
the common stock. The redemption price of the Class A Preferred Stock is
equivalent to its par value.
In 1995, Advanta sold 2,500,000 depositary shares each representing a
one-hundredth interest in a share of Stock Appreciation Income Linked Securities
("SAILS"). The SAILS constituted a series of Advanta's Class B Preferred Stock,
designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995. On
September 15, 1999, all of the 1.4 million outstanding depositary shares, each
representing a one-hundredth interest in a share of SAILS, mandatorily converted
into 1.4 million shares of Class B Common Stock.
63
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 20, 1998, Advanta 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 depositary shares each representing a one-hundredth
interest in a share of SAILS, at $32.80 per share net, through the Tender Offer.
In 1998, the Board of Directors authorized the repurchase of up to 2.5
million shares of Advanta's Class A and Class B Common Stock and the formation
of an Employee Stock Ownership Plan ("ESOP"). Through December 31, 1999, Advanta
had purchased 445,600 shares of Class B Common Stock and 1,405,000 shares of
Class A Common Stock at a total cost of $21.1 million. Of the total shares
purchased, 1,000,000 shares of Class A Common Stock were purchased for Advanta's
ESOP.
NOTE 13. BENEFIT PLANS
RESTRICTED STOCK PLANS
Advanta has adopted several management incentive plans designed to provide
incentives to participating employees to remain in the employ of Advanta and
devote themselves to its success. Under these plans, eligible employees were
given the opportunity to elect to take portions of their anticipated or target
bonus payments for future years in the form of restricted shares of common stock
(with each plan covering three performance years). To the extent that these
elections were made, or were required by the terms of the plans for executive
officers, restricted shares were issued to employees. The number of shares
granted to employees is determined by dividing the amount of future bonus
payments that the employee had elected to receive in stock by the market price
as determined under the incentive plans. The restricted shares are subject to
forfeiture prior to vesting should the employee terminate employment with
Advanta. Restricted shares vest 10 years from the date of grant. Vesting was and
may continue to be accelerated annually with respect to up to one-third of the
shares granted under the plan covering the particular performance year, based on
the extent to which the employee and Advanta met or meet their respective
performance goals for that plan performance year. When newly eligible employees
elect to participate in a plan, the number of shares issued to them with respect
to their target bonus payments for the relevant plan performance years is
determined based on the average market price of the stock for the 90 days prior
to eligibility. Compensation expense on restricted shares is recognized over the
vesting period of the shares. Compensation expense recognized in connection with
restricted shares was $3.8 million in 1999, $8.2 million in 1998 and $11.3
million in 1997. The following table summarizes restricted shares outstanding
and shares issued.
1999 1998
------------------- ----------------------------
(SHARES IN THOUSANDS) --------- WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF PRICE AT DATE OF NUMBER OF PRICE AT DATE OF
SHARES ISSUANCE SHARES ISSUANCE
- ----------------------------------------------------------------------------------------------------------
Restricted shares outstanding at December 31 1,750 $15 1,592 $20
Restricted shares issued in the year ended
December 31 1,002 $11 1,234 $17
- ----------------------------------------------------------------------------------------------------------
Advanta also grants shares of phantom stock to certain officers in lieu of
restricted shares. In 1999, there were 27,413 shares of phantom stock granted at
a price of $10.625. In 1998, there were 50,632 phantom stock shares granted at a
price of $10.625. Shares of phantom stock outstanding totaled 78,045 at December
31, 1999 and 50,632 at December 31, 1998. There were no phantom shares granted
before 1998. Compensation expense related to the appreciation on shares of
phantom stock was not material during 1999 or 1998.
STOCK OPTION PLANS
At December 31, 1999 Advanta had two stock option plans and accounts for these
plans following Accounting Principles Board Opinion No. 25, under which no
compensation expense has been recognized.
64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for these plans been determined consistent with SFAS
123, Advanta's net income and earnings per share would have been reduced to the
following pro forma amounts:
1999 1998 1997
- --------------------------------------------------------------------------------------------
Net income
As reported $49,818 $447,880 $71,625
Pro forma $41,810 436,960 58,576
- --------------------------------------------------------------------------------------------
Basic earnings per share
As reported
Combined $ 1.99 $ 16.65 $ 1.52
Class A 1.95 16.62 1.45
Class B 2.02 16.68 1.57
Pro forma
Combined $ 1.65 $ 16.24 $ 1.22
Class A 1.62 16.21 1.15
Class B 1.68 16.27 1.27
- --------------------------------------------------------------------------------------------
Diluted earnings per share
As reported
Combined $ 1.96 $ 15.71 $ 1.50
Class A 1.93 15.69 1.43
Class B 1.99 15.73 1.54
Pro forma
Combined $ 1.63 $ 15.33 $ 1.20
Class A 1.59 15.31 1.14
Class B 1.65 15.34 1.24
- --------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31:
1999 1998 1997
--------------------
Dividend yield 3% 3% 1%
Expected life (in years) 10 10 10
Expected volatility 51% 48% 40%
Risk-free interest rate 5.4% 5.7% 6.7%
Because SFAS 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
During 1997 and 1998, Advanta changed the exercise price of certain options
granted during 1996 and 1997 to the market price on the date of the
modification. These modifications did not result in additional compensation
expense under the accounting prescribed by SFAS 123. Also in 1998, Advanta
amended the terms of options granted to employees who became employees of Fleet
LLC or whose employment was otherwise terminated in connection with the Consumer
Credit Card Transaction to extend the post-employment exercise period. In 1998,
Advanta accelerated vesting of 43.15% of outstanding options that were not
vested at the time of the Consumer Credit Card Transaction. See discussion in
Note 20 of charges to earnings relating to these modifications.
Advanta's two stock option plans together authorize the grant to employees
and directors of options to purchase an aggregate of 10.2 million shares of
common stock. Advanta presently intends only to issue options to purchase Class
B Common Stock. Substantially all of the options outstanding at December 31,
1999 were options to purchase Class B Common Stock. Options generally vest over
a four-year period and expire 10 years
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after the date of grant. Shares available for future grant were approximately
2.7 million at December 31, 1999 and 2.2 million at December 31, 1998.
Transactions under the plans for the three years ended December 31, 1999, were
as follows:
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------------------------------------------------------------------
Outstanding at
beginning of year 2,988 $22 3,934 $27 4,109 $25
Granted 1,358 10 1,186 18 967 27
Exercised (8) 2 (1,471) 24 (774) 11
Terminated (1,610) 23 (661) 21 (368) 33
- -----------------------------------------------------------------------------------------------------------------
Outstanding at end of
year 2,728 15 2,988 22 3,934 27
- -----------------------------------------------------------------------------------------------------------------
Options exercisable
at year-end 722 1,353 2,003
- -----------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
year $ 4.60 $ 8.05 $22.90
- -----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 1999.
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
------------------------------------------------- ------------------------------
1 to 10 1,004 9.1 years $ 8 56 $ 9
11 to 20 1,053 8.6 16 192 17
21 to 30 641 6.6 22 445 22
31 to 40 27 5.8 38 27 38
41 to 46 3 6.2 46 2 46
- -----------------------------------------------------------------------------------------------------
Total 2,728 722
- -----------------------------------------------------------------------------------------------------
During 1999 and 1998, Advanta issued stock appreciation rights to certain
directors of Advanta in exchange for or in lieu of options. At December 31,
1999, 1,230 rights were outstanding with a strike price of $4.75, 127,000 rights
were outstanding with a strike price of $10.75, 163,074 rights were outstanding
with a strike price of $12.33 and 233,675 rights were outstanding with a strike
price between $19.00 and $22.125. At December 31, 1998, 1,230 rights were
outstanding with a strike price of $4.75, 163,074 rights were outstanding with a
strike price of $12.33 and 233,675 rights were outstanding with a strike price
between $19.00 and $22.125. Total stock appreciation rights outstanding were
524,979 at December 31, 1999 and 397,979 at December 31, 1998. Compensation
expense related to stock appreciation rights was not material in 1999 or 1998.
EMPLOYEE STOCK PURCHASE PLAN
Advanta has an Employee Stock Purchase Plan, which allows employees and
directors to purchase Class B Common Stock at a 15% discount from the market
price without paying brokerage fees. Advanta reports this 15% discount as
compensation expense and incurred expense of $162 thousand in 1999, $200
thousand in 1998, and $339 thousand in 1997. Shares issued under the plan are
issued at the average market price on the day of purchase.
66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE SAVINGS PLAN
Advanta has a tax-deferred employee savings plan, which provides employees with
savings and investment opportunities, including the ability to invest in
Advanta's Class B Common Stock. The employee savings plan provides for
discretionary employer contributions equal to a portion of the first 5% of an
employee's compensation contributed to the plan. For the three years ended
December 31, 1999, 1998 and 1997, Advanta contributions equaled 100% of the
first 5% of participating employees' compensation contributed to the plan. The
expense for this plan totaled $2.7 million in 1999, $2.4 million in 1998, and
$3.5 million in 1997. All shares purchased by the plan in the years ended
December 31, 1999, 1998 and 1997 were acquired from Advanta at the market price
on each purchase date or were purchased on the open market.
