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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required] for the
fiscal year ended December 31, 1993 or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required] 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 (I.R.S. Employer Identification No.)
organization)
Brandywine Corporate Center, 650 Naamans Road, Claymont, Delaware 19703
- - - ----------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302-791-4400)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Class B Common Stock, $.01 par value
-------------------------------------------------------------------------
(Title of each class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K / /
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405)
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$ 341,344,003 as of March 1, 1994 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 1, 1994 there were 17,248,389 shares of the Registrant's Class A
Common Stock, $.01 par value, outstanding and 22,876,523 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
- - - -------- -------------------
Definitive Proxy Statement relating to the Part III, Items 10-13
Registrant's 1994 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, and referred
to herein as the "Proxy Statement".
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. (the "Company") is a highly focused direct marketer of select
consumer financial services. The Company primarily originates and services
credit cards and mortgage loans. Other businesses include small ticket
equipment leasing, credit insurance and deposit products. At year end 1993,
assets under management totalled over $6.1 billion.
Approximately 75% of total revenues are derived from credit cards marketed
through carefully targeted direct mail campaigns. By focusing primarily on the
no fee gold card, the Company has successfully grown to one of the ten largest
issuers of gold cards. Mortgage services contribute 10% of total
revenues with a managed loan portfolio of $1.15 billion. Mortgage loans are
originated through a network of branch offices, a direct originations center
and an expanding number of correspondent relationships.
The Company was incorporated in Delaware in 1974 as Teachers Service
Organization, Inc., the successor to a business originally founded in 1951.
In January 1988, the Company's name was changed from TSO Financial Corp. to
Advanta Corp. The Company's principal executive office is located at
Brandywine Corporate Center, 650 Naamans Road, Claymont, Delaware 19703. Its
principal operating office is located at Five Horsham Business Center, 300
Welsh Road, Horsham, Pennsylvania 19044-0749. The Company's telephone numbers
at its principal executive and operating offices are, respectively, (302)
791-4400 and (215) 657-4000. References to the Company in this Report include
its consolidated subsidiaries unless the context otherwise requires.
CREDIT CARDS
The Company, which has been in the credit card business since 1983, issues gold
and standard MasterCard and VISA credit cards nationwide. The Company has
built a substantial cardholder base which, as of December 31, 1993, totalled
nearly 2.7 million accounts and $3.9 billion in managed receivables. According
to industry statistics, the Company is one of the ten largest issuers of gold
cards. Both gold and standard accounts undergo the same credit analysis, but
gold accounts have higher initial credit limits because of the cardholders'
higher incomes. In addition, gold accounts generally offer a wider variety of
services to cardholders.
The primary method of account acquisition is direct mail solicitation. The
Company generally uses credit scoring by independent third parties and a
proprietary market segmentation and targeting model to target its mailings to
profitable segments of the market.
In 1982, the Company acquired Colonial National Bank USA ("Colonial National").
As a national bank, Colonial National has the ability to make loans to
consumers without many of the restrictions found in various state usury and
licensing laws, to negotiate variable rate loans, to generate funds
economically in the form of deposits insured by the Federal Deposit Insurance
Corporation ("FDIC"), and to include in its product mix a MasterCard and VISA
credit card program. Substantially all of the Company's credit card
receivables and bank deposits, and most of its mortgage loan receivables, are
held by Colonial National.
MasterCard and VISA license banks, such as Colonial National and other
financial institutions, to issue credit cards using their trademarks and to
utilize their interchange networks. Cardholders may use their cards to make
purchases at participating merchants or to obtain cash advances at
participating financial institutions. The purchase is submitted to a merchant
bank which remits to the merchant the purchase amount less a merchant discount
fee, and submits the purchase to the card issuing bank for payment through the
interchange system. The card issuing bank receives an interchange fee as
compensation for the funding and credit risk that it takes when its customers
use its credit card. MasterCard or VISA sets the interchange fee as a
percentage of each card transaction (currently approximately 1.4%).
The Company generates interest and other income from its credit card business
through finance charges assessed on outstanding loans, interchange income, cash
advance and other credit card fees, and securitization income as described
below. Credit Card income also includes fees paid by credit card customers for
product
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enhancements they may select, and revenues paid to Colonial National by third
parties for the right to market their products to the Company's credit card
customers.
Most of the Company's MasterCard and VISA credit cards carry no annual fee, and
those credit cards which do include an annual fee generally have lower fees
than those charged by many of the Company's competitors. The Company believes
that this characteristic of no or low annual fee credit cards has appealed to
consumers, and that the Company's credit cards have also appealed to consumers
because of their competitive interest rates, quality service, payment terms and
credit lines.
While the Company believes that its credit card offers will continue to appeal
to consumers for the reasons stated, the Company also notes that competition is
increasing in the credit card industry. At the same time, the American people
are becoming generally more sophisticated and demanding users of credit. These
forces are likely to produce significant changes in the industry; in recent
years they have resulted in slower growth and lower yields for the industry,
and these trends may continue. The Company is devoting substantial resources
to meeting the challenges, and taking advantage of the opportunities, which
management sees emerging in the industry. In 1993, this included significant
focus on balance transfer initiatives, in which the Company encouraged
consumers to transfer account balances they were maintaining with other credit
card issuers to a Colonial National account with a lower interest rate.
Approximately one-half of the growth in the Company's managed credit card
receivables in 1993 resulted from balance transfers. The Company intends to
continue exploring new approaches to the credit card market.
The interest rates on the majority of the Company's credit card receivables are
variable, tied to the prime rate. This helps the Company maintain net interest
margins in both rising and declining interest rate environments. As Delaware,
Colonial National's state of domicile, does not have a usury ceiling applicable
to banks, there is no statutory maximum interest rate that the Company may
charge its credit cardholders, nor does Delaware law limit the amount of any
annual fees, late charges and other ancillary charges which may be assessed.
While the state in which an individual cardholder resides may seek to regulate
the annual fees and ancillary charges which Colonial National may charge to
that state's residents, the enforceability of such regulation is unclear and is
currently the subject of litigation in certain states. At the present time,
the only Federal appellate decision addressing this issue held such regulation
to be unenforceable. See "Government Regulation--Colonial National."
Since 1988, Colonial National has been active in the credit card securitization
market, securitizing $1.0 billion of credit card receivables in 1993 and $3.2
billion since 1988. The Company continues to recognize income on a monthly
basis from the securitized receivables. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 of
the Notes to Consolidated Financial Statements.
Colonial National's securitization program provides a number of benefits:
diversifying its funding base, providing liquidity, reducing the bank's
regulatory capital requirements, lowering its cost of funds, providing a source
of variable rate funding to complement the variable rate credit card portfolio
and helping to limit the on-balance sheet growth of Colonial National to not
more than 7% per annum. See "Government Regulation--The Company."
Furthermore, Colonial National continues to own the credit card accounts and
customer relationships, which the Company believes continue to build
significant long-term value. While the Company believes that securitization
will continue to be a reliable source of funding, there is no assurance that
the Company will be able to continue securitizations in amounts or under terms
comparable to its securitizations to date.
A securitization involves the transfer by the Company of the receivables
generated by a pool of credit card accounts to a securitization trust.
Certificates issued by the trust and sold to investors represent undivided
ownership interests in receivables transferred to the trust. The
securitization results in removal of receivables from the Company's balance
sheet for financial and regulatory accounting purposes. For tax purposes, the
investor certificates are characterized as a collateralized debt financing of
the Company.
The trust receives finance and other charges paid by the credit card customers
and pays a rate of return on a monthly basis to the certificate holders. While
in most cases the rate of return paid to investors is variable in order to
match the pricing dynamics of the underlying receivables, the Company also uses
fixed rate securitizations where appropriate to balance interest rate exposure
on its assets and liabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management."
Credit losses on the securitized receivables are paid from the funds in the
trust. The Company continues to service the accounts for a fee, generally two
percent per annum of the securitized receivables. Excess funds (defined as
finance charges plus miscellaneous fees less interest paid to certificate
holders, credit
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losses and servicing fees) are first retained to build up a reserve fund to a
certain level, after which amounts are remitted to the Company. The Company's
relationship with its credit card customers is not affected by the
securitization.
Investors in the trust receive payments of interest only during the first three
to four years of the trust. Thereafter, an amortization period (generally
between six and ten months) commences, during which the certificate holders are
entitled to payment of principal and interest. Acceleration of the
commencement of the amortization period (which may occur in limited
circumstances) on a securitization would accelerate the Company's funding
requirement. Upon full repayment of principal to the certificate holders,
whether as a result of normal or accelerated amortization, the trust's lien on
the accounts terminates and all related receivables and funds held in the
trust, including the reserve fund, are transferred to the Company.
MORTGAGE LOANS
The Company's subsidiary, Advanta Mortgage Corp. USA ("Advanta Mortgage"),
originates and services closed end mortgage loans for itself and for Colonial
National's "Advanta Mortgage USA" Division, primarily through a broker network
serviced by selected sales locations, a centralized direct origination center,
and correspondent relationships. Closed end mortgage loans involve the loan of
a fixed amount of funds to a residential borrower repayable over a contractual
period of generally fifteen years. The Company does not extend mortgage lines
of credit, which involve the extension of a revolving amount of credit to a
borrower. Advanta Mortgage and Colonial National also purchase portfolios of
mortgage loan receivables. Portfolio acquisitions totalled $6 million in 1991,
$32 million in 1992 and $42 million in 1993.
Advanta Mortgage and Colonial National operate the Company's mortgage loan
business as a mortgage banking enterprise, i.e., they originate or purchase
loans and then sell or securitize them, generally retaining servicing rights
and the related excess cash flows. Consequently, the mortgage loan receivables
on the Company's balance sheet are generally its most recently originated loans
being held for sale. Thus, while mortgage loan receivables owned at December
31, 1993 were $91 million, during 1993 the Company originated or purchased $510
million and securitized $608 million of such receivables. At the time the
receivables are sold or securitized, the Company recognizes a gain which is
included in its mortgage banking income. See Note 1 to the Consolidated
Financial Statements.
Thus, Advanta Mortgage packages its loans for sale and customarily enters into
agreements with the purchasers to continue to service the loans for a fee.
Advanta Mortgage also services Colonial National's mortgage loan portfolio,
packages Colonial National's mortgage loans for sale, and performs the
servicing on loans sold by Colonial National where Colonial National retains
the servicing rights and obligations. In addition, Advanta Mortgage performs
fee-based servicing on loans originated and owned by unrelated third party
mortgage lenders. Therefore, Advanta Mortgage and Colonial National's Advanta
Mortgage USA Division have the following basic sources of income: net
interest income on loans outstanding pending their sale, gains on sales of
loans, loan servicing fees and loan origination fees ("points"). Points are
deferred and amortized over the contractual life of a loan, and on sale or
securitization of the loan are included in the computation of the gain on sale.
Interest income earned on loans prior to their sale or securitization is
included in the Company's interest revenues, as detailed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Net
Interest Income."