DEFERRED COMPENSATION PLAN
Advanta offers an elective, nonqualified deferred compensation plan to qualified
executives and non-employee directors, which allows them to defer a portion of
their cash compensation on a pretax basis. The plan contains provisions related
to minimum contribution levels and deferral periods with respect to any
individual's participation. The plan participant makes irrevocable elections at
the date of deferral as to deferral period and date of distribution. Interest is
credited to the participant's account at the rate of 125% of the 10-year rolling
average interest rate on 10-Year U.S. Treasury Notes. Distribution from the plan
may be either at retirement or at an earlier date, and can be either in a lump
sum or in installment payments. Advanta has purchased life insurance contracts
with a face value of $55 million to fund this plan.
EMPLOYEE STOCK OWNERSHIP PLAN
On September 10, 1998, Advanta's Board of Directors authorized the formation of
an Employee Stock Ownership Plan, covering all employees of Advanta who have
reached age 21 with one year of service. During 1998, the ESOP borrowed
approximately $12.6 million from Advanta and used the proceeds to purchase
approximately 1,000,000 shares of Advanta's Class A Common Stock. The ESOP loan
is repayable with an interest rate of 8% over 30 years. Advanta makes annual
contributions to the ESOP equal to the ESOP's debt service less dividends
received on unallocated shares by the ESOP. As the ESOP loan is repaid, shares
are allocated to active employees, based on the proportion of debt service paid
in the year. Advanta 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 committed to
be released to each employee, Advanta 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
used to fund debt service of the ESOP. ESOP compensation expense was $535
thousand for the year ended December 31, 1999 and $17 thousand for the year
ended December 31, 1998. At December 31, 1999 there were 965,229 unearned and
unallocated ESOP shares with a fair value of $17.6 million. At December 31,
1998, there were 998,513 unearned and unallocated ESOP shares with a fair value
of $13.2 million.
NOTE 14. CAPITAL RATIOS
Advanta National Bank and Advanta Bank Corp. are wholly-owned subsidiaries of
Advanta. Advanta National Bank and Advanta Bank Corp. are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory --
and possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on the institutions' and
Advanta's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the institutions must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The institutions' capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the institution to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).
As of December 31, 1999 and 1998, Advanta National Bank and Advanta Bank
Corp. met all capital adequacy requirements to which they were subject and were
categorized as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized the institutions must
maintain minimum total risk-based capital, Tier I risk-based capital and Tier I
leverage ratios as set forth in the following table.
TO BE WELL-
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1999
- ---------------------------
Total Capital (to Risk Weighted
Assets)
Advanta National Bank $427,409 14.86% $230,061 greater $287,576 greater
than or than or
equal equal
to to
8.0% 10.0%
Advanta Bank Corp. 143,151 13.28 86,204 greater 107,755 greater
than or than or
equal equal
to to
8.0% 10.0%
Tier I Capital (to Risk Weighted
Assets)
Advanta National Bank $414,359 14.41% $115,030 greater $172,546 greater
than or than or
equal equal
to to 6.0%
4.0%
Advanta Bank Corp. 128,193 11.90 43,102 greater 64,653 greater
than or than or
equal equal
to to 6.0%
4.0%
Tier I Capital (to Average Assets)
Advanta National Bank $414,359 18.18% $ 91,193 greater $113,991 greater
than or than or
equal equal
to to 5.0%
4.0%
Advanta Bank Corp. 128,193 27.86 18,406 greater 23,008 greater
than or than or
equal equal
to to 5.0%
4.0%
AS OF DECEMBER 31, 1998
- ---------------------------
Total Capital (to Risk Weighted
Assets)
Advanta National Bank $380,107 12.12% $250,932 greater $313,665 greater
than or than or
equal equal
to to
8.0% 10.0%
Advanta Bank Corp. 41,840 14.13 23,683 greater 29,604 greater
than or than or
equal equal
to to
8.0% 10.0%
Tier I Capital (to Risk Weighted
Assets)
Advanta National Bank $370,281 11.80% $125,466 greater $188,199 greater
than or than or
equal equal
to to 6.0%
4.0%
Advanta Bank Corp. 38,139 12.88 11,842 greater 17,763 greater
than or than or
equal equal
to to 6.0%
4.0%
Tier I Capital (to Average Assets)
Advanta National Bank $370,281 17.13% $ 86,458 greater $108,074 greater
than or than or
equal equal
to to 5.0%
4.0%
Advanta Bank Corp. 38,139 16.10 9,474 greater 11,842 greater
than or than or
equal equal
to to 5.0%
4.0%
NOTE 15. DIVIDEND AND LOAN RESTRICTIONS
In the normal course of business, Advanta and its subsidiaries enter into
agreements, or are subject to regulatory requirements, that result in dividend
and loan restrictions.
FDIC-insured banks are subject to certain provisions of the Federal Reserve
Act which impose various legal limitations on the extent to which banks may
finance or otherwise supply funds to certain of their affiliates. In particular,
Advanta National Bank and Advanta Bank Corp. are subject to certain restrictions
on any extensions of credit to, or other covered transactions, such as certain
purchases of assets, with Advanta or its affiliates. Advanta National Bank and
Advanta Bank Corp. are prevented by these restrictions from lending to Advanta
and its affiliates unless these extensions of credit are secured by U.S.
Government obligations or other specified collateral. Further, secured
extensions of credit are limited in amount: (a) as to Advanta Corp. or any
affiliate, to 10 percent of each bank's capital and surplus, and (b) as to
Advanta Corp. and all affiliates in the aggregate, to 20 percent of each bank's
capital and surplus.
68
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under certain grandfathering provisions of the Competitive Equality Banking
Act of 1987, Advanta is not required to register as a bank holding company under
the Bank Holding Company Act of 1956, as amended, so long as Advanta and Advanta
National Bank continue to comply with certain restrictions on their activities.
These restrictions include limiting the scope of Advanta National Bank's
activities to those in which it was engaged prior to March 5, 1987. Since
Advanta National Bank was not making commercial loans at that time, it must
continue to refrain from making commercial loans -- which would include any
loans to Advanta or any of its subsidiaries -- in order for Advanta to maintain
its grandfathered exemption under the Bank Holding Company Act. Advanta has no
present plans to register as a bank holding company under the Bank Holding
Company Act.
Advanta National Bank is also subject to various legal limitations on the
amount of dividends that can be paid to its parent, Advanta Corp. Advanta
National Bank is eligible to declare a dividend provided that it is not greater
than the current year's net profits plus net profits of the preceding two years.
In addition, dividends paid by either Advanta National Bank or Advanta Bank
Corp. would be prohibited if the effect thereof would cause the bank's capital
to be reduced below applicable minimum capital requirements. During 1998, the
Office of the Comptroller of the Currency approved the payment of a special
dividend/return of capital of $1.3 billion from Advanta National Bank to Advanta
Corp. to effect the Tender Offer described in Note 9. As a result of this
special dividend/return of capital and the dividend restrictions described
above, Advanta National Bank will not be eligible to declare any dividends to
Advanta Corp. without prior regulatory approval until at least the first quarter
of 2001. Advanta National Bank paid no dividends to Advanta Corp. during 1999 or
1997. There were no dividends from Advanta Bank Corp. to Advanta Corp. during
1999, 1998 or 1997.
Advanta's insurance subsidiaries are also subject to certain capital,
deposit and dividend rules and regulations as prescribed by state jurisdictions
in which they are authorized to operate. At December 31, 1999 and 1998, the
insurance subsidiaries were in compliance with these rules and regulations.
Insurance subsidiaries paid dividends to Advanta Corp. of $1.2 million in 1999.
Dividends paid to Advanta Corp. in 1998 by insurance subsidiaries were $39
million, including an extraordinary dividend of $35 million that was approved in
advance by the applicable state regulators. There were no dividends paid to
Advanta Corp. by insurance subsidiaries in 1997.
Total stockholders' equity of Advanta's banking and insurance affiliates
approximated $584 million at December 31, 1999, and $429 million at December 31,
1998. Of Advanta's total equity in these affiliates, $524 million was restricted
at December 31, 1999 and $406 million was restricted at December 31, 1998. At
January 1, 2000, $60 million of stockholders' equity of Advanta's banking and
insurance affiliates was available for payment of dividends under applicable
regulatory guidelines.
In addition to restrictions at banking subsidiaries, certain non-bank
subsidiaries are subject to minimum equity requirements as part of
securitization agreements or financing facility agreements. The total minimum
equity requirement of non-bank subsidiaries was $35 million at December 31,
1999.
NOTE 16. SEGMENT INFORMATION
Advanta's reportable segments as of December 31, 1999 were Advanta Mortgage,
Advanta Business Cards and Advanta Leasing Services. Each of these business
segments has separate management teams and infrastructures that offer different
products and services. Through February 20, 1998, Advanta also had an additional
reportable segment, Advanta Personal Payment Services.
Effective January 1, 1999, Advanta Leasing Services and Advanta Business
Cards were considered separate segments due to the development of separate
management teams and infrastructures in each unit, whereas at December 31, 1998,
they were considered one combined segment, Advanta Business Services. Advanta
has restated the corresponding items of segment information for earlier periods.