Advanta Mortgage and Colonial National began securitizing home loans in 1988,
when they privately placed with institutional investors $72 million of
certificates representing fractional ownership interests in securitization
trusts. In February 1991, Advanta Mortgage and Colonial National securitized
$108 million of loans in their first publicly offered mortgage securitization
transaction and securitized approximately $193 million of additional loans in
public offerings during the balance of 1991. They publicly securitized $385
million of loans in 1992, and $608 million in 1993.
Securitizations of mortgage loans are similar to credit card securitizations as
described above. The Company transfers a specified pool of mortgage loans to a
trust which issues certificates representing undivided ownership interests in
the loans. The Company acts as servicing agent for the trust, providing
customer service and collection efforts, and receives loan servicing fees equal
to .5% per annum of the securitized receivables. Finance and other charges
paid to the trust are used to pay the investors interest on their certificates
and premiums on an insurance contract issued by a third party guaranteeing full
repayment of principal and interest to
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the investors. Excess amounts generally go into a reserve account, and after
that account reaches a specified level, are paid to the Company. Credit losses
on the securitized loans reduce the amount of these payments to the Company.
Significant differences from the Company's credit card securitizations,
however, include: (1) while in most cases the credit card securitization
certificates pay a variable interest rate (which complements the variable rate
pricing on the Company's credit cards), the mortgage securitization
certificates generally carry a fixed rate of interest (as generally do each of
the mortgage loans held by the trust), and (2) payments to investors in the
mortgage loan securitizations include both principal and interest from the
outset, since the loans held by the trust are not revolving credit lines.
At December 31, 1993, Advanta Mortgage and Colonial National had approximately
$91 million of mortgage loan receivables outstanding secured by mortgages on
properties located in 30 states plus the District of Columbia. Additionally,
as of that date, Advanta Mortgage was servicing approximately $1.1 billion in
mortgage loans sold by the Company's subsidiaries, as well as $125 million of
"contract servicing" receivables. Contract servicing receivables are not
included in the Company's "managed portfolio," as the performance of such loans
does not have a material impact on either the Company's net income or its
credit risk profile. In contrast, the performance of the managed portfolio,
including loans sold by the Company, can materially impact ongoing mortgage
banking income. See Note 1 to the Consolidated Financial Statements.
In 1993, loan loss and prepayment experience depressed mortgage banking income,
resulted in higher charge-off rates and necessitated an increase in off-balance
sheet mortgage loan recourse reserves. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - - Provision for
Credit Losses" and "-- Credit Risk Management -- Asset Quality." As
indicated by these higher off-balance sheet reserves, in 1994 the Company
expects to experience a higher relative managed mortgage charge-off rate
compared to 1993. A majority of this experience is due to a class of loan
which the Company has not actively solicited since 1991, as well as to
softening real estate values in certain areas in which the Company operates.
Approximately 43% of the managed portfolio is secured by second mortgages and
the balance is secured by non-purchase money first mortgages. At December 31,
1993, total mortgage loans managed, and the nonperforming loans included in
those totals, are concentrated in the following regions:
Percent of
Percent of Percent of Nonperforming
Mortgage Total Portfolio Nonperforming To Total
Receivables Nonperforming By Region By Region Receivables
----------- ------------- --------- --------- -----------
(Dollars in Millions)
California $275.4 $8.7 24.0% 17.4% .8%
Midatlantic 454.6 25.1 39.5% 49.7% 2.2%
Northeast 279.7 13.7 24.3% 27.2% 1.2%
Other 140.1 2.9 12.2% 5.7% .2%
----- --- ----- ---- ---
$1,149.9 50.4 100.0% 100.0% 4.4%
======== ==== ====== ====== ====
Geographic concentration carries a risk of increased delinquency and/or loss if
an area suffers an economic downturn. Advanta Mortgage monitors economic
conditions in those regions through market and trend analyses. A Credit Policy
Committee meets through the year to update lending policies based on the
results of analyses, which may include abandoning lending activities in
economically unstable areas of the country. The Company believes that the
concentrations of nonperforming loans reflected in the preceding table are not
necessarily reflective of general economic conditions in each region, but
rather reflect the credit risk inherent in the different grades of loans
originated in each area. The interest rate charged and the maximum
loan-to-value ratio permitted with respect to each grade of loans are adjusted
to compensate for the credit risk inherent in that loan grade.
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The Company generally limits the total dollar amount of all loans secured by a
property, including both the Company's mortgage loan and any other lender's
first mortgage, to between 60% and 80% (depending upon the creditworthiness of
the borrower) of the appraised value of the property. The average total
loan-to-value ratio is 68% (calculated based upon the appraised values of the
properties at the time of origination). However, a substantial depreciation in
home values may impair the Company's security for these loans. As a result of
substantial refinancing activity by consumers as market interest rates
declined, in 1992 over 60% and in 1993 over 70% of the mortgage loans
originated by the Company were first lien loans.
EQUIPMENT LEASING
The Company's leasing subsidiary, Advanta Leasing Corp. ("Advanta Leasing"),
engages primarily in non-cancelable financing leases of equipment, including
computers, fax machines, copiers and commercial cleaning equipment, primarily
to professionals and small businesses. Most of the equipment leased has an
initial value of less than $150,000, while the average initial value of leased
equipment is approximately $7,000. Costs relating to equipment maintenance,
insurance and personal property taxes are the responsibility of the lessee. In
October 1991, Advanta Leasing closed its first securitization of lease
receivables with a private placement of $74.5 million of certificates and
closed a similar transaction in the amount of $53 million in September 1992.
In 1993, Advanta Leasing securitized $68 million of lease receivables.
Securitization of lease receivables is substantially similar to mortgage loan
securitization as described above, except that the servicing fee payable to
Advanta Leasing is 1.25% per annum of the securitized lease receivables.
Including $138 million of remaining securitized receivables, at December 31,
1993 Advanta Leasing managed a portfolio of $189 million of net lease
receivables.
The small ticket equipment leasing industry is experiencing change as many
smaller companies' funding sources have retrenched. This has provided Advanta
Leasing with attractive direct marketing and portfolio acquisition
opportunities, as Advanta Leasing's funding capacity remains strong.
Consequently, the Company anticipates Advanta Leasing's origination volume
increasing in 1994.
CREDIT INSURANCE AND CREDIT PROTECTION
Through unaffiliated insurance carriers, the Company offers credit life,
disability and unemployment insurance to its credit cardholders and credit life
insurance and a limited life/disability/unemployment insurance product to its
mortgage loan customers. The unaffiliated insurers reinsure 100% of the risk
on the credit card credit life, disability and unemployment insurance (but not
the mortgage loan credit life insurance) with one or more of the Company's
insurance subsidiaries. Such subsidiaries receive reinsurance premiums
approximating 94% of the net premiums written. The subsidiaries are obligated
to pay all losses and refunds, and to maintain reserve amounts equal to all
statutory reserves for the benefit of the unaffiliated insurance carriers. In
1992, the insurance subsidiaries began direct underwriting of the property
insurance provided for the Company's equipment leasing customers. The
insurance subsidiaries are domiciled in Arizona, and are subject to regulation
by the Arizona Department of Insurance and other insurance departments in
states where they are licensed.
The credit card credit life insurance insures the life of the borrower (and any
joint borrower) in an amount equal to the unpaid loan balance and accrued
interest (subject to a maximum amount of $5,000) and provides for payment to
the lender of the borrower's obligation in the event of death. The credit
disability insurance and credit unemployment insurance pay the minimum monthly
payments required by the credit card loan with respect to the debt outstanding
at the commencement of a period of disability or unemployment, up to a maximum
of $5,000.
Through Colonial National, the Company offers to some of its credit cardholders
in certain states a card enhancement program named Credit Protection
PlusR which provides benefits similar to those provided to other customers by
the credit life, disability and unemployment insurance coverages offered by the
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unaffiliated insurance carriers. Colonial National, which insures its excess
risk of loss on this product with the Company's insurance subsidiaries, began
expanding its offering of Credit Protection PlusR in 1993.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured savings and transaction accounts through
Colonial National, and offers uninsured investment products through the direct
and brokered public sale of its senior and subordinated debt securities. Bank
deposit services include demand deposits, money market savings accounts,
statement savings accounts, retail certificates of deposit, large denomination
certificates of deposit (certificates of $100,000 or more) and individual
retirement accounts. During 1993, both the senior debt securities of Advanta
Corp. and the senior debt securities and deposits of Colonial National achieved
investment-grade ratings from the nationally recognized rating agencies. These
ratings have allowed the Company to further diversify its funding sources. In
November 1993, the Company filed a shelf registration statement with the
Securities and Exchange Commission for $1 billion of senior debt securities,
and subsequently sold $150 million of three-year notes in an underwritten
transaction as well as $90 million (as of March 1, 1994) of medium-term notes
of varying maturities pursuant to its $500 million medium-term note program
established under this registration statement. In addition, the Company's
subordinated debt securities historically have been and continue to be offered
to investors with a variety of maturities (ranging from demand to ten years)
and yield options. Further, a wholly-owned subsidiary of the Company, Colonial
National Financial Corp. ("CNF"), began taking deposits in the form of
certificates of deposit in January 1992. CNF is an FDIC insured industrial
loan corporation organized under the laws of the State of Utah. The activities
of CNF are not currently material to the Company's business.
Consumer deposit business at Colonial National is generated from repeat sales
to existing customers and new deposits from individuals attracted by newspaper,
direct mail and radio advertisements. Also, Colonial National offers retail
certificates of deposit to customers through several nationally recognized
broker/dealer firms which offer "Master Certificate of Deposit" programs to
banks throughout the nation. Under these programs, the customers of the
broker/dealer firms may purchase Colonial National certificates of deposit in
$1,000 increments, from $1,000 to $100,000. The award of investment grade
ratings to Colonial National's senior debt securities has allowed the bank to
acquire additional sources of institutional funds throuogh both deposit and
non-deposit products. Together, these various programs provide Colonial
National with cost effective sources of funding which are geographically
diverse and improve control in managing interest rate sensitivity. Investments
in the Company's senior debt securities are marketed primarily to institutional
investors through underwritten offerings as well as direct placements pursuant
to the Company's medium-term note program. Investments in the Company's
subordinated debt securities are generated from newspaper advertisements, from
direct mail marketing efforts to existing and prospective investors, and
through broker/dealer firms.
GOVERNMENT REGULATION
THE COMPANY. The Company is not required to register as a bank holding
Company under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Company owns Colonial National, which is a "bank" as defined under the BHCA
as amended by the Competitive Equality Banking Act of 1987 ("CEBA"). However,
under certain grandfathering provisions of CEBA, the Company is not required to
register as a bank holding Company under the BHCA, because Colonial National,
which takes demand deposits but does not make commercial loans, did not come
within the BHCA's definition of the term "bank" prior to the enactment of CEBA
and it complies with certain restrictions set forth in CEBA, such as limiting
its activities to those in which it was engaged prior to March 5, 1987 and
limiting its growth rate to not more than 7% per annum. Such restrictions also
prohibit Colonial National from cross-marketing products or services of an
affiliate that are not permissible for bank holding companies under the BHCA.