Advanta Mortgage makes nonconforming home equity loans directly to
consumers and through brokers. This business unit originates and services first
and second lien mortgage loans, including home equity lines of
69
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit, directly through subsidiaries of Advanta. In addition to servicing and
managing the loans it originates, Advanta Mortgage contracts with third parties
to service their nonconforming home equity loans on a subservicing basis.
Advanta Business Cards offers MasterCard business credit cards to small
businesses using targeted direct mail and the Internet. This product provides
approved customers with access, through merchants, banks and ATMs, to an instant
unsecured revolving business credit line.
Advanta Leasing Services offers flexible lease financing programs on
small-ticket equipment to small businesses. The primary products financed
include office machinery, security systems and computers. The commercial
equipment leasing business is generated primarily through third-party referrals
from manufacturers or distributors of equipment, as well as independent brokers,
direct mail marketing and telemarketing. The equipment is leased under
noncancelable leases with initial terms of generally one to five years.
Prior to the Consumer Credit Card Transaction, Advanta offered consumer
credit cards through Advanta Personal Payment Services. This business segment
issued consumer credit cards nationwide using direct marketing techniques. As of
February 20, 1998, this segment had no operations, and the activity below
reflects operations through that date.
The accounting policies of the segments are the same as those followed by
Advanta. Centrally incurred operating expenses are allocated to the segments
based on consumption, where practical, or based on average managed assets.
Centrally incurred interest expense is charged to the segments using a funds
transfer pricing methodology primarily based on average assets, and which also
reflects the impact of organization-wide interest rate risk management
strategies. Advanta evaluates performance based largely on the net income of the
respective business units.
ADVANTA ADVANTA
ADVANTA BUSINESS LEASING
MORTGAGE CARDS SERVICES OTHER(1) TOTAL
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Noninterest revenues $ 192,321 $ 84,288 $ 40,182 $ 9,506 $ 326,297
Interest revenue 133,367 35,798 11,524 65,537 246,226
Interest expense 89,619 14,541 10,940 52,576 167,676
Unusual charges(2) 0 0 0 16,713 16,713
Income tax (benefit) expense(3) (7,238) 14,830 1,958 (59,822) (50,272)
Net (loss) income (10,994) 22,829 3,031 34,952 49,818
Average managed receivables 8,366,593 892,862 716,520 17,450 9,993,425
Total assets 1,841,647 387,440 233,913 1,226,662 3,689,662
Capital expenditures 15,698 1,000 4,212 4,568 25,478
Depreciation and amortization 6,715 923 3,998 6,871 18,507
- ----------------------------------------------------------------------------------------------------------
70
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA
PERSONAL ADVANTA ADVANTA
PAYMENT ADVANTA BUSINESS LEASING
SERVICES MORTGAGE CARDS SERVICES OTHER(1) TOTAL
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Noninterest revenues $ 83,823 $ 240,366 $ 53,334 $ 35,107 $ 4,762 $ 417,392
Interest revenue 23,465 123,550 21,730 12,412 64,183 245,340
Interest expense 33,352 76,056 9,983 10,871 54,013 184,275
Gain on transfer of consumer credit
card business 541,288 0 0 0 0 541,288
Unusual charges(4) 125,072 0 0 0 0 125,072
Income tax expense (benefit) (24,141) 10,667 4,952 (522) 0 (9,044)
Net income (loss) 412,452 25,090 11,555 (1,217) 0 447,880
Average managed receivables 1,846,109 6,737,019 744,192 609,199 15,724 9,952,243
Total assets 0 1,794,491 340,878 132,573 1,453,478 3,721,420
Capital expenditures 2,469 10,140 620 3,038 29,093 45,360
Depreciation and amortization 5,600 6,160 1,105 3,615 5,000 21,480
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Noninterest revenues $ 587,818 $ 130,511 $ 25,481 $ 47,231 $ 34,854 $ 825,895
Interest revenue 179,844 94,499 26,372 16,111 120,034 436,860
Interest expense 130,351 51,825 8,687 11,386 122,309 324,558
Income tax expense (benefit) 16,042 1,107 1,577 6,279 (100) 24,905
Net income 22,877 33,316 2,956 11,770 706 71,625
Average managed receivables 11,356,944 3,918,240 507,423 555,633 31,810 16,370,050
Total assets 3,498,212 1,018,244 275,418 236,510 1,627,531 6,655,915
Capital expenditures 33,770 26,027 1,340 3,242 14,851 79,230
Depreciation and amortization 22,339 3,534 882 3,321 5,204 35,280
- ----------------------------------------------------------------------------------------------------------------
(1) Other includes insurance operations and assets/investment activities not
attributable to other segments.
(2) Unusual charges in 1999 represent charges associated with cost reduction
initiatives in the first quarter and additional costs associated with
products exited in the first quarter of 1998.
(3) Other includes a $50 million tax benefit in 1999 related to the former
consumer credit card business. See Note 19.
(4) Unusual charges in 1998 represent severance and outplacement costs
associated with workforce reduction, option exercise and other employee
costs associated with the Consumer Credit Card Transaction/Tender Offer;
expense associated with exited business/product; asset impairment; and
equity losses related to exited business/product.
NOTE 17. SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Equity securities gains (losses)(1) $30,391 $(41,750) $(11,426)
Business card interchange income 33,786 20,741 11,617
Consumer credit card interchange income 0 11,881 85,208
Consumer credit card overlimit fees 0 16,233 46,447
Mortgage other (loss) income (9,686) 22,945 4,535
Leasing other revenues 15,399 14,519 25,748
Insurance revenues, net 8,206 14,408 37,816
Other 4,387 1,149 18,021
- ---------------------------------------------------------------------------------------------
Total other revenues, net $82,483 $ 60,126 $217,966
- ---------------------------------------------------------------------------------------------
(1) Equity securities gains (losses) represent changes in the fair value and
realized gains on Advanta Partners investments.
71
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING EXPENSES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits $123,768 $152,706 $219,954
Marketing 58,671 53,109 53,039
Professional/consulting fees 24,244 14,767 38,600
Equipment expense 21,039 23,381 37,712
Credit and collection expense 20,264 15,715 20,017
Occupancy expense 16,347 16,001 23,097
External processing 14,936 21,908 43,256
Telephone expense 11,091 12,428 21,262
Postage 5,958 8,949 29,039
Amortization of credit card deferred origination costs, net 5,863 22,271 69,344
Credit card fraud losses 833 3,194 22,287
Other 34,047 35,335 44,354
- ---------------------------------------------------------------------------------------------
Total operating expenses $337,061 $379,764 $621,961
- ---------------------------------------------------------------------------------------------
NOTE 18. NET INTEREST INCOME
The following table presents the components of net interest income:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Interest income:
Loans and leases $122,861 $133,998 $ 278,568
Trading investments 6,752 10,374 0
Investments available for sale 97,259 79,294 140,636
Interest component of previously discounted cash flows 19,354 21,674 17,656
- ---------------------------------------------------------------------------------------------
Total interest income 246,226 245,340 436,860
Interest expense:
Deposits 101,386 85,935 150,164
Debt 61,940 87,900 161,295
Other borrowings 4,350 10,440 13,099
- ---------------------------------------------------------------------------------------------
Total interest expense 167,676 184,275 324,558
Net interest income 78,550 61,065 112,302
Less: Provision for credit losses (42,647) (67,193) (210,826)
- ---------------------------------------------------------------------------------------------
Net interest after provision for credit losses $ 35,903 $ (6,128) $ (98,524)
- ---------------------------------------------------------------------------------------------
72
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. INCOME TAXES
Income tax (benefit) expense consisted of the following components:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Current:
Federal $ 15,500 $ 20,254 $ 5,953
State (155) 2,470 (651)
- ---------------------------------------------------------------------------------------------
Total current 15,345 22,724 5,302
- ---------------------------------------------------------------------------------------------
Deferred:
Federal (65,290) (44,777) 16,950
State (327) 13,009 2,653
- ---------------------------------------------------------------------------------------------
Total deferred (65,617) (31,768) 19,603
- ---------------------------------------------------------------------------------------------
Total tax (benefit) expense $(50,272) $ (9,044) $24,905
- ---------------------------------------------------------------------------------------------
The reconciliation of the statutory federal income tax to the consolidated
tax expense is as follows:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Statutory federal income tax $ (159) $ 153,593 $33,786
State income taxes, net of federal income tax benefit (313) 10,061 1,302
Net operating losses (49,956) 0 0
Insurance program income (expense) 112 30,414 (8,707)
Tax credits 0 (7,288) (5,271)
Compensation limitation 175 4,725 0
Transfer of consumer credit card business (see Note 9) 0 (200,494) 0
Nontaxable investment income (596) (607) (560)
Other 465 552 4,355
- ---------------------------------------------------------------------------------------------
Tax (benefit) expense $(50,272) $ (9,044) $24,905
- ---------------------------------------------------------------------------------------------
Deferred taxes are provided to reflect the estimated future tax effects of
the differences between the financial statement and tax bases of assets and
liabilities and enacted tax laws. The net deferred tax asset (liability) is
comprised of the following:
DECEMBER 31,
- -----------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------
Deferred tax liabilities $(102,248) $(80,566)
Deferred tax assets 194,593 44,541
- -----------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 92,345 $(36,025)
- -----------------------------------------------------------------------------------
73
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of deferred tax assets and liabilities follows:
DECEMBER 31,
- ----------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------
Deferred loan fees and costs $ (6,149) $ (5,167)
Allowance for loan losses 22,273 17,415
Net operating loss carryforwards 182,437 0
Securitization income (41,547) (32,538)
Leasing income (19,009) (16,092)
Deferred compensation 9,054 13,192
Noncash unusual charges 18,321 0
Other 9,965 (12,835)
Valuation allowance (83,000) 0
- ----------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 92,345 $(36,025)
- ----------------------------------------------------------------------------------
The gain on the Consumer Credit Card Transaction in 1998 was not subject to
income tax and no tax provision was recorded. The Consumer Credit Card
Transaction also resulted in additional book/tax differences, which were
quantified during 1999 in connection with the filing of the 1998 tax return.