In addition, the Company complies with certain other restrictions set forth in
CEBA, such as not acquiring control of more than 5% of the stock or assets of
an additional "bank" or "savings association" as defined for these purposes
under the BHCA. Consequently, the Company is not subject to examination by the
Federal Reserve Board (other than for purposes of assuring continued compliance
with the CEBA restrictions referenced in this paragraph). Should the Company
or Colonial National cease complying
9
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. The Federal Reserve
Board may deny an application if it determines that control of a bank by a
particular Company will cause undue interference with competition or that such
Company lacks the financial or managerial resources to serve as a source of
strength to its subsidiary bank. While the Company believes that it meets the
Federal Reserve Board's managerial standards and that its ownership of Colonial
National has improved the bank's competitiveness, should the Company be
required to apply to become a bank holding Company the outcome of any such
application cannot be certain.
Registration as a bank holding Company would subject the Company and its
subsidiaries to inspection and regulation by the Federal Reserve Board.
Although the Company has no plans to register as a bank holding Company at this
time, the Company believes that registration would not restrict, curtail, or
eliminate any of its activities at current levels, except that some portions of
the current business operations of the Company's insurance subsidiaries would
have to be discontinued, the effects of which would not be material.
COLONIAL NATIONAL. The Company conducts substantially all its deposit-taking
activities and credit card lending business, as well as a large portion of its
mortgage lending business, through Colonial National. Under Federal law,
Colonial National may "export" (i.e., charge its customers resident in other
states) the finance charges permissible under the law of its state of domicile,
Delaware, which state has no usury statute applicable to banks. Consistent
with prevailing industry practice, the Company also exports credit card fees
(including, for example, annual fees, late charges and fees for exceeding
credit limits) permitted under Delaware law. There is no precedent clearly
applicable to Colonial National as to the permissibility of exporting such
fees. In a case involving this issue (to which the Company was not a party),
the United States Court of Appeals for the First Circuit ruled that the
Commonwealth of Massachusetts did not have the power to prevent a Delaware
state-chartered financial institution from charging Massachusetts residents
credit card fees in excess of those allowed under Massachusetts law. The
United States Supreme Court declined to consider an appeal of the First
Circuit's decision, and so that decision became final in 1992. However,
litigation involving this issue has been initiated against other credit card
issuers in several states, and it is possible that a contrary decision could be
reached in a jurisdiction where the judgment of the First Circuit Court of
Appeals is not binding. The Company cannot quantify the impact on its
business, as a result of possible loss of fees, penalties or other sanctions,
that could result from an adverse determination on this issue in one or more
states.
Colonial National is subject primarily to regulation and periodic examination
by the Office of the Comptroller of the Currency (the "Comptroller"). Such
regulation relates to the maintenance of reserves for certain types of
deposits, the maintenance of certain financial ratios, transactions with
affiliates and a broad range of other banking practices. As a national bank,
Colonial National is subject to provisions of federal law which restrict its
ability to extend credit to its affiliates or pay dividends to its parent
Company. See "Dividends and Transfers of Funds."
Colonial National is subject to capital adequacy guidelines approved by the
Comptroller. 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. As of
December 31, 1993, the minimum ratio of total capital to risk-weighted assets
(including certain off- balance sheet items) was 8%. At least half of the
total capital is to be comprised of common equity, retained earnings and a
limited amount of non-cumulative perpetual preferred stock ("Tier 1 capital").
The remainder 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 ("Tier 2 capital"). In addition, the
Comptroller has also adopted a minimum leverage ratio (Tier 1 capital divided
by total average assets) of 3% for national banks that meet certain specified
criteria, including that they have the highest regulatory rating. Under this
guideline, the minimum leverage ratio would be at least 1 or 2 percentage
points higher for national banks that do not have the highest regulatory
rating, for national banks undertaking major expansion programs, and for other
national banks in certain circumstances. As of December 31, 1993, Colonial
National's Tier 1 capital ratio was 7.19%, its combined Tier 1 and Tier 2
capital ratio was 12.06%, and its leverage ratio was 6.03%.
10
Recognizing that the risk-based capital standards address only credit risk
(i.e., not interest rate, liquidity, operational or other risks), the
Comptroller has indicated that many national banks will be expected to maintain
capital in excess of the minimum standards. As indicated above, Colonial
National's capital levels currently exceed the minimum standards. To date, the
Comptroller has not required Colonial National to maintain capital in excess of
the minimum standards. However, there can be no assurance that such a
requirement will not be imposed in the future, or if it is, what higher
standard will be applicable.
In addition, pursuant to certain provisions of the FDIC Improvements Act of
1991 ("FDICIA") and regulations promulgated thereunder, FDIC insured
institutions such as Colonial National may only accept brokered deposits
without FDIC permission if they meet certain 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 total capital to risk-weighted assets of not less than 10%, Tier 1
capital to risk-weighted assets of not less than 6%, and a Tier 1 leverage
ratio of not less than 5%. Based on the applicable standards under these
regulations, Colonial National is currently "well-capitalized," and the Company
intends to maintain Colonial National as a "well-capitalized" institution.
LENDING AND LEASING ACTIVITIES. The Company's activities as a lender are also
subject to regulation under various federal and state laws including the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Home Mortgage
Disclosure Act, the Electronic Funds Transfer Act, and the Fair Credit
Reporting Act. Provisions of those statutes, and related regulations, among
other matters, require disclosure to borrowers of finance charges in terms of
an annual percentage rate, prohibit certain discriminatory practices in
extending credit, and regulate the dissemination and use of information
relating to a borrower's creditworthiness. Certain of these statutes and
regulations also apply to the Company's leasing activities. In addition,
Advanta Mortgage and its subsidiaries are subject to licensure and regulation
in various states as mortgage bankers, mortgage brokers, and originators,
sellers and servicers of mortgage mortgage loans.
DIVIDENDS AND TRANSFERS OF FUNDS. There are various legal limitations on the
extent to which Colonial National can finance or otherwise supply funds through
dividends, loans or otherwise to the Company and its affiliates. The prior
approval of the Comptroller is required if the total of all dividends declared
by Colonial National in any calendar year exceeds its net profits (as defined)
for that year combined with its retained net profits for the preceding two
years, less any required transfers to surplus accounts. In addition, Colonial
National may not pay a dividend in an amount greater than its undivided profits
then on hand after deducting its losses and bad debts. The Comptroller 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 Comptroller could claim that a dividend
payment might under some circumstances be an unsafe or unsound practice.
Colonial National is also subject to restrictions under Sections 23A and 23B of
the Federal Reserve Act. These restrictions limit the transfer of funds to the
Company and certain other affiliates, as defined in that Act, in the form of
loans, extensions of credit, investments or purchases of assets, and they
require generally that Colonial National's transactions with its affiliates be
on terms no less favorable to the bank than comparable transactions with
unrelated third parties. These transfers by Colonial National to the Company
or any single affiliate are limited in amount to 10% of Colonial National's
capital and surplus and transfers to all affiliates are limited in the
aggregate to 20% of Colonial National's capital and surplus. Furthermore, such
loans and extensions of credit are also subject to various collateral
requirements. In addition, in order for the Company to maintain its
grandfathered exemption under CEBA, Colonial National may not make any loans to
the Company or any of its subsidiaries.
The Company's insurance subsidiaries are insurance companies organized under
and regulated by Arizona law. Arizona insurance regulations restrict the
amount of dividends which an insurance Company may distribute without the prior
consent of the Director of Insurance.
GENERAL. Because the banking and finance businesses in general are the
subject of such extensive regulation at both the state and federal levels, and
because numerous legislative and regulatory
11
proposals are advanced each year which, if adopted, could affect the Company's
profitability or the manner in which the Company conducts its activities, the
Company cannot now predict the extent of the impact of any such new laws or
regulations.
Various legislative proposals have been introduced in Congress in recent years,
including, among others, proposals relating to imposing a statutory cap on
credit card interest rates, permitting interstate branching by banks,
permitting affiliations between banks and commercial or securities firms, and
proposals which would place new restrictions on a lender's ability to utilize
pre-screening of consumers' credit reports through credit reporting agencies
(credit bureaus) in connection with the lender's direct marketing efforts. It
is impossible to determine whether any of these proposals will become law and,
if so, what impact they will have on the Company. In September 1992, the
Federal Communications Commission established rules implementing the Telephone
Consumer Protective Act of 1991 which limits telephone solicitations to
residences. Because the statute exempts telemarketing to existing or former
customers, it will not materially impact the Company's current business
operations.
COMPETITION
As a marketer of credit products, the Company faces intense competition from
numerous providers of financial services. Many of these companies are
substantially larger and have more capital and other resources than the
Company. Competition among lenders can take many forms including convenience
in obtaining a loan, customer service, size of loans, interest rates and other
types of finance or service charges, duration of loans, the nature of the risk
which the lender is willing to assume and the type of security, if any,
required by the lender. Although the Company believes it is generally
competitive in most of the geographic areas in which it offers its services,
there can be no assurance that its ability to market its services successfully
or to obtain an adequate yield on its loans will not be impacted by the nature
of the competition that now exists or may develop.
In seeking investment funds from the public, the Company faces competition from
banks, savings institutions, money market funds, credit unions and a wide
variety of private and public entities which sell debt securities, some of
which are publicly traded. Many of the competitors are larger and have more
capital and other resources than the Company. Competition relates to such
matters 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 his 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.
EMPLOYEES
As of December 31, 1993, the Company had 1,614 employees, up from 1,327
employees at the end of 1992. The Company believes that it has good
relationships with its employees. None of its employees is represented by a
collective bargaining unit.
12
ITEM 2. PROPERTIES.
The Company leases an aggregate of approximately 189,000 square feet of office
space in six office buildings located in Horsham, Pennsylvania, a Philadelphia
suburb, and owns a 95,000 square foot building in Horsham. The Company also
leases an aggregate of approximately 75,000 square feet of office space for its
Advanta Mortgage offices in California, New Jersey, New York and Maryland, and
41,000 square feet of office space for its Advanta Leasing offices in New
Jersey.
The Company's principal executive and Colonial National's principal operating
offices are currently located in approximately 81,000 square feet of leased
space in two office buildings in Delaware.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Registrant or any
of its subsidiaries is a party or of which any of their property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers of the Company listed below was elected by the
Board of Directors, to serve at the pleasure of the Board in the capacities
indicated.
Date Elected to
Name Age Office Current Position
- - - -------------------------------------------------------------------------------------------------------------
Dennis Alter 51 Chairman of the Board 1972
and Chief Executive Officer
Alex W. "Pete" Hart 54 Executive Vice Chairman and 1994
Director
Richard A. Greenawalt 50 President, Chief Operating 1987
Officer and Director
Warren Kantor 52 Vice Chairman and Director 1993
David D. Wesselink 51 Senior Vice President and 1993
Chief Financial Officer
Robert A. Marshall 53 Executive Vice President and 1993
Group Executive,
Consumer Financial Services
Milton Riseman 57 Senior Vice President, and President 1994
of Advanta Mortgage Corp. USA
Albert E. Lindenberg 41 President and Director, 1988
Advanta Leasing Corp.