Such book/tax differences, when combined with certain less significant recurring
differences, have resulted in net operating loss carryforwards of approximately
$521 million. This amount is net of $96 million carried back to prior years, and
includes $500 million that pertains to losses incurred on the consumer credit
card portfolio after the date of the transaction. Of the total net operating
loss carryforwards, $502 million expire in 2018 and $19 million expire in 2019.
A deferred tax asset of $50 million, net of valuation allowance, resulting from
the net operating loss carryforwards was recorded as an income tax benefit in
the fourth quarter of 1999.
Advanta has established a valuation allowance against these deferred tax
assets. In establishing the valuation allowance, management considered (1) the
level of expected future taxable income, (2) existing and projected book/tax
differences, (3) tax planning strategies available, and (4) the general and
industry specific economic outlook. Based on this analysis, management believes
the net deferred tax asset will be realized.
The net deferred federal tax asset (liability) is presented net with
current federal income taxes receivable for financial reporting purposes, and is
included in other assets.
NOTE 20. UNUSUAL CHARGES
In connection with the Consumer Credit Card Transaction more fully discussed in
Note 9, Advanta made major organizational changes during the first quarter of
1998 to reduce corporate expenses incurred in the past: (a) to support the
business contributed to Fleet LLC in the Consumer Credit Card Transaction, and
(b) associated with the business and products no longer being offered or not
directly associated with its mortgage, business card and leasing units. In
addition, in 1999, Advanta implemented a plan to exit the auto finance business
and to implement cost reduction initiatives throughout the organization
including the consolidation of support functions. Costs associated with these
changes include:
CHARGED TO 12/31/98 CHARGED TO 12/31/99
ACCRUED ACCRUAL ACCRUAL ACCRUED ACCRUAL ACCRUAL
IN 1998 IN 1998 BALANCE IN 1999 IN 1999 BALANCE
- ---------------------------------------------------------------------------------------------------------
Employee costs associated with staff
reductions $ 0 $ 0 $ 0 $ 3,350 $ 2,528 $ 822
Employee costs associated with
Consumer Credit Card
Transaction/Tender Offer 62,257 58,966 3,291 0 283 3,008
Expenses associated with exited
businesses/products 54,115 39,349 14,766 13,363 7,481 20,648
Asset impairment/disposal 8,700 8,133 567 0 567 0
- ---------------------------------------------------------------------------------------------------------
Total $125,072 $106,448 $18,624 $16,713 $10,859 $24,478
- ---------------------------------------------------------------------------------------------------------
74
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE COSTS ASSOCIATED WITH STAFF REDUCTIONS
In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with cost reduction initiatives and the
consolidation of support functions. There were 121 employees severed who were
entitled to benefits. This staff reduction was substantially complete by June
30, 1999.
EMPLOYEE COSTS ASSOCIATED WITH CONSUMER CREDIT CARD TRANSACTION/TENDER OFFER
In connection with the organizational changes in 1998, Advanta incurred
approximately $26.8 million of severance and related costs classified as
employee costs associated with the Consumer Credit Card Transaction/Tender
Offer. These expenses included severance and outplacement costs associated with
the workforce reduction, option exercise and re-measurement costs, and other
employee costs directly attributable to the Consumer Credit Card
Transaction/Tender Offer.
In connection with these organizational changes, 255 employees who ceased
to be employed by Advanta were entitled to benefits, of which 190 employees were
directly associated with the business contributed to Fleet LLC and 65 employees
were associated with the workforce reduction.
Additionally, during the first quarter of 1998, Advanta incurred
approximately $35.5 million of other compensation charges. This amount includes
$21.3 million attributable to payments under change of control plans and $14.2
million associated with the execution of the Tender Offer.
EXITED BUSINESSES/PRODUCTS
In the first quarter of 1999, Advanta implemented a plan to cease the
origination of auto loans and recorded a $3.4 million charge for costs
associated with exited businesses/products. The charges included severance and
outplacement costs for 22 employees in the auto origination group, and
professional fees associated with exited businesses/products not directly
associated with the mortgage, business card and leasing units. Advanta completed
the closing of the auto loan origination center and termination of related
employees during the second quarter of 1999. Advanta expects to pay a
substantial portion of the remaining costs during the year ended December 31,
2000.
During the first quarter of 1998, Advanta implemented a plan to exit
certain businesses and product offerings not directly associated with its
mortgage, business card and leasing units. In connection with this plan,
contractual vendor commitments of approximately $10.0 million associated with
discontinued development and other activities were accrued. Advanta has
substantially completed the settlement of these contractual commitments.
Advanta also has contractual commitments to certain customers, and
non-related financial institutions that are providing benefits to those
customers, under a product that will no longer be offered and for which no
future revenues or benefits will be received. In 1998, Advanta recorded a charge
of $22.8 million associated with this commitment, and an $8.3 million charge
associated with the write-down of assets associated with this program. In 1999,
an additional charge of $10.0 million was recorded based on a change in the
estimate of total expected costs for exited businesses. Advanta expects to pay a
substantial portion of these costs over the next 36 months. The actions required
to complete this plan include the settlement of contractual commitments and the
payment of customer benefits.
In connection with the Consumer Credit Card Transaction/Tender Offer and
the other exited business and product offerings, Advanta also incurred $11.5
million of related professional fees and $1.5 million of other expenses related
to these plans.
ASSET IMPAIRMENT/DISPOSAL
In connection with Advanta's plans to reduce corporate expenses and exit certain
business and product offerings, certain assets were identified for disposal and
the carrying costs thereof were written off or written down to estimated
realizable value in 1998 resulting in a charge of $8.7 million. These assets
consisted
75
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principally of leasehold improvements and various other assets. The disposal of
these assets has been completed.
NOTE 21. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of basic earnings per share and
diluted earnings per share for the years ended December 31:
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net income $49,818 $447,880 $ 71,625
Less: Preferred A dividends (141) (141) (141)
Less: Preferred B dividends (2,661) (3,549) (6,409)
- ---------------------------------------------------------------------------------------------
Income available to common shareholders $47,016 $444,190 $ 65,075
Less: Class A dividends declared (2,471) (2,615) (7,997)
Less: Class B dividends declared (4,896) (4,589) (13,754)
- ---------------------------------------------------------------------------------------------
Undistributed earnings $39,649 $436,986 $ 43,324
Basic shares
Class A 9,057 11,174 18,172
Class B 14,515 15,500 24,635
Combined (1) 23,572 26,674 42,807
Options A 1 8 63
Options B 202 103 532
Restricted shares Class A 36 0 0
Restricted shares Class B 118 138 99
Preferred B 0 1,572 0
- ---------------------------------------------------------------------------------------------
Diluted shares
Class A 9,094 11,182 18,235
Class B 14,835 17,313 25,266
Combined (1) 23,929 28,495 43,501
Basic earnings per share
Class A $ 1.95 $ 16.62 $ 1.45
Class B 2.02 16.68 1.57
Combined (1) 1.99 16.65 1.52
- ---------------------------------------------------------------------------------------------
Diluted earnings per share
Class A $ 1.93 $ 15.69 $ 1.43
Class B 1.99 15.73 1.54
Combined (1) 1.96 15.71 1.50
- ---------------------------------------------------------------------------------------------
(1) Combined represents a weighted average of Class A and Class B earnings per
share.
There were 14,211 shares of Advanta's Class B Convertible Preferred Stock
outstanding from January 1, 1999 through September 15, 1999 and 25,000 shares
outstanding during 1997, which were not included in the computation of diluted
earnings per share, because they were antidilutive for those periods. Each share
of Class B Convertible Preferred Stock was mandatorily converted into one share
of Class B Common Stock effective September 15, 1999.
In 1999, there were 1.2 million restricted shares of Class B Common Stock
outstanding and 1.6 million options to purchase shares of Class B Common Stock
outstanding that were not included in the computation of diluted earnings per
share because they were antidilutive for the period. In 1998, there were 1.1
million restricted shares of Class B Common Stock outstanding and 2.7 million
options to purchase shares of Class B Common Stock outstanding that were not
included in the computation of diluted earnings per share because they were
antidilutive for the period.