Ronald W. Averett 37 Vice President 1988
Jeffrey D. Beck 45 Vice President and Treasurer 1992
John J. Calamari 39 Vice President, Finance 1988
Katharin S. Dyer 36 Vice President, Marketing 1992
Jeffrey L. Fread 37 Vice President, Asset Quality 1987
Mitchell S. Fried 41 Vice President, Strategic Planning 1992
and Business Development
Michael A. Girman 44 Vice President, Audit and Control 1991
John Hofmann 47 Vice President, Human Resources 1987
Edward Millman 42 Vice President and Chief Financial 1993
Officer, Consumer Financial Services
Harry F. Perlet, III 51 Vice President, Insurance and 1988
President, Advanta Insurance
Companies
Gene S. Schneyer 40 Vice President, Secretary 1989
and General Counsel
14
Mr. Alter became Executive Vice President and a director of the Company in
1967. He was elected President and Chief Executive Officer in 1972, and
Chairman of the Board of Directors in August 1985. In February 1986, he
relinquished the title of President.
Mr. Hart joined the Company in March 1994 as Executive Vice Chairman. For the
five years prior to that he had been President and Chief Executive Officer of
MasterCard International, Inc., a worldwide association of over 29,000 member
financial institutions. Prior to joining MasterCard in November 1988, Mr. Hart
was Executive Vice President of First Interstate Bancorp, Los Angeles,
California.
Mr. Greenawalt was elected President and Chief Operating Officer of the Company
in November 1987. Prior to joining the Company, Mr. Greenawalt served as
President of Transamerica Financial Corp., Los Angeles, California, from May
1986. For the 15 years prior to that, Mr. Greenawalt served in various
capacities with Citicorp, including most recently as Chairman and Chief
Executive Officer of Citicorp Person-to-Person, Inc., St. Louis, Missouri, and,
prior to that, as President and Chief Executive Officer of Citicorp Retail
Services, Inc., New York, New York.
Mr. Kantor became a Senior Vice President of the Company in April 1986, a
director in May 1986, Chief Financial Officer in September 1986 and Executive
Vice President in December 1986. In November 1993, he was promoted to the
position of Vice Chairman, and he relinquished the title of Chief Financial
Officer. Prior to joining the Company, Mr. Kantor was the partner in charge of
the Financial Services Division of Arthur Andersen & Co. in Philadelphia,
Pennsylvania where he served for more than ten years, and was also the audit
partner assigned to the Company's account.
Mr. Wesselink joined the Company in November 1993 as Senior Vice President and
Chief Financial Officer. Prior to joining the Company, Mr. Wesselink was Vice
President and Treasurer of Household International. Previous positions held at
Household include Vice President-Director of Research, Group Vice
President-Chief Financial Officer of Household Finance Corporation (HFC) and
Senior Vice President-Chief Financial Officer of HFC.
Mr. Marshall joined the Company in January 1988 and was elected Senior Vice
President in February 1988. Prior to joining the Company, from July 1987 he
was Chief Operations Officer of a Scudder, Stevens & Clark joint venture.
Prior to that, Mr. Marshall served in various capacities at Citibank from 1976.
At the time he left Citibank, he was a Senior Vice President of Citicorp Retail
Services, managing a major portion of its client relationships.
Mr. Riseman came to the Company in June 1992 as Senior Vice President,
Administration. He was appointed to his present position in February 1994.
Prior to joining the Company, Mr. Riseman had 27 years experience with
Citicorp, most recently as Director of Training and Development. Prior to that
he held Citicorp positions as Business Manager for the Long Island Region, Head
of Policy and Administration for New York's Retail Bank, and Chairman of
Citicorp Acceptance Co. which was involved in the financing and leasing of
autos and financing of mobile homes.
Mr. Lindenberg had been the Chairman of the Board and President of an equipment
leasing business, LeaseComm Financial Corporation, from that Company's
inception in June 1985 until its purchase by the Company. Following the
acquisition, Mr. Lindenberg was elected President and Chief Executive Officer
of Advanta Leasing Corp., the successor to LeaseComm. Prior to starting
LeaseComm, Mr. Lindenberg had been with First Pennsylvania Bank, Philadelphia,
Pennsylvania since 1982, where he had served in various capacities, most
recently as Vice President of the national division responsible for that bank's
commercial lending activities in leasing and electronics.
Mr. Averett came to the Company as Vice President in January 1988. Prior to
joining the Company, Mr. Averett worked with Citicorp from 1980 to 1987. Most
of this tenure was in a retail credit card division (CRS) holding a wide array
of positions from financial analyst to credit cycle manager and eventually
Regional Collections Manager.
Mr. Beck joined the Company in 1986 as Senior Vice President of Colonial
National and was elected Vice President and Treasurer in 1992. Prior to
joining the Company, he was Vice President, Fidelity Bank,
15
N.A., responsible for asset/liability planning, as well as for managing a
portfolio of investment securities held at the bank. From 1970 through 1980,
he served in various treasury and planning capacities for Wilmington Trust
Company.
Mr. Calamari joined the Company in May 1988. From May 1985 through April 1988,
Mr. Calamari served in various capacities in the accounting departments of
Chase Manhattan Bank, N.A. and its subsidiaries, culminating in the position of
Chief Financial Officer of Chase Manhattan of Maryland. From 1976 until May
1985, Mr. Calamari was an accountant with the public accounting firm of Peat,
Marwick, Mitchell in New York.
Ms. Dyer joined the Company as Vice President, Marketing in 1992. Prior to
joining the Company, she was Vice President and Director of Marketing for the
Retail Finance Division of MNC Financial. From 1985 to 1989, she was Director,
Product Development and Management at the Student Loan Marketing Association
and had previously held marketing management positions with Citicorp in their
credit card, mortgage and consumer finance businesses.
Mr. Fread joined the Company in 1986 as Director of Internal Audit, and was
elected to the office of Vice President, Asset Quality in June 1987. Prior to
joining the Company, he was an audit manager for Arthur Andersen & Co. where he
was responsible for audit and consulting engagements for a variety of financial
service companies.
Mr. Fried joined the Company as Vice President, Strategic Planning and Business
Development in 1992. Prior to joining the Company, he was Vice President, New
Business Development for Chase Manhattan's Direct Response Banking Sector.
Prior to that position, Mr. Fried had 11 years of senior level marketing,
planning and development experience in the Credit Card, Consumer Branch Banking
and Private Label Retail Credit Divisions at Citicorp.
Mr. Girman joined the Company as Vice President, Accounting Operations,
Policies and Procedures in July 1988, and was elected Vice President, Audit and
Control, in April 1991. Prior thereto, Mr. Girman served as Vice President,
Management Accounting and Accounting Policies and Procedures for The Chase
Manhattan Bank (USA), N.A. from April 1985 until joining the Company.
Mr. Hofmann came to the Company as Director of Human Resources in November 1986
and was elected Vice President, Human Resources in March 1987. Prior to
joining the Company, he was Manager, Human Resources Planning and Development
for Subaru of America, Inc. from October 1984, and Manager, Management and
Organization Development for Shared Medical Systems Corporation from
March 1981 until October 1984.
Mr. Millman joined the Company in September 1989 and was elected Assistant
Treasurer in July 1990 and Vice President, Corporate Funds Management in August
1991. In November 1993, he became Chief Financial Officer of the Consumer
Financial Services unit. Prior to joining the Company, Mr. Millman served as
Director of Financial Planning for Knight Ridder, Inc. from March 1987 to
January 1988, and as Chief Financial Officer of Osteotech, Inc. from January
1988 to September 1989.
Mr. Perlet joined the Company in November 1987, and was elected as Vice
President, Insurance in June 1988. Prior to joining the Company, Mr. Perlet
was with Colonial Penn Group, Inc. for 13 years, where he served in a variety
of capacities, most recently as Senior Vice President.
Mr. Schneyer joined the Company as Associate General Counsel in September 1986
and was elected to the offices of Vice President, Secretary and General Counsel
in March 1989. Prior to joining the Company, from October 1983, Mr. Schneyer
was an attorney in the Legal Department of Allied-Signal, Inc., Morristown, New
Jersey.
16
ADVANTA CORP. AND SUBSIDIARIES
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDEND POLICY
- - - ---------------------------------------------
In April 1992, the Company approved a dual class stock plan which resulted in
an effective two-for-one stock split and established two classes of common
stock effect May 5, 1992. On September 23, 1993, the Board of the Directors
approved a three-for-two stock split effected in the form of a 50% stock
dividend on both the class A and class B common Stock to shareholders of record
as of October 4, 1993, which dividend was paid on October 15, 1993. All share
and per share amounts have been adjusted to reflect this stock split as a
result of the stock dividend. The Company's common is traded on the over
the counter market on NASDAQ National Market system under the the trading
symbols ADVNB (non-voting common stock) and ADVNA (voting common stock).
Following are the high and low 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 Declared
- - - -----------------------------------------------------------
Class A:
- - - --------
March 1992 $16.75 $ 11.50 $.02
June 1992 15.75 9.00 .027
September 1992 15.50 10.33 .027
December 1992 21.83 10.67 .033
March 1993 29.33 19.00 .033
June 1993 32.50 24.17 .042
September 1993 41.50 29.83 .042
December 1993 46.75 29.25 .05
Class B:
- - - --------
June 1992 $12.83 $ 7.75 $.032
September 1992 13.83 9.33 .032
December 1992 19.67 9.67 .04
March 1993 25.33 16.00 .04
June 1993 26.50 20.17 .05
September 1993 36.50 25.33 .05
December 1993 38.50 25.00 .06
- - - -----------------------------------------------------------
At December 31, 1993, the Company had approximately 1,000 and 850 holders of
record of Class B and Class A common stock, respectively.