76
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22. PARENT COMPANY FINANCIAL STATEMENTS
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
- --------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------
ASSETS
Cash $ 4,292 $ 17,276
Commercial paper equivalent(1) 375,000 440,900
Investments 7,820 20,592
Investments in and advances to bank subsidiaries 543,276 446,533
Investments in and advances to non-bank subsidiaries 479,020 708,667
Other assets 165,019 89,456
- --------------------------------------------------------------------------------------
Total assets $1,574,427 $1,723,424
- --------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses and other liabilities $ 100,542 $ 37,218
Long-term debt 884,254 1,125,902
- --------------------------------------------------------------------------------------
Total liabilities 984,796 1,163,120
- --------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 287 267
Other stockholders' equity 588,334 559,027
- --------------------------------------------------------------------------------------
Total stockholders' equity 589,631 560,304
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,574,427 $1,723,424
- --------------------------------------------------------------------------------------
(1) Commercial paper equivalent refers to unsecured loans made to Advanta
National Bank and Advanta Bank Corp. for terms less than 35 days in maturity
which are not automatically renewable, consistent with commercial paper
issuance.
The parent company guarantees certain warehouse financing facilities,
commercial paper conduit facilities, and lease agreements of its subsidiaries.
At December 31, 1999, there were $22.3 million of lease obligations guaranteed
by the parent and $19.1 million of parent guarantees associated with warehouse
and commercial paper conduit financing facilities.
77
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
INCOME:
Dividends from bank subsidiaries(1) $ 0 $ 553,715 $ 0
Dividends from non-bank subsidiaries(1) 2,225 6,300 12,300
Interest 44,369 78,210 81,656
Gain on transfer of credit card business 0 48,944 0
Other, net 52,510 44,623 33,649
- ---------------------------------------------------------------------------------------------
Total income 99,104 731,792 127,605
- ---------------------------------------------------------------------------------------------
EXPENSES:
General and administrative 45,638 44,289 69,010
Interest 67,102 86,557 97,067
Unusual charges 4,561 59,707 0
- ---------------------------------------------------------------------------------------------
Total expense 117,301 190,553 166,077
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in
subsidiaries (18,197) 541,239 (38,472)
- ---------------------------------------------------------------------------------------------
Income tax benefit 22,327 8,566 20,677
- ---------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net profit
(loss) in subsidiaries 4,130 549,805 (17,795)
- ---------------------------------------------------------------------------------------------
Equity in undistributed net profit (loss)of subsidiaries 45,688 (101,925) 89,420
- ---------------------------------------------------------------------------------------------
Net income $ 49,818 $ 447,880 $ 71,625
- ---------------------------------------------------------------------------------------------
(1) Dividends from subsidiaries include only dividends from current year net
income of subsidiaries. See Parent Company Only Condensed Statements of Cash
Flows for total dividends received from subsidiaries.
The Parent Company Only Statements of Changes in Stockholders' Equity is
the same as the Consolidated Statements of Changes in Stockholder's Equity.
78
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 49,818 $ 447,880 $ 71,625
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Equity in net profit of subsidiaries (47,913) (458,090) (101,719)
Dividends received from subsidiaries 2,225 903,831 12,300
Equity securities gains (1,709) 0 0
Depreciation and amortization 2,066 6,880 5,083
Gain on transfer of consumer credit card business 0 (48,944) 0
Noncash unusual charges 0 11,974 0
Change in other assets, interest-bearing deposits,
accrued expenses and other liabilities (30,987) (101,208) (59,642)
- ---------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (26,500) 762,323 (72,353)
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in premises & equipment (2,199) 4,793 (8,793)
Net change in commercial paper equivalents 65,900 (440,900) 0
Investments in subsidiaries (23,540) (124,500) 0
Return of investment from subsidiaries 39,731 470,000 0
Purchase of investments available for sale (851,132) (471,582) (87,324)
Proceeds from sales of investments available for sale 2,702 143,770 49,946
Proceeds from maturing investments available for sale 850,000 327,200 25,000
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 81,462 (91,219) (21,171)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in lines of credit 0 0 (40,000)
Proceeds from issuance of long-term debt 123,529 29,858 536,002
Payments on redemption of long-term debt (365,177) (294,026) (359,482)
Decrease (increase) in affiliate borrowings 187,806 339,822 (26,827)
Issuance of stock 20 5,249 14,000
Tender Offer 0 (801,606) 0
Stock buyback (3,955) (4,549) 0
ESOP stock purchase 0 (12,569) 0
Cash dividends paid (10,169) (10,894) (28,301)
- ---------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (67,946) (748,715) 95,392
- ---------------------------------------------------------------------------------------------
Net (decrease) increase in cash (12,984) (77,611) 1,868
Cash at beginning of period 17,276 94,887 93,019
- ---------------------------------------------------------------------------------------------
Cash at end of period $ 4,292 $ 17,276 $ 94,887
- ---------------------------------------------------------------------------------------------
In 1999, noncash transactions of the Parent Company included a $4.5 million
assumption of liabilities of subsidiaries and a $43.3 million return of
investment by subsidiaries through forgiveness of advances. In 1998, the noncash
transaction represented capital contributions to subsidiaries through the
forgiveness of advances of $143.5 million.
79
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Advanta's financial instruments are as follows at
December 31:
1999 1998
- ------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
Financial assets:
Cash $ 29,301 $ 29,301 $ 16,267 $ 16,267
Federal funds sold 144,938 144,938 267,400 267,400
Restricted interest-bearing deposits 93,688 93,688 80,028 80,028
Trading investments 0 0 501,563 501,563
Investments available for sale 748,881 748,881 521,410 521,410
Loan and lease receivables, net 1,449,624 1,534,106 1,107,427 1,157,618
Retained interest-only strip 115,641 115,641 209,096 209,096
Contractual mortgage servicing rights 92,636 96,736 74,425 77,932
Subordinated trust assets 400,148 400,148 291,942 291,942
Financial liabilities:
Demand and savings deposits $ 248,111 $ 248,111 $ 185,782 $ 185,782
Time deposits 1,264,248 1,260,121 1,564,008 1,570,946
Long-term debt 788,508 771,560 1,030,147 989,088
Other borrowings 409,601 409,601 36,301 36,301
Off-balance sheet financial instruments --
Asset/(liability):
Interest rate swaps $ 0 $ 29,511 $ 0 $ 11,589
Interest rate caps purchased 1,040 3,137 45 130
Interest rate caps written (1,040) (3,137) (45) (130)
Put options purchased (986) 849 0 0
Forward contracts 0 3,867 0 365
- ------------------------------------------------------------------------------------------------
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for Advanta's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Advanta used the following methods and assumptions in estimating fair value
disclosures for financial instruments:
CASH, FEDERAL FUNDS SOLD AND RESTRICTED INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable estimate
of the fair value.
INVESTMENTS
The fair values of trading investments and investment securities available for
sale are based on quoted market prices, dealer quotes or estimates using quoted
market prices for similar securities. For investments that are
80
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not publicly traded, management has made estimates of fair value that consider
several factors including the investees' financial results, conditions and
prospects, and the values of comparable public companies.
LOAN AND LEASE RECEIVABLES, NET
The fair values of loan and lease receivables are estimated using quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value for these loans includes the estimated value of
future discounted cash flows estimated as the excess of the weighted average
yield over the aggregate cost of funds plus an estimate of future credit losses
over the life of the receivables.
RETAINED INTEREST-ONLY STRIPS AND CONTRACTUAL MORTGAGE SERVICING RIGHTS
The fair values of retained interest-only strips and contractual mortgage
servicing rights are estimated based on discounted cash flow analyses as
described in Note 1. Management has used the following assumptions in the
estimation of fair values of the retained interest-only strip from Advanta
Mortgage loan securitizations for the years ended December 31:
1999 1998
- --------------------------------------------------------------------------
Assumed constant prepayment rates:
Fixed rate loans 25% 29%
Variable rate loans 37 43
Assumed loss rate (annualized) 1.38 1.00
Assumed discount rate 15 14
- --------------------------------------------------------------------------
For purposes of estimating the fair value of contractual mortgage servicing
rights, management has assumed a discount rate of 10% and constant prepayment
rates consistent with the retained interest-only strip assumptions.
SUBORDINATED TRUST ASSETS
Subordinated trust assets earn a variable rate, risk-adjusted return. These
assets are classified as trading securities, and are reported at estimated fair
value.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. This fair value does not
include any benefit that may result from the low cost of funding provided by
these deposits compared to the cost of borrowing funds in the market.
TIME DEPOSITS
The fair value of fixed-maturity certificates of deposit is estimated using
discounted cash flow analyses based on the rates currently offered for deposits
of similar remaining maturities.
LONG-TERM DEBT
The fair value of Advanta's long-term borrowings is estimated using discounted
cash flow analyses based on Advanta's current incremental borrowing rates for
similar types of borrowing arrangements.
OTHER BORROWINGS
The carrying amounts of borrowings under repurchase agreements and other
short-term borrowings maturing within ninety days approximate their fair values.
The other borrowings are all at variable interest rates and therefore the
carrying value approximates a reasonable estimate of the fair value.
81
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE SWAPS, INTEREST RATE CAPS, OPTIONS AND FORWARD CONTRACTS
The fair value of interest rate swaps, interest rate caps, options and forward
contracts is the estimated amount that Advanta would pay or receive to terminate
the agreement at the reporting date, taking into account current interest rates
and the current creditworthiness of the counterparty.
COMMITMENTS TO EXTEND CREDIT
There is no market value associated with Advanta's unused commitments to extend
credit, since any fees charged are consistent with the fees charged by other
companies at the reporting date to enter into similar agreements. Unused
commitments to extend credit were $2.6 billion at December 31, 1999 and $2.1
billion at December 31, 1998.
NOTE 24. DERIVATIVE FINANCIAL INSTRUMENTS
In managing its interest rate risk, Advanta may use derivative financial
instruments. These instruments are used for the express purpose of managing
interest rate exposures and are not used for any trading or speculative
activities.
The following table summarizes by notional amounts Advanta's derivative
instruments as of December 31:
1999 1998
- --------------------------------------------------------------------------------------
Interest rate swaps $2,975,086 $2,997,912
Interest rate caps written 409,278 268,633
Interest rate caps purchased 409,278 268,633
Put options purchased 156,000 0
Forward contracts 565,000 499,000
- --------------------------------------------------------------------------------------
Total $4,514,642 $4,034,178
- --------------------------------------------------------------------------------------
The notional amounts of derivatives do not represent amounts exchanged by
the counterparties and, thus, are not a measure of Advanta'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.
Credit risk associated with derivatives arises from the potential for a
counterparty to default on its obligations. Advanta limits credit risk by only
transacting with highly creditworthy counterparties, requiring International
Swaps and Derivatives Association agreements for all interest rate swap and
interest rate option contracts, and maintaining collateral agreements with
substantially all counterparties. All derivative counterparties are associated
with organizations having securities rated as investment grade by independent
rating agencies. The Investment Committee, a management committee, controls the
list of eligible counterparties, setting of counterparty limits, and monitoring
of credit exposure. Advanta'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 (see Note 23). For
caps written, credit exposure does not exist since the counterparty has
performed its obligation to pay Advanta a premium payment.
INTEREST RATE SWAPS
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments without the exchange of the underlying notional
amount on which the interest payments are calculated. Based on its interest rate
sensitivity analyses, Advanta uses interest rate swaps to more effectively
manage the impact of fluctuating interest rates on its noninterest revenues and
cost of funds. In 1999, 1998 and 1997, Advanta used interest rate swaps to
effectively convert fixed rate debt and deposits to a LIBOR-based variable rate
and to effectively convert certain off-balance sheet variable securitizations to
a fixed rate.
82
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes by notional amounts Advanta's interest rate
swap activity by major category for the periods presented:
RECEIVE PAY
FIXED RATE FIXED RATE TOTAL
- -----------------------------------------------------------------------------------------------
Balance at 12/31/96 $ 812,835 $ 900,609 $1,713,444
Additions 967,250 472,496 1,439,746
Net amortization 0 (142,894) (142,894)
Maturities (136,835) (10,500) (147,335)
Swaptions exercised 0 (153,000) (153,000)
Terminations (598,250) 0 (598,250)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/97 $1,045,000 $1,066,711 $2,111,711
Additions 0 1,948,046 1,948,046
Net amortization (4,000) (380,533) (384,533)
Maturities (249,000) 0 (249,000)
Terminations (54,790) (211,812) (266,602)
Contributed to Fleet Credit Card LLC (161,710) 0 (161,710)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/98 $ 575,500 $2,422,412 $2,997,912
Additions 200,000 702,446 902,446
Net amortization 0 (658,666) (658,666)
Maturities (141,000) (66,324) (207,324)
Terminations (15,000) (44,282) (59,282)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/99 $ 619,500 $2,355,586 $2,975,086
- -----------------------------------------------------------------------------------------------
The following table discloses Advanta's interest rate swaps by major
category, notional value, weighted average interest rates, and annual maturities
for the periods presented. Variable rates in the table represent the current
LIBOR-based rates.
BALANCES MATURING IN:
BALANCE AT --------------------------------------------------------------------------
12/31/99 2000 2001 2002 2003 2004 2005 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable:
Notional Value $2,355,586 $353,818 $ 86,476 $137,986 $374,530 $324,348 $334,076 $744,352
Weighted Average Pay Rate 5.79% 5.70% 5.30% 5.90% 5.34% 6.23% 5.55% 6.01%
Weighted Average Receive Rate 6.47% 6.48% 6.18% 6.40% 6.48% 6.48% 6.48% 6.48%
Receive Fixed/Pay Variable:
Notional Value $ 619,500 $309,000 $250,500 $ 60,000 $ 0 $ 0 $ 0 $ 0
Weighted Average Receive Rate 6.19% 5.76% 6.63% 6.60% 0% 0% 0% 0%
Weighted Average Pay Rate 6.24% 6.28% 6.19% 6.23% 0% 0% 0% 0%
Total Notional Value $2,975,086 $662,818 $336,976 $197,986 $374,530 $324,348 $334,076 $744,352
Total Weighted Average Rates on Swaps:
Pay Rate 5.88% 5.97% 5.96% 6.00% 5.34% 6.23% 5.55% 6.01%
Receive Rate 6.41% 6.14% 6.51% 6.46% 6.48% 6.48% 6.48% 6.48%
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE OPTIONS
Interest rate options, which include caps and floors, are contracts that
transfer, modify or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. In exchange for the premium payment,
these contracts require the seller (writer) to pay the purchaser at specified
future dates the amount by which a specified market interest rate exceeds the
cap rate or falls below the floor rate, multiplied against a notional amount.
83
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advanta purchased interest rate caps as part of certain variable rate
receivable securitizations for credit enhancement purposes. In order to achieve
its desired interest rate sensitivity structure, Advanta has synthetically
altered the interest rate structure on certain off-balance sheet receivable
securitizations by writing interest rate caps to offset the purchased rate caps
attached to them. The premiums received or paid for writing or purchasing the
cap contracts with third parties are included in other assets and are amortized
to noninterest revenues over the life of the contract. Any obligations, which
may arise under these contracts, are recorded in noninterest revenues on an
accrual basis.
PUT OPTIONS
Put options provide the holder the right, but not the obligation, to sell the
underlying financial instrument at a specified exercise or strike price at a
specific point in time. Put options, therefore, protect Advanta from losses in a
rising interest rate environment, but allow for the full appreciation of
underlying assets should interest rates fall. Advanta regularly securitizes and
sells receivables. Advanta may choose to hedge the changes in the market value
of the index on which the securitization is priced, relating to the warehouse
and/or pipeline of receivables anticipated to be securitized, by purchasing put
options on the underlying index. The maximum term of hedges of anticipated loan
sales is seven months; the average term is four months. Premiums paid and gains
and losses on put options are deferred as other liabilities and included in the
measurement of the dollar basis of the loans sold. Deferred gains were $849
thousand and deferred premiums were $986 thousand at December 31, 1999. There
were no put options outstanding at December 31, 1998.
FORWARD CONTRACTS
Forward contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and may be settled in cash or
through delivery of the underlying financial instrument. Advanta regularly
securitizes and sells receivables. Advanta may choose to hedge the changes in
the market value of its fixed rate loans and commitments designated for
anticipated securitizations by selling U.S. Treasury securities for forward
settlement. The maximum term of hedges of anticipated loan sales is seven
months; the average term is four months. Gains and losses from forward sales are
deferred as other liabilities and included in the measurement of the dollar
basis of the loans sold. Advanta had deferred gains of $5.9 million at December
31, 1999 and deferred losses of $3.8 million at December 31, 1998.
Advanta may choose to hedge market value changes on its trading investments
with forward contracts. Gains and losses on forward contracts hedging trading
investments are recognized currently and reported in other revenues with the
gains and losses on trading investments.
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86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Advanta Corp.:
We have audited the accompanying consolidated balance sheets of Advanta
Corp. (a Delaware corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanta
Corp. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Philadelphia, PA
January 21, 2000
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING
To the Stockholders of Advanta Corp.:
The management of Advanta Corp. and its subsidiaries is responsible for the
preparation, content, integrity and objectivity of the financial statements.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and as such must, by
necessity, include amounts based upon estimates and judgments made by
management. The other financial information was also prepared by management and
is consistent with the financial statements.
Management maintains a system of internal controls that provides reasonable
assurance as to the integrity and reliability of the financial statements. This
control system includes: (l) organizational and budgetary arrangements which
provide reasonable assurance that errors or irregularities would be detected
promptly; (2) careful selection of personnel and communications programs aimed
at assuring that policies and standards are understood by employees; (3) a
program of internal audits; and (4) continuing review and evaluation of the
control program itself.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Their audits were conducted in accordance with
auditing standards generally accepted in the United States and considered
Advanta's system of internal controls to the extent they deemed necessary to
determine the nature, timing and extent of their audit tests. Their report is
printed herewith.