17
ADVANTA CORP. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts) Year Ended December 31,
- - - ------------------------------------------------------------------------------------------------------------
Five Year
1993 1992 1991 1990 1989 1988 CAGR(2)
- - - ------------------------------------------------------------------------------------------------------------ ----------
SUMMARY OF OPERATIONS
Net interest income $ 72,078 $ 68,694 $ 69,252 $ 56,855 $ 45,084 $ 63,030 2.7%
Noninterest revenues 255,580 193,144 133,357 85,894 67,200 41,882 43.6
Net operating revenues(1) 327,658 261,838 202,609 133,839 93,698 102,670 26.1
Provision for credit
losses 29,802 47,138 55,461 42,411 26,047 21,895 6.4
Operating expenses 174,601 137,600 107,829 77,808 73,623 90,206 *
Income (loss) before
income taxes and
extraordinary items 123,255 77,100 39,319 22,530 12,614 (7,189) *
Income (loss) before
extraordinary items 77,920 48,037 25,165 15,095 8,765 (6,588) *
Net income (loss) 76,647 48,037 25,165 15,095 12,033 (9,088) *
- - - ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA(3)
Income (loss) before
extraordinary items $ 1.95 $ 1.38 $ .81 $ .53 $ .31 $ (.25) *
Net income (loss) 1.92 1.38 .81 .53 .42 (.34) *
Cash dividends
declared(4)
Class A .167 .107 .063 .037 .033 .00 *
Class B .200 .104 N/A N/A N/A N/A *
Book value 8.82 5.22 3.70 2.60 2.17 1.77 37.9%
Average common shares
outstanding(5) 39,777 34,590 31,044 28,053 28,389 26,835 8.2
Closing stock price
Class A 33.25 21.58 11.50 3.33 3.29 1.44 87.4
Class B 29.00 19.33 N/A N/A N/A N/A *
- - - ------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION--YEAR
END
Investments and money
market instruments $ 542,222 $ 521,567 $ 270,267 $ 187,631 $ 241,869 $ 238,466 17.9%
Gross receivables
Owned 1,277,305 998,244 1,273,420 1,129,493 947,002 828,663 9.0
Securitized 3,986,923 2,721,726 1,573,164 980,856 590,020 409,000 57.7
Managed 5,264,228 3,719,970 2,846,584 2,110,349 1,537,022 1,237,663 33.6
Total assets
Owned 2,141,382 1,775,067 1,716,350 1,450,942 1,297,788 1,171,049 12.8
Managed 6,128,305 4,496,793 3,289,514 2,431,798 1,887,808 1,580,049 31.1
Deposits 1,254,881 1,204,486 1,205,035 1,052,322 976,641 876,337 7.4
Long-term debt 368,372 173,668 112,609 80,990 79,030 83,795 34.5
Stockholders' equity 342,741 174,870 118,859 70,895 61,595 50,431 46.7
Stockholders' equity and
long-term debt 711,113 348,538 231,468 151,885 140,625 134,226 39.6
- - - ------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Return on average assets 3.91% 2.82% 1.63% 1.09% .92% (.73)% *
Return on average equity 27.50 33.32 27.09 23.28 21.53 (16.50) *
Equity/Owned assets 16.01 9.85 6.93 4.88 4.75 4.31 *
Dividend payout 9.56 7.69 7.85 6.90 7.67 -- *
Owned net interest margin 4.85 5.07 5.68 5.48 4.92 6.50 *
Managed net interest
margin(6) 7.77 8.05 7.54 6.70 6.04 7.01 *
- - - ------------------------------------------------------------------------------------------------------------------------
(1) Excludes gains on sales of credit card accounts in 1988-1990.
(2) Compound annual growth rate from December 31, 1988.
(3) All share and per share amounts have been adjusted to reflect an effective three-for-two stock split as a result of the
October 15, 1993 stock dividend.
(4) 1992 cash dividends include dividends for three quarters on the Class B common stock and the full year on the Class A common
stock, adjusted to reflect the effective stock split.
(5) Includes common stock equivalents.
(6) Combination of owned interest earning assets/interest-bearing liabilities and securitized credit card assets/liabilities.
* Not meaningful.
18
ADVANTA CORP. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
Net income for 1993 rose to $76.6 million or $1.92 per share. This reflects
increases of 60% and 39%, respectively, from the $48.0 million or $1.38 per
share reported in 1992. Net income before extraordinary item was $77.9 million
or $1.95 per share, increases of 62% and 41%, respectively, from 1992. Earnings
per share for 1993 incorporated a 15% increase in the number of common shares
outstanding versus 1992, reflecting an equity offering by the Company in March
1993. Earnings per share for 1992 have been adjusted to reflect an effective
three-for-two stock split as a result of the October 15, 1993 stock dividend.
Earnings for 1993 increased primarily as a result of a $1.1 billion or 34%
increase in average managed receivables, continued improvement in credit
quality with the total managed charge-off rate decreasing from 3.4% in 1992 to
2.9% in 1993, and controlled growth in operating expenses. The Company
continues to securitize a majority of the growth in its receivables and to
report the performance of the securitized receivables as noninterest revenues.
Consequently, the 34% increase in average managed receivables resulted in a
$62.5 million or 32% increase in noninterest revenues to $255.6 million in
1993, from $193.1 million in 1992. As a result of improved credit quality, the
provision for credit losses in 1993 fell to $29.8 million from $47.1 million in
1992. Despite a lower provision, reserve coverage of impaired owned assets was
higher at December 31, 1993 compared to a year ago. Disciplined cost management
resulted in operating expenses increasing only 27%, while average managed
receivables grew 34% and the operating expense ratio fell to 4.1% for 1993
compared to 4.4% in 1992.
Net interest income of $72.1 million for 1993 increased $3.4 million or
5% from 1992 as a result of a $170 million increase in average earning asset
balances, offset by a 22 basis point drop in the owned net interest margin.
The Company is executing a strategy to market a "risk-adjusted" credit card
product in which credit cards are issued with lower rates to customers whose
credit quality is expected to result in a lower rate of credit losses (the
"risk-adjusted" strategy). This strategy resulted in a drop in credit card
yields thereby lowering the owned net interest margin.
Over the last three years, average managed receivables have grown at a
compound annual rate of 34%. This receivable growth has generated higher
financial returns, net income and earnings per share. The Company intends to
continue pursuing a strategy of receivable growth with a goal of increasing
average managed receivables by 30% or more in 1994.
Net income for 1992 of $48.0 million or $1.38 per share increased 91%
and 72%, respectively, from $25.2 million or $.81 per share in 1991.
Earnings increased in 1992 primarily as a result of an $807 million or
34% increase in average managed receivables and a 51 basis point increase in the
managed net interest margin. Average securitized assets rose 67% in 1992
increasing noninterest revenues $59.8 million or 45%. The largest single
component of noninterest revenues, credit card securitization income, rose $38.3
million or 90% as average securitized credit card receivables increased 85%.
The provision for credit losses was down 15% in 1992 compared to 1991 as
a result of lower charge-offs and delinquency levels on owned receivables.
Operating expenses increased 28% with a 34% increase in average managed
receivables, while operating expenses as a percentage of average managed
receivables fell to 4.4% in 1992 from 4.6% in 1991.
NET INTEREST INCOME
(Dollars in thousands)
- - - --------------------------------------------------------------------
1993 1992 1991
- - - --------------------------------------------------------------------
Net interest income before
amortization of deferred
origination costs and fees
and including tax
equivalent interest $80,170 $ 75,083 $78,707
Amortization of deferred
origination costs,
net of deferred fees(1) (7,188) (6,303) (9,026)
Tax equivalent interest (904) (86) (429)
- - - --------------------------------------------------------------------
Net interest income $72,078 $ 68,694 $69,252
====================================================================
(1)See Note 1 to Consolidated Financial Statements.
22
19
ADVANTA CORP. AND SUBSIDIARIES
The owned net interest margin fell to 4.85% in 1993 from 5.07% in 1992, due to
a 173 basis point decrease in the yield on interest earning assets partially
offset by a 151 basis point improvement in the cost of funding those assets. In
1993, the owned net interest margin of 4.85% reflects the benefit of the March
1993 equity offering and increased retained earnings.
Credit card, mortgage and lease receivable securitization activity
shifts revenues from interest income to noninterest revenues. This ongoing
securitization activity reduces the level of higher-yielding receivables on the
balance sheet while increasing the quantity of lower-yielding money market
assets. While the money market assets are subsequently replaced with new
receivables, the active securitization program reduces the average yield of the
on-balance sheet portfolio. Net interest income on securitized credit card
balances is reflected in credit card securitization income. Net interest income
on securitized mortgage loans is reflected in income from mortgage banking
activities, and net interest income on securitized lease receivables is
reflected in leasing revenues, net. All securitization income is included in
noninterest revenues. See Note 1 to Consolidated Financial Statements.
Average managed credit card receivables of $3.0 billion for 1993
increased $755 million or 34% from 1992. This increase can be attributed to
several successful credit card campaigns which generated approximately 853,000
new accounts and a large volume of balance transfers by card- holders. Owned
receivable balances would have been higher in both years had it not been for the
securitization of $1.0 billion of credit card receivables in 1993 and $950
million in 1992. The 241 basis point decline in the yield on owned credit card
receivables was the result of the Company's "risk-adjusted" strategy and the
influence of a predominance of newer, lower-yielding accounts in the owned
portfolio. It is anticipated that these accounts will start repricing upwards in
1994.
Average managed mortgage loans increased to $1.0 billion in 1993, a 34%
increase from $786.3 million in 1992. The average balance of owned mortgage
loans de-creased to $154.2 million in 1993 from $185.6 million in 1992 primarily
due to the securitization of $608 million of receivables in 1993. Mortgage loan
originations of $510 million in 1993 were up $84 million or 20% from 1992.
Yields on owned mortgage loans decreased to 9.91% from 11.40% in 1992 reflecting
the lower rate environment and a significant increase in the proportion of first
lien mortgage loans in the portfolio.
Average managed lease receivables of $154.8 million increased $45
million or 42% from 1992. Average owned balances on leases increased $12.7
million during 1993 due to increased originations and portfolio purchases.
Yields on owned leases increased from 17.46% in 1992 to 18.70% in 1993 due to a
higher amount of late fees.
A significant decline in the owned average cost of funds was experienced
in 1993 as the cost of funds fell to 5.18% from 6.39% in 1992. The rollover of
deposits in a lower rate environment, lower money market rates, and the
Company's entrance into funding markets not previously available to them with a
newly acquired investment-grade rating were the primary reasons for this
decline.
Net interest income of $68.7 million in 1992 dropped slightly from $69.3
million in 1991 primarily as a result of a 61 basis point decline in the owned
net interest margin. This decline in the owned net interest margin was a result
of a 218 basis point decline in yields on interest earning assets partially
offset by a 157 basis point improvement in the cost of funding those assets.
Offsetting this decline in the owned net interest margin was a $96 million
increase in average interest earning asset balances.
The following table provides an analysis of both owned and managed
interest income and expense data, average balance sheet data, net interest
spread (the difference between the yield on interest earning assets and the
average rate paid on interest-bearing liabilities), and net interest margin (the
difference between the yield on interest earning assets and the average rate
paid to fund interest earning assets) for 1991 through 1993. Average owned loan
and lease receivables and the related interest revenues exclude deferred
origination costs and the amortization thereof (see Note 1 to Consolidated
Financial Statements) and include certain loan fees.