/s/ Dennis Alter /s/ Philip M. Browne /s/ James L. Shreero
- ---------------------------- ---------------------------- ----------------------------
Chairman of the Board and Senior Vice President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer Chief Accounting Officer
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87
SUPPLEMENTAL SCHEDULES (UNAUDITED)
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31,
(IN THOUSANDS) 1999
- --------------------------------------------------------------------------
Maturity:
3 months or less $115,171
Over 3 months through 6 months 19,667
Over 6 months through 12 months 175,205
Over 12 months 50,878
- --------------------------------------------------------------------------
Total $360,921
- --------------------------------------------------------------------------
COMMON STOCK PRICE RANGES AND DIVIDENDS
Advanta's common stock is traded on the National Market tier of The Nasdaq Stock
Market under the symbols ADVNB (Class B non-voting common stock) and ADVNA
(Class A voting common stock). Following are the high, low and closing sale
prices and cash dividends declared for the last two years as they apply to each
class of stock:
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
Class B:
- ------------------------------------------------------------------------------------------------
March 1998 $31.25 $19.69 $21.00 $.076
June 1998 24.25 17.50 19.88 .076
September 1998 20.56 8.25 10.50 .076
December 1998 12.00 5.25 11.06 .076
March 1999 $12.31 $ 7.75 $ 8.94 $.076
June 1999 14.75 7.59 13.56 .076
September 1999 19.13 11.38 11.75 .076
December 1999 15.88 10.44 14.06 .076
- ------------------------------------------------------------------------------------------------
Class A:
- ------------------------------------------------------------------------------------------------
March 1998 $32.75 $21.00 $22.50 $.063
June 1998 26.25 19.25 21.94 .063
September 1998 22.75 9.38 12.88 .063
December 1998 14.88 7.13 13.25 .063
March 1999 $15.19 $10.31 $11.06 $.063
June 1999 18.25 9.63 18.06 .063
September 1999 23.94 14.63 14.63 .063
December 1999 20.38 14.63 18.25 .063
- ------------------------------------------------------------------------------------------------
At December 31, 1999, Advanta had approximately 805 holders of record of
Class B stock and 315 holders of record of Class A stock.
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88
SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED
QUARTERLY DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
Interest income $ 60,526 $ 61,185 $ 59,201 $ 65,314
Securitization income (loss) (2,731) 51,360 41,116 34,769
Other revenues 38,678 48,198 55,233 59,674
------------------------------------------------------
Total revenues 96,473 160,743 155,550 159,757
------------------------------------------------------
Interest expense 39,147 41,935 43,317 43,277
Provision for credit losses 14,640 10,452 7,407 10,148
Operating expenses 85,747 82,702 82,179 86,433
Minority interest in income of consolidated
subsidiary 2,220 2,220 2,220 2,220
Unusual charges(2) 10,000 0 0 6,713
------------------------------------------------------
Total expenses 151,754 137,309 135,123 148,791
------------------------------------------------------
Pretax income (loss) (55,281) 23,434 20,427 10,966
- ----------------------------------------------------------------------------------------------------
Net income $ 16,555(3) $ 14,178 $ 12,312 $ 6,773
- ----------------------------------------------------------------------------------------------------
Basic earnings per share
Class A $ .67 $ .56 $ .48 $ .24
Class B .68 .57 .50 .26
Combined(1) .67 .57 .49 .25
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share
Class A $ .65 $ .54 $ .48 $ .24
Class B .66 .56 .49 .26
Combined(1) .66 .55 .49 .25
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding
Basic
Class A 8,992 8,984 8,976 9,280
Class B 15,619 14,429 14,187 13,807
Combined(1) 24,611 23,413 23,163 23,087
- ----------------------------------------------------------------------------------------------------
Weighted average shares -- assuming dilution
Diluted
Class A 9,042 9,030 9,009 9,282
Class B 16,097 14,960 14,364 13,896
Combined(1) 25,139 23,990 23,373 23,178
- ----------------------------------------------------------------------------------------------------
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SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED
QUARTERLY DATA -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
Interest income $ 55,514 $ 56,539 $ 53,561 $ 79,726
Securitization income 49,659 50,489 41,487 20,723
Gain on transfer of consumer credit card
business 0 0 0 541,288
Other revenues 57,345 40,254 35,966 121,469
------------------------------------------------------
Total revenues 162,518 147,282 131,014 763,206
------------------------------------------------------
Interest expense 41,340 39,165 36,226 67,544
Provision for credit losses 19,972 6,414 6,846 33,961
Operating expenses 92,419 78,019 72,245 137,081
Minority interest in income of consolidated
subsidiary 2,220 2,220 2,220 2,220
Unusual charges(2) 0 0 0 125,072
------------------------------------------------------
Total expenses 155,951 125,818 117,537 365,878
------------------------------------------------------
Pretax income 6,567 21,464 13,477 397,328
- ----------------------------------------------------------------------------------------------------
Net income $ 4,597 $ 15,025 $ 9,471 $418,787
- ----------------------------------------------------------------------------------------------------
Basic earnings per share
Class A $ .15 $ .57 $ .34 $ 11.84
Class B .17 .58 .35 11.85
Combined(1) .16 .58 .35 11.84
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share
Class A $ .15 $ .56 $ .34 $ 11.04
Class B .17 .58 .35 11.04
Combined(1) .16 .58 .35 11.04
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding
Basic
Class A 9,374 10,316 10,362 14,798
Class B 13,811 14,166 14,161 20,480
Combined(1) 23,185 24,482 24,523 35,278
- ----------------------------------------------------------------------------------------------------
Weighted average shares -- assuming dilution
Diluted
Class A 9,377 10,320 10,372 14,822
Class B 13,817 14,194 14,330 23,093
Combined(1) 23,194 24,514 24,702 37,915
- ----------------------------------------------------------------------------------------------------
(1) See Note 1 to Consolidated Financial Statements.
(2) 1999 amounts included charges associated with cost reduction initiatives in
the first quarter and additional costs associated with products exited in
the first quarter of 1998. 1998 amounts included severance and outplacement
costs associated with workforce reduction, option exercises and other
employee costs associated with the Consumer Credit Card Transaction/Tender
Offer; expense associated with exited business/product and asset impairment;
and equity losses related to exited business/product.
(3) Net income in the fourth quarter of 1999 included a $50 million tax benefit
related to the former consumer credit card business. See Note 19 to the
Consolidated Financial Statements.
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90
SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
($ IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- -------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------------
Advanta Mortgage loans(1) $21,743 52% $20,092 60% $ 5,822 4% $ 8,785 10% $ 3,360 6%
Business cards 14,663 35 6,916 21 6,899 5 2,643 3 977 2
Leases 3,110 7 2,695 8 2,899 2 1,598 2 0 0
Consumer credit cards 0 0 0 0 118,420 86 76,084 85 36,889 69
Other loans 2,331 6 3,734 11 3,733 3 74 0 12,268 23
- --------------------------------------------------------------------------------------------------------------------------
Total $41,847 100% $33,437 100% $137,773 100% $89,184 100% $53,494 100%
- --------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF GROSS RECEIVABLES
($ IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------------------
Advanta Mortgage loans(1) $1,050,478 71% $ 829,819 74% $ 478,433 14% $ 376,260 14% $ 321,711 12%
Business cards 275,095 19 150,022 13 140,399 4 72,348 3 0 0
Leases 132,802 9 122,657 11 112,536 4 103,730 4 63,666 2
Consumer credit cards 0 0 0 0 2,579,890 77 2,045,219 78 2,338,280 86
Other loans 21,930 1 17,862 2 40,978 1 20,835 1 9,276 0
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,480,305 100% $1,120,360 100% $3,352,236 100% $2,618,392 100% $2,732,933 100%
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes mortgage loans for all years presented and auto loans beginning in
1996.
YIELD AND MATURITY OF INVESTMENTS AT DECEMBER 31, 1999
($ IN THOUSANDS) MATURING
- ------------------------------------------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
----------------------- ----------------------- ----------------------- -----------------------
MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) MARKET VALUE YIELD(3)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other
U.S. Government
securities $17,141 4.68% $123,303 5.56% $ 0 0.00% $ 0 0.00%
State and municipal
securities(1) 521 4.70 865 5.05 1,093 6.08 909 5.58
Other(2) 0 0.00 0 0.00 612 5.49 542,012 6.66
- ------------------------------------------------------------------------------------------------------------------------------
Total investments
available for sale $17,662 4.68% $124,168 5.56% $1,705 5.87% $542,921 6.66%
- ------------------------------------------------------------------------------------------------------------------------------
(1) Yield computed on a taxable equivalent basis using a statutory rate of 35%.
(2) Equity investments and other securities without a stated maturity are
excluded from this table.
(3) Yields are computed by dividing annualized interest by the amortized cost of
the respective investment securities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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91
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" are hereby
incorporated by reference, as is the text in Part I of this Report under the
caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive
Compensation," "Compensation Committee Report on Executive Compensation" and
"Election of Directors "-- Committees, Meetings and Compensation of the Board of
Directors", '-- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The text of the Proxy Statement under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" are hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the Proxy Statement under the captions "Election of
Directors -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Financial Statements, Schedules, and Other Information of the
Registrant and its subsidiaries are included in this Form 10-K:
(a)(1) Financial Statements.