23
20
ADVANTA CORP. AND SUBSIDIARIES
INTEREST RATE ANALYSIS
(Dollars in thousands) Year Ended December 31,
- - - ----------------------------------------------------------------------------------------------------
1993 1992
------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- - - ----------------------------------------------------------------------------------------------------
ON-BALANCE SHEET
- - - ------------------------
Interest earning assets:
Receivables:
Credit cards $ 899,650 $ 108,518 12.06% $ 805,604 $ 116,577 14.47%
Mortgage loans 154,210 15,286 9.91 185,596 21,149 11.40
Leases 57,877 10,825 18.70 45,169 7,886 17.46
Other loans 1,911 177 9.26 1,625 179 11.02
----------- --------- ---------- --------
Total receivables 1,113,648 134,806 12.10 1,037,994 145,791 14.05
Federal funds sold 93,507 2,831 3.03 99,426 3,231 3.25
Interest-bearing
deposits 177,942 7,927 4.45 160,318 7,100 4.43
Tax-free securities(1) 42,669 2,585 6.06 2,509 241 9.61
Taxable investments 223,991 11,324 5.06 181,626 12,265 6.75
----------- --------- ---------- ---------
Total interest
earning assets(2) $ 1,651,757 $ 159,473 9.65%(3) $1,481,873 $ 168,628 11.38%(3)
=========== ========= ===== ========== ========= ======
Interest-bearing
liabilities:
Deposits:
Savings $ 214,351 $ 6,984 3.26% $ 195,814 $ 7,706 3.94%
Time deposits
under $100,000 686,159 35,676 5.20 671,442 44,344 6.60
Time deposits of
$100,000 or more 268,064 10,729 4.00 268,853 14,476 5.38
----------- -------- ---------- ---------
Total deposits 1,168,574 53,389 4.57 1,136,109 66,526 5.87
Debt 302,430 22,951 7.59 259,856 23,426 9.01
Other borrowings 59,957 2,963 4.94 68,032 3,593 5.28
----------- -------- ---------- ---------
Total interest-bearing
liabilities 1,530,961 79,303 5.18 1,463,997 93,545 6.39
Net noninterest-bearing
liabilities 120,796 17,876
----------- ----------
Sources to fund interest
earning assets $ 1,651,757 $ 79,303 4.80% $1,481,873 $ 93,545 6.31%
=========== ========= ===== ========== ========= ======
Net interest spread 4.47% 4.99%
===== =====
Net interest margin 4.85% 5.07%
===== =====
OFF-BALANCE SHEET
- - - -------------------------
Average balance on
securitized:
Credit cards $ 2,110,583 $1,449,681
Mortgage loans 895,237 600,738
Leases 96,891 64,152
----------- ----------
Total average securitized
receivables 3,102,711 2,114,571
----------- ----------
Total average managed
receivables $ 4,216,359 $3,152,565
=========== ==========
MANAGED NET INTEREST
ANALYSIS(4)
- - - --------------------------
Interest earning assets $ 3,762,340 $ 479,799 12.75% $2,931,554 $ 409,902 13.98%
Interest-bearing
liabilities $ 3,641,544 $ 187,269 5.14% $2,913,678 $ 173,885 5.97%
Net interest spread 7.61% 8.01%
Net interest margin 7.77% 8.05%
- - - ----------------------------------------------------------------------------------------------------
(Dollars in thousands) Year Ended December 31,
- - - -------------------------------------------------------------------
1991
----------------------------------
Average Average
Balance Interest Rate
- - - -------------------------------------------------------------------
ON-BALANCE SHEET
- - - --------------------------
Interest earning assets:
Receivables:
Credit cards $ 809,246 $128,282 15.85%
Mortgage loans 201,203 24,939 12.39
Leases 69,382 13,258 19.11
Other loans 1,977 257 13.00
---------- --------
Total receivables 1,081,808 166,736 15.41
Federal funds sold 80,482 4,502 5.59
Interest-bearing
deposits 93,327 5,643 6.05
Tax-free securities(1) 12,504 1,248 9.98
Taxable investments 117,282 9,717 8.28
----------- --------
Total interest
earning assets(2) $ 1,385,403 $187,846 13.56%(3)
=========== ======== ======
Interest-bearing liabilities
Deposits:
Savings $ 193,438 $ 11,324 5.85%
Time deposits
under $100,000 599,337 47,245 7.88
Time deposits of
$100,000 or more 306,385 22,226 7.25
----------- -------
Total deposits 1,099,160 80,795 7.35
Debt 197,153 20,239 10.27
Other borrowings 86,697 8,105 9.35
Total interest-bearing ----------- -------
liabilities 1,383,010 109,139 7.89
Net noninterest-bearing
liabilities 2,393
-----------
Sources to fund interest
earning assets $ 1,385,403 $109,139 7.88%
=========== ======== ====
Net interest spread 5.67%
====
Net interest margin 5.68%
====
OFF-BALANCE SHEET
- - - --------------------------
Average balance on
securitized:
Credit cards $ 782,576
Mortgage loans 463,888
Leases 17,332
-----------
Total average securitized
receivables 1,263,796
-----------
Total average managed
receivables $ 2,345,604
===========
MANAGED NET INTEREST
ANALYSIS(4)
- - - -----------------------------
Interest earning assets $ 2,167,979 $325,009 14.99%
Interest-bearing
liabilities $ 2,165,586 $161,406 7.45%
Net interest spread 7.54%
Net interest margin 7.54%
- - - ----------------------------------------------------------------------------------------------------
(1) Interest and average rate computed on a tax equivalent basis using a statutory rate of 35%
in 1993 and 34% in 1992 and 1991.
(2) Includes assets held and available for sale, and nonaccrual loans and leases.
(3) The yields on owned interest earning assets for 1993, 1992 and 1991 were 9.22%, 10.95% and
12.91%, respectively, including the impact of SFAS 91 (See Note 1 to Consolidated Financial
Statements).
(4) Combination of owned interest earning assets/owned interest-bearing liabilities and
securitized credit card assets/liabilities.
24
21
ADVANTA CORP. AND SUBSIDIARIES
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, excluding the amortization of deferred origination costs 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.
(Dollars in thousands)
- - - ---------------------------------------------------------------------------------------------------------------------
1993 vs. 1992 1992 vs. 1991
------------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
------------------------------------- ------------------------------------
Volume Rate Total Volume Rate Total
- - - ---------------------------------------------------------------------------------------------------------------------
Interest income from:
Loan and lease
receivables:
Credit cards $ 12,680 $(20,739) $(8,059) $ (575) $(11,130) $(11,705)
Mortgage loans (3,307) (2,556) (5,863) (1,867) (1,923) (3,790)
Leases 2,347 592 2,939 (4,306) (1,066) (5,372)
Other loans 29 (31) (2) (42) (36) (78)
Federal funds sold (187) (213) (400) 898 (2,169) (1,271)
Interest-bearing
deposits 794 33 827 3,264 (1,807) 1,457
Tax-free securities 2,465 (121) 2,344 (964) (43) (1,007)
Taxable investments 2,503 (3,444) (941) 4,594 (2,046) 2,548
-------- ------- ------ -------- -------- --------
Total interest income(1) 17,324 (26,479) (9,155) 1,002 (20,220) (19,218)
-------- ------- ------ -------- -------- --------
Interest expense on:
Deposits:
Savings 876 (1,598) (722) 137 (3,755) (3,618)
Time deposits
under $100,000 949 (9,617) (8,668) 5,294 (8,195) (2,901)
Time deposits
of $100,000 or more (42) (3,705) (3,747) (2,496) (5,254) (7,750)
Debt 3,519 (3,994) (475) 5,885 (2,698) 3,187
Other borrowings (408) (222) (630) (1,493) (3,019) (4,512)
-------- ------- ------ -------- -------- --------
Total interest expense 4,894 (19,136) (14,242) 7,327 (22,921) (15,594)
-------- ------- ------ -------- -------- --------
Net interest income $ 12,430 $ (7,343) $ 5,087 $(6,325) $ 2,701 $ (3,624)
======================================================================================================================
(1) Includes income from assets held and available for sale.
PROVISION FOR CREDIT LOSSES
- - - ---------------------------
The provision for credit losses of $29.8 million in 1993 decreased $17.3
million or 37% from $47.1 million in 1992. This decrease can be attributed to
lower charge-offs on owned receivables, which on a consolidated basis were 2.4%
of average receivables compared to 3.9% in 1992, and to lower levels of
impaired assets. The owned impaired asset level fell to $22.5 million at
December 31, 1993, from $31.6 million a year ago. Lower delinquency levels
helped to strengthen the Company's reserve coverage of impaired assets to
138.6% at December 31, 1993, from 127.4% a year ago.
During 1993, the Company transferred $11 million of on-balance sheet
unallocated loan loss reserves to increase off-balance sheet mortgage loan
recourse reserves, which reserves are netted against excess mortgage servicing
rights.
The provision for credit losses of $47.1 million in 1992 decreased $8.4
million or 15% from $55.5 million in 1991. This decrease was primarily due to
lower charge-offs on owned receivables and lower impaired asset levels.
A description of the credit performance of the loan portfolio is set
forth under the section entitled "Credit Risk Management."
25
22
ADVANTA CORP. AND SUBSIDIARIES
NONINTEREST REVENUES
(DOLLARS IN THOUSANDS)
- - - -------------------------------------------------------------
1993 1992 1991
- - - -------------------------------------------------------------
Credit card securitization
income $ 135,785 $ 80,761 $ 42,422
Credit card
servicing income 41,593 28,634 15,362
Income from mortgage
banking activities 24,146 24,633 21,417
Credit card interchange
income 18,843 30,693 31,819
Other credit card revenues 11,545 11,752 11,966
Leasing revenues, net 10,317 6,170 3,492
Insurance revenues, net 9,249 7,406 5,851
Other 4,102 3,095 1,028
---------- --------- ---------
Total noninterest
revenues $ 255,580 $ 193,144 $ 133,357
========== ========= =========
For the year:
Noninterest revenues
as a percentage of average
managed receivables 6.1% 6.1% 5.7%
Noninterest revenues of $255.6 million in 1993 increased $62.5 million or 32%
from $193.1 million in 1992.
Due to the securitization of credit card receivables, activity from
securitized account balances normally reported as net interest income and
charge-offs is reported in securitization income and servicing income, both of
which are included in noninterest revenues. Credit card securitization income
increased 68% to $135.8 million from $80.8 million in 1992 while average
securitized credit card receivables increased 46% to $2.1 billion in 1993 from
$1.5 billion in the prior year. Securitization income as a percentage of average
securitized receivables was 6.4% in 1993 compared with 5.6% for 1992. See Note 1
to Con-solidated Financial Statements for further description of securitization
income.
Credit card securitization income is the revenue collected on the
securitized receivables, including interest, interchange income and certain
fees, less the related ex-penses, including interest payments to investors in
the trusts, charge-offs, servicing costs and transaction expenses.
Credit card servicing income increased to $41.6 million in 1993 from
$28.6 million in 1992. Servicing income represents fees paid to the Company for
continuing to service accounts which have been securitized. Such fees
approximate 2% of securitized receivables.
Total interchange income earned represents approximately 1.4% of credit
card purchases. The amount of inter-change paid to the securitization trusts
ranges from 1% to 2% of securitized balances and is included in credit card
securitization income. Interchange income decreased 39% to $18.8 million in 1993
from $30.7 million in 1992 due to a larger proportion of interchange revenues
being included in securitization income. Other credit card revenues, which
include credit insurance, cash advance fees and other credit card related
revenues, were basically flat year-to-year due to an increasing proportion of
credit card revenues becoming part of securitization income. Additionally, the
amortization of annual fee income on owned credit card receivables previously
had been included in other credit card revenues; beginning in 1993, this
amoritization is included as a com-ponent of net interest income.
During 1993, the Company securitized $608 million of mortgage loans
compared to $385 million in 1992. In 1993, increased credit losses on the
securitized portfolio decreased income from mortgage banking activities by
approximately $14 million. Increased prepayments also de-creased income from
mortgage banking activities by $14 million in 1993. Consequently, mortgage
banking income of $24.1 million was relatively flat compared with 1992. See Note
1 to Consolidated Financial Statements for a description of mortgage banking
income.
Noninterest revenues of $193.1 million in 1992 increased $59.7 million
or 45% from $133.4 million in 1991 primarily due to increases in credit card
securitization and servicing income.
26
23
ADVANTA CORP. AND SUBSIDIARIES
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
- - - -------------------------------------------------------------
1993 1992 1991
- - - -------------------------------------------------------------
Salaries and
employee benefits $ 65,469 $ 51,599 $ 42,566
Marketing 18,742 13,845 8,135
External processing 16,604 12,993 10,871
Credit card fraud losses 13,779 13,134 10,820
Professional fees 10,761 5,700 3,236
Postage 9,818 7,806 6,278
Credit & collection expense 7,055 5,273 4,140
Equipment expense 6,550 5,629 5,433
Occupancy expense 6,247 5,272 4,591
Telephone expense 5,402 4,379 3,346
Other 14,174 11,970 8,413
---------- --------- ---------
Total operating
expenses $ 174,601 $ 137,600 $ 107,829
========== ========= =========
At year end:
Number of accounts
managed (000's) 2,827 2,252 2,125
Number of employees 1,614 1,327 1,082
For the year:
Operating expenses
as a percentage of average
managed receivables 4.1% 4.4% 4.6%
Operating expenses of $174.6 million for 1993 increased $37.0 million or 27%
from $137.6 million in 1992, driven by a 34% growth in average managed
receivables. The increase in operating expenses can be primarily attrib-uted
to: (a) a $13.9 million, or 27%, increase in salaries and employee benefits
with a 22% increase in the number of employees from 1992, (b) a $4.9 million
increase in marketing expenses as the Company promoted its finan-cial products
as well as enhanced its general public visibility, (c) a $3.6 million increase
in external processing resulting primarily from a 26% increase in the number of
accounts managed year-to-year, (d) a $5.1 million increase in professional fees
as the Company invested in long-term planning projects, and (e) an overall
increase in credit card related costs due to a 27% increase in the number of
accounts managed.
Operating expenses of $137.6 million for 1992 were up $29.8 million or
28% from $107.8 million in 1991 while average managed receivables grew 34%. This
increase in operating expenses can be primarily attributed to: (a) a $9.0
million, or 21%, increase in salaries and employee benefits with a 23% increase
in the number of employees year-to-year, (b) a $5.7 million increase in
marketing expenses to market the Company's financial products and enhance its
general visibility, (c) a $2.3 million increase in credit card fraud losses, due
to the growth in managed credit card receivables and a higher incidence of
fraud, and (d) an overall increase in credit card related costs due to a 15%
increase in the number of accounts managed. In 1991, credit card fraud losses
included $3.9 million related to the acceleration of charge-offs (see discussion
in "Asset Quality" on page 30). The operating expense ratio fell to 4.4% in 1992
from 4.6% in 1991.
INCOME TAXES
The Company's consolidated income tax expense was $45.3 million for 1993, or an
effective tax rate of 37%, compared to tax expense of $29.1 million, or 38%, in
1992 and tax expense of $14.2 million, or 36%, in 1991. The decrease in the
effective tax rate from 1992 to 1993 resulted from a higher level of tax-free
income, while the increase in the effective tax rate from 1991 to 1992 resulted
from higher pretax income and less tax-free income year-to-year.
ASSET/LIABILITY MANAGEMENT
- - - -------------------------------------------------------------------------------
The financial condition of Advanta Corp. is managed with a focus on maintaining
high credit quality standards, disci-plined interest rate risk management and
prudent levels of leverage and liquidity.
INTEREST RATE SENSIVITY
Interest rate sensitivity refers to the net interest income volatility
resulting from changes in interest rates, product spread variability and
mismatches in the repricing intervals between interest-rate-sensitive assets
and liabilities.
The Company attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating the
risk inherent in its asset and liability structure, including securitized
assets. This risk arises from continuous changes in the Company's
asset/liability mix, market interest rates, the yield curve, prepayment trends
and the timing of cash flows. Computer simulations are used to evaluate net
interest income volatility under varying rate, spread and volume projections
over monthly time periods of up to two years.
In managing its interest rate sensitivity position, the Company
periodically securitizes, sells and purchases assets, alters the mix and term
structure of its retail and institutional funding base and complements its basic
business activities by changing the investment portfolio and short-
27
24
ADVANTA CORP. AND SUBSIDIARIES
term asset positions. The Company has primarily utilized variable rate funding
in pricing its credit card securitization transactions in an attempt to match
the pricing dynamics of the underlying receivables sold to the trusts. Although
credit card receivables are priced at a spread over the prime rate, they
generally contain interest rate floors. These floors have the impact of
converting the credit card receivables to fixed rate receivables in a low
interest rate environment. In instances when a significant portion of credit
card receivables are at their floors, the Company may convert part of the
underlying funding to a fixed rate by using interest rate hedges, swaps and
fixed rate securitizations. In pricing mortgage and lease securitizations,
primarily fixed rate fund-ing is used as nearly all of the receivables sold to
investors carry a fixed rate.
Interest rate fluctuations affect net interest income at virtually all
financial institutions. While interest rate volatility does have an effect on
net interest income, other factors also contribute significantly to changes in
net inter-est income. Specifically, within the credit card portfolio, pricing
decisions and customer behavior regarding convenience usage affect the yield on
the portfolio. These factors may counteract or exacerbate income changes due to
fluc-tuating interest rates. The Company closely monitors interest rate
movements, competitor pricing and consumer behavioral changes in its ongoing
analysis of net interest income sensitivity.
LIQUIDITY, FUNDING, AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, both long-
and short-term, through active management of both assets and liabilities.
During 1993, the Company, through its subsidiaries, securitized $1.0 billion of
credit card receivables, $608 million of mortgage loans and $68 million of
lease receivables. Cash generated from these transactions was temporarily
invested in short-term, high quality investments at money market rates awaiting
redeployment to pay down deposits and to fund future credit card, mortgage loan
and lease receivable growth. See Consolidated Statements of Cash Flows for more
information regarding liquidity, funding and capital resources. In addition,
see Note 5 to Consolidated Financial Statements and Supplemental Schedules
thereto for additional information regarding the Company's investment
portfolio.
Over the last six years, the Company has accessed the securitization
market to efficiently support its growth strate-gy. While securitization should
continue to be a reliable source of funding for the Company, other funding
sources are available and include deposits, subordinated debt, medium-term notes
and the ability to sell assets and raise additional equity.
At December 31, 1993, the Company was carrying $668 million of loans
available for sale. The fair value of such loans was in excess of their carrying
value at year end. In connection with managing liquidity and asset/liability
management, the Company had $308 million of investments available for sale at
December 31, 1993. See Note 18 to Consolidated Financial Statements for fair
value disclosures.
In August 1993, the Company's principal subsidiary, Colonial National
Bank USA ("Colonial National" or the "Bank"), sold $50 million of subordinated
notes which had received an investment-grade rating and qualified as Tier 2
capital.
The following table details the composition of the deposit base at year
end for each of the past five years.
Composition of Deposit Base
(Dollars in millions) As of December 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
-------------- ---------------- ---------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
- - - -----------------------------------------------------------------------------------------------------------------------
Demand deposits $ 33.4 3% $ 24.8 2% $ 20.2 2% $ 8.5 1% $ 7.7 1%
Money market savings 220.7 17 210.7 17 197.1 16 192.8 18 138.9 14
Time deposits of
$100,000 or less 961.4 77 926.8 77 932.5 77 762.9 73 755.6 77
Time deposits of
more than $100,000 39.4 3 42.2 4 55.2 5 88.1 8 74.4 8
- - - -----------------------------------------------------------------------------------------------------------------------
Total deposits $1,254.9 100% $ 1,204.5 100% $1,205.0 100% $1,052.3 100% $976.6 100%
=======================================================================================================================
28
25
ADVANTA CORP. AND SUBSIDIARIES
It is expected that deposits will increase slightly in 1994, as the Bank is
likely to expand its asset base within the limits permitted under the
Competitive Equality Banking Act of 1987 ("CEBA"). As a grandfathered
institution under CEBA, the Company must limit the Bank's asset growth to 7%
per annum. For the fiscal CEBA year ended September 30, 1993, the Bank's
average assets did not exceed the allowable amount and, accordingly, the Bank
was in full compliance with CEBA growth limits.
Deposits at December 31, 1993 include $38 million of deposits at
Colonial National Financial Corp. ("CNF"), a Utah state-chartered, FDIC- insured
industrial loan corporation (a wholly-owned subsidiary of the Company). CNF's
assets or operations are not currently material to the Company, and the Company
does not expect them to become material in the near term.
During 1993, the debt securities of Advanta Corp. achieved
investment-grade ratings from the nationally recognized rating agencies. These
ratings have allowed the Company to further diversify its funding sources. In
November 1993, the Company filed a shelf registration statement with the
Securities and Exchange Commission for $1 billion of debt securities, and
subsequently sold $150 million of three-year notes under this registration
statement. The Company also anticipates selling up to an additional $500 million
of medium-term notes as needed. In addition, steady building of liquidity and
capital in 1993 and 1992 was achieved as a result of $76.5 million of dividends
from subsidiaries in 1993 and $40.0 million in 1992, and retained earnings of
$69.3 million in 1993 and $44.0 million in 1992. The Board of Directors
currently intends to have the Company pay regular quarterly dividends to its
shareholders, maintaining a 20% premium on the dividend paid on the Class B
shares; however, the Company plans to reinvest the majority of its earnings to
support future growth.
During 1993, the Company raised $90 million in new equity through a 3.0
million share (pre-split) Class B common stock offering. Proceeds were used to
support future growth.
Other elements contributed to liquidity at the subsidiary level (other
than the Bank) in 1993. Advanta Mortgage Corp. USA ("Advanta Mortgage") had
lines of credit totaling $190 million, which, because of other available funding
sources, were not renewed when they expired in December 1993. Advanta Leasing
Corp. ("Advanta Leasing") also has lines of credit totaling approximately $86
million.
While there are no specific capital requirements for Advanta Corp., the
Office of the Comptroller of the Currency requires that Colonial National
maintain a risk-based capital ratio of at least 8%. Colonial National's
risk-based capital ratio of 12.06% at December 31, 1993 was in excess of the
required level and, in fact, exceeded the mini-mum required capital level of 10%
for designation as a "well capitalized" depository institution. The Company
intends to take the necessary actions to maintain Colonial National as a "well
capitalized" bank. In addition, the Company is subject to various rate setting
rules and capital regulations related to the Advanta Insurance Companies. At
December 31, 1993, the Company was in full compliance with these rules and
regulations.
CAPITAL EXPENDITURES
The Company spent $11.3 million for capital expenditures in 1993, primarily for
the purchase of a building, improvements to that building and additional space
in other build-ings, office and voice communication equipment and furniture and
fixtures. This compared to $5.3 million for capital expenditures in 1992 and
$4.2 million in 1991.
In 1994, the Company anticipates capital expenditures to exceed those of
1993 as its facilities are expanding and the Company is continuing to upgrade
its voice and comm-unication systems.
In 1994, the Company anticipates that its marketing expenditures will
exceed those of 1993 as the Company continues to manage account retention,
originate new accounts and develop new consumer products for its customers.