1. Consolidated Balance Sheets at December 31, 1999 and 1998.
2. Consolidated Income Statements for each of the three years
in the period ended December 31, 1999.
3. Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December 31,
1999.
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999.
5. Notes to Consolidated Financial Statements.
(a)(2) Schedules.
Other statements and schedules are not being presented
either because they are not required or the information
required by such statements and schedules is presented
elsewhere in the financial statements.
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92
(a)(3) Exhibits
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994) , as
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS)) (incorporated
by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated August 15, 1995, as further amended
by the Certificate of Designations, Preferences, Rights and
Limitations of the Registrant's Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to the Registrant's Registration Statement on Form
8-A, dated March 17, 1997.
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K dated March 17, 1997).
3-c Rights Agreement, dated as of March 14, 1997, by and between
the Registrant and the Rights Agent, which includes as
Exhibit B thereto the Form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A dated March 17, 1997).
4-a* Trust Indenture dated April 22, 1981 between Registrant and
Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as
Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of
Class B Common Stock Certificate (incorporated by reference
to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8
and Exhibit 1 to Registrant's Form 8-A, respectively, both
dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the
Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form
S-3 (No. 33-50883), filed November 2, 1993).
4-d Senior Trust Indenture, dated as of October 23, 1995,
between the Registrant and Mellon Bank, N.A., as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-3 (File No.
33-62601), filed September 13, 1995).
4-e Indenture dated as of December 17, 1996 between Advanta
Corp. and The Chase Manhattan Bank, as trustee relating to
the Junior Subordinated Debentures. (incorporated by
reference to Exhibit 4-g to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
4-f Declaration of Trust dated as of December 5, 1996 of Advanta
Capital Trust I. (incorporated by reference to Exhibit 4-h
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
4-g Amended and Restated Declaration of Trust dated as of
December 17, 1996 for Advanta Capital Trust I. (incorporated
by reference to Exhibit 4-I to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
4-h Series A Capital Securities Guarantee Agreement dated as of
December 17, 1996. (incorporated by reference to Exhibit 4-j
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by
reference to Exhibit 10-b to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989).+
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).+
91
93
10-c Advanta Management Incentive Plan, as amended (incorporated by reference to Exhibit 10-c to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).+
10-d* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial
National Bank USA on March 25, 1983.
10-e* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement
executed by Colonial National Bank USA on March 25, 1983.
10-f* Indenture of Trust dated May 11, 1984 between Linda Alter, as settlor, and Dennis Alter, as
trustee.
10-f(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the
Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual
capacity, Linda Alter, and Michael Stolper, which Agreement modifies the Indenture (incorporated
by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File No.
33-58660), filed February 23, 1993).
10-g Agreement dated as of March 5, 1998 between the Registrant and Olaf Olafsson (incorporated by
reference to Exhibit 10-g to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).+
10-h Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c
to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (File No. 33-33350),
filed February 21, 1990).+
10-i Advanta Corp. Executive Deferral Plan (incorporated by reference to the Exhibit 10-j to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+
10-j Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by reference to Exhibit 10-K to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+
10-k Advanta Management Incentive Plan With Stock Election II (incorporated by reference to Exhibit
10-o to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8,
1991).+
10-l Amended and Restated Advanta Management Incentive Plan With Stock Election III, (incorporated by
reference to Exhibit 10-l to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998).+
10-m Life Insurance Benefit for Certain Key Executives and Directors (filed herewith).+
10-n Amended and Restated Advanta Management Incentive Plan With Stock Election IV (incorporated by
reference to Exhibit 10-n to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998).+
10-o Amended and Restated Agreement of Limited Partnership of Advanta Partners LP, dated as of October
1, 1996 (incorporated by reference to Exhibit 10-o to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
10-p Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated
by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).+
10-q Pooling and Servicing Agreement, dated as of June 1, 1996, among Advanta Business Receivables
Corp., Advanta Financial Corp. and First National Bank of Chicago, as Trustee (incorporated by
reference to Exhibit 10-q to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10-r Agreement dated May 11, 1998 between the Registrant and Philip M. Browne (incorporated by
reference to Exhibit 10-r to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998).+
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94
10-s Master Business Receivables Asset-Backed Financing Facility
Agreement, dated as of May 1, 1997, by and among Advanta
Business Service Corp., Advanta Leasing Receivables Corp.
III and The Chase Manhattan Bank (incorporated by reference
to Advanta Business Services Corp.'s Registration Statement
on Form S-1 (File No. 333-38575).
10-t Contribution Agreement, dated as of October 28, 1997, by and
between Advanta Corp. and Fleet Financial Group
(incorporated by reference to Exhibit (c)(2) to the
Registrant's Schedule 13E-4, dated January 20, 1998), as
amended by the First Amendment to the Contribution
Agreement, dated as of February 10, 1998, by and among
Advanta Corp., Fleet Financial Group and Fleet Credit Card,
LLC (incorporated by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K, filed March 6,
1998).
10-u Agreement dated July 27, 1998 between the Registrant and
George O. Deehan (incorporated by reference to Exhibit 10-u
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998).+
10-v Commercial Lease, dated September 28, 1995, by and between
Draper Park North, L.C. and Advanta Financial Corp., as
amended January 31, 1996 and May 20, 1996 (filed herewith).
10-w Lease Agreement, dated August 27, 1997 between San Diego
Development #1, LLC and Advanta Mortgage Corp. USA, as
amended October 20, 1998 (filed herewith).
10-x Amended and Restated Sale and Servicing Agreement, dated as
of August 31, 1999, among Advanta Home Equity Loan Owner
Trust 1998-MS1, as Issuer, Advanta Conduit Receivables Inc.,
as Depositor, Advanta Mortgage Corp. USA, Advanta National
Bank and Advanta Bank Corp., as Loan Originators, Advanta
Corp., as Transfer Obligor and Bankers Trust Company of
California, N.A., as Indenture Trustee (filed herewith).
11 Inapplicable.
12 Computation of Ratio of Earnings to Fixed Charges (filed
herewith).
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of Independent Public Accountants (filed herewith).
24 Powers of Attorney (included on the signature page hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
- ---------------
* Incorporated by reference to the Exhibit with corresponding number
constituting part of the Registrant's Registration Statement on Form S-2
(No. 33-00071), filed on September 4, 1985.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the Company on October 25, 1999
regarding the resignation of one of the Company's executive officers.
2. A Report on Form 8-K was filed by the Company on October 26, 1999
regarding consolidated earnings of the Company and its subsidiaries for the
fiscal quarter ended September 30, 1999. Summary earnings and balance sheet
information as of that date were filed with such report.
3. A Report on Form 8-K was filed by the Company on November 30, 1999
regarding the Company's earnings guidance for the year 2000.
93
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Advanta Corp.
By: /s/ WILLIAM A. ROSOFF
-----------------------------------
William A. Rosoff, President and
Vice Chairman of the Board
Dated: March 20, 2000
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
constitute and appoint Dennis Alter, William A. Rosoff, Philip M. Browne, James
L. Shreero and Elizabeth H. Mai, or any of them (with full power to each of them
to act alone), his or her true and lawful attorney in-fact and agent, with full
power of substitution, for him or her and on his or her behalf to sign, execute
and file an Annual Report on Form 10-K under the Securities Exchange Act of
1934, as amended, for the fiscal year ended December 31, 1999 relating to
Advanta Corp. and any or all amendments thereto, with all exhibits and any and
all documents required to be filed with respect thereto, with the Securities and
Exchange Commission or any regulatory authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he or she might or could do if personally present, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the 20th day of March, 2000.
NAME TITLE
---- -----
/s/ DENNIS ALTER Chairman of the Board and
- ------------------------------------------ Chief Executive Officer
Dennis Alter
/s/ WILLIAM A. ROSOFF President and Vice Chairman
- ------------------------------------------ of the Board
William A. Rosoff
/s/ PHILIP M. BROWNE Senior Vice President and
- ------------------------------------------ Chief Financial Officer
Philip M. Browne
/s/ JAMES L. SHREERO Vice President and Chief
- ------------------------------------------ Accounting Officer
James L. Shreero
/s/ ARTHUR P. BELLIS Director
- ------------------------------------------
Arthur P. Bellis
/s/ MAX BOTEL Director
- ------------------------------------------
Max Botel
/s/ WILLIAM C. DUNKELBERG Director
- ------------------------------------------
William C. Dunkelberg
/s/ DANA BECKER DUNN Director
- ------------------------------------------
Dana Becker Dunn
94
96
NAME TITLE
---- -----
/s/ ROBERT C. HALL Director
- ------------------------------------------
Robert C. Hall
/s/ JAMES E. KSANSNAK Director
- ------------------------------------------
James E. Ksansnak
/s/ RONALD LUBNER Director
- ------------------------------------------
Ronald Lubner
/s/ OLAF OLAFSSON Director
- ------------------------------------------
Olaf Olafsson
/s/ MICHAEL STOLPER Director
- ------------------------------------------
Michael Stolper
95