CREDIT RISK MANAGEMENT
- - - -------------------------------------------------------------------------------
Management regularly reviews the loan portfolio in order to evaluate the
adequacy of the reserve for credit losses. The evaluation includes such factors
as the inherent credit quality of the loan portfolio, past experience, current
eco-nomic conditions, projected credit losses and changes in the composition of
the loan portfolio. The reserve for credit losses is maintained for on-balance
sheet receivables. The on-balance sheet reserve is intended to cover all credit
losses inherent in the owned loan portfolio. With regard to securitized assets,
anticipated losses and related recourse reserves are reflected in the
calculations of Securitization Income and Amounts Due From Securitizations.
Recourse reserves are intended to cover all probable credit losses over the
life of the securitized receivables.
29
26
ADVANTA CORP. AND SUBSIDIARIES
The reserve for credit losses on a consolidated basis was $31.2
million, or 2.4% of receivables, at December 31, 1993, down from $40.2 million,
or 4.0% of receivables, in 1992. Due to improved credit quality, this reserve
level resulted in higher reserve coverage of impaired assets (nonperforming
assets and accruing loans past due 90 days or more on credit cards) of 138.6%
at December 31, 1993, compared to 127.4% at December 31, 1992. Reserve
cover-age of impaired credit card assets was 183.7% at December 31, 1993, down
slightly from 187.6% at year end 1992.
The reserve for credit losses on a consolidated basis increased to $40.2
million, or 4.0% of receivables, in 1992 up from $36.4 million, or 2.9% of
receivables, in 1991. This reserve level and a decrease in impaired assets
resulted in higher reserve coverage of impaired assets.
ASSET QUALITY
Impaired assets include both nonperforming assets (mortgage loans and
leases past due 90 days or more, real estate owned, credit card receivables due
from cardholders in bankruptcy, and off-lease equipment) and accruing loans
past due 90 days or more on credit cards. The carrying values for both real
estate owned and equipment held for lease or sale are based on net realizable
value after taking into account holding costs and costs of disposition and are
reflected in other assets.
On the total managed portfolio, impaired assets were $95.1 million, or
1.8% of receivables, at year end 1993 compared to $92.7 million, or 2.5% of
receivables, in 1992. Nonperforming assets on the total managed portfolio were
$63.6 million, or 1.2% of receivables, compared to $57.8 million, or 1.6%, in
1992. A key credit quality statistic, the 30-plus-day delinquency rate on
managed credit cards, dropped to 2.4% from 3.7% a year ago. The total managed
charge-off rate for 1993 was 2.9%, compared to 3.4% for 1992. The charge-off
rate on managed credit cards was 3.5% for 1993, down from 4.5% for 1992.
On the total owned portfolio, impaired assets were $22.5 million, or
1.8% of receivables, in 1993 compared to $31.6 million, or 3.2%, in 1992. Gross
interest income that would have been recorded in 1993 and 1992 for owned
nonperforming assets, had interest been accrued through-out the year in
accordance with the assets' original terms, was approximately $1.5 million and
$1.8 million, respectively. The amount of interest on nonperforming assets
included in income for 1993 and 1992 was $.3 million and $.5 million,
respectively.
Past due loans represent accruing loans that are past due 90 days or
more as to collection of principal and interest. Credit card receivables, except
those on bankrupt, decedent and fraudulent accounts, continue to accrue interest
until the time they are charged off at 186 days contractual delinquency. In
contrast, all mortgage loans and leases are put on nonaccrual when they become
90 days past due. Owned credit card receivables past due 90 days or more and
still accruing interest were $11.0 million or 1.0% of receivables at December
31, 1993, compared to $16.3 million, or 2.2% of receivables, a year ago.
Through 1990, when the Company received notice that a credit cardholder
had filed a bankruptcy petition or was deceased, the Company established a
reserve equal to the full balance of the receivable. The receivable, if not
paid, would be charged off in accordance with the Com-pany's normal credit card
charge-off policy at 186 days contractual delinquency. Likewise, receivables in
accounts identified as fraudulent would be reserved against and written off (as
an operating expense) when they became 186 days contractually delinquent. These
policies are consistent with many leading competitors in the credit card
industry.
During 1991, the Company adopted a new policy for the charge-off of
bankrupt, decedent and fraudulent credit card accounts. Under the new policy,
the Company charges off bankrupt or decedent accounts within 30 days of
notification and accounts suspected of being fraudulent after a 90-day
investigation period, unless the investigation shows no evidence of fraud.
Consequently, in 1991, both newly identified bankrupt, decedent and fraudulent
accounts, as well as those previously identified, were written off. The 1991
charge-off rates included in the following tables exclude the effect of this
acceleration.
With respect to the mortgage loan business, in 1993 the Company
continued to face several difficult challenges: softening real estate values,
increased prepayments and a higher level of charge-offs. The managed charge-off
rate on mortgage loans increased from .8% in 1992 to 1.3% in 1993. The 1993
charge-off amount includes $3.0 million of accelerated charge-offs. The managed
mortgage charge-off rate in 1994 is anticipated to stay at a high level.
30
27
ADVANTA CORP. AND SUBSIDIARIES
The following tables provide a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
(DOLLARS IN THOUSANDS) DECEMBER 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- - - -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED--MANAGED
Nonperforming assets $ 63,589 $ 57,797 $ 47,587 $ 41,126 $ 25,847
Accruing loans past due 90 days or more 31,514 34,890 33,250 21,463 14,622
Impaired assets 95,103 92,687 80,837 62,589 40,469
Total loans 30 days or more delinquent 186,297 184,670 159,345 126,977 86,509
As a percentage of gross receivables:
Nonperforming assets 1.2% 1.6% 1.7% 2.0% 1.7%
Accruing loans past due 90 days or more .6% .9% 1.2% 1.0% 1.0%
Impaired assets 1.8% 2.5% 2.8% 3.0% 2.6%
Total loans 30 days or more delinquent 3.5% 5.0% 5.6% 6.0% 5.6%
Net charge-offs:
Amount $ 122,715 $108,606(1) $ 89,072 $ 46,270 $ 35,961
As a percentage of average gross
receivables 2.9% 3.4%(1) 3.2%(2) 2.7% 2.7%
- - - -----------------------------------------------------------------------------------------------------------------------
CREDIT CARDS--MANAGED
Nonperforming assets $ 10,881 $ 7,592 $ 5,586 $ 13,615 $ 7,152
Accruing loans past due 90 days or more 31,489 34,890 33,239 21,424 14,560
Impaired assets 42,370 42,482 38,825 35,039 21,712
Total loans 30 days or more delinquent 94,035 99,308 97,100 77,712 53,123
As a percentage of gross receivables:
Nonperforming assets .3% .3% .3% .9% .7%
Accruing loans past due 90 days or more .8% 1.3% 1.6% 1.5% 1.4%
Impaired assets 1.1% 1.6% 1.9% 2.4% 2.1%
Total loans 30 days or more delinquent 2.4% 3.7% 4.8% 5.4% 5.2%
Net charge-offs:
Amount $ 105,966 $100,465 $ 84,113 $ 43,115 $ 31,850
As a percentage of average gross
receivables 3.5% 4.5% 4.4%(2) 3.8% 3.9%
- - - -----------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS--MANAGED
Nonperforming assets $ 50,418 $ 46,755 $ 37,371 $ 22,703 $ 15,779
Total loans 30 days or more delinquent 75,747 69,962 51,137 39,001 27,786
As a percentage of gross receivables:
Nonperforming assets 4.4% 5.1% 5.2% 3.9% 3.6%
Total loans 30 days or more delinquent 6.6% 7.7% 7.1% 6.6% 6.4%
Net charge-offs:
Amount $ 13,991 $ 5,924(1) $ 3,031 $ 1,335 $ 415
As a percentage of average gross
receivables 1.3% .8%(1) .5% .3% .1%
- - - -----------------------------------------------------------------------------------------------------------------------
LEASES--MANAGED
Nonperforming assets $ 2,290 $ 3,432 $ 4,625 $ 4,808 $ 2,916
Total loans 30 days or more delinquent 16,476 15,320 11,048 10,212 5,494
As a percentage of receivables:
Nonperforming assets 1.2% 2.5% 4.5% 5.8% 4.0%
Total loans 30 days or more delinquent 8.7% 11.1% 10.8% 12.2% 7.6%
Net charge-offs:
Amount $ 2,759 $ 2,352 $ 2,130 $ 2,226 $ 1,247
As a percentage of average receivables 1.8% 2.2% 2.5% 2.8% 1.9%
- - - -----------------------------------------------------------------------------------------------------------------------
(1) Restated, where necessary, to exclude interest advances on the serviced
mortgage portfolio to be consistent with presentation of owned portfolio.
(2) The 1991 charge-off rates are normalized to exclude the acceleration of the
charge-off of bankrupt and decedent accounts related to the adoption of a
new credit card charge-off policy in 1991. Including these amounts, the
charge-off rates for 1991 were 3.8% and 5.3% on a consolidated-managed and
credit card-managed basis, respectively.
31
28
ADVANTA CORP. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS) DECEMBER 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- - - -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED--OWNED
Reserve for credit losses $ 31,227 $40,228 $36,355 $31,701 $ 23,108
Nonperforming assets 11,487 15,318 18,367 25,765 18,300
Accruing loans past due 90 days or more 11,038 16,270 20,989 17,118 11,220
Impaired assets 22,525 31,588 39,356 42,883 29,520
Reserve as a percentage of impaired assets 138.6% 127.4% 92.4% 73.9% 78.3%
As a percentage of gross receivables:
Reserve 2.4% 4.0% 2.9% 2.8% 2.4%
Nonperforming assets .9% 1.5% 1.4% 2.3% 1.9%
Accruing loans past due 90 days or more .9% 1.6% 1.7% 1.5% 1.2%
Impaired assets 1.8% 3.2% 3.1% 3.8% 3.1%
Net charge-offs:
Amount $ 26,776 $39,965 $50,807 $33,435 $ 24,672
As a percentage of average gross receivables 2.4% 3.9% 4.0%(1) 3.4% 2.9%
- - - -----------------------------------------------------------------------------------------------------------------------
CREDIT CARDS--OWNED
Reserve for credit losses $ 25,859 $35,743 $31,193 $27,247 $ 19,247
Nonperforming assets 3,062 2,780 3,008 9,354 5,384
Accruing loans past due 90 days or more 11,013 16,270 20,978 17,079 11,158
Impaired assets 14,075 19,050 23,986 26,433 16,542
Reserve as a percentage of impaired assets 183.7% 187.6% 130.0% 103.1% 116.4%
As a percentage of gross receivables:
Reserve 2.3% 4.8% 3.0% 3.4% 2.9%
Nonperforming assets .3% .4% .3% 1.2% .8%
Accruing loans past due 90 days or more 1.0% 2.2% 2.0% 2.2% 1.7%
Impaired assets 1.2% 2.6% 2.3% 3.3% 2.5%
Net charge-offs:
Amount $ 23,623 $37,382 $47,252 $30,445 $ 20,624
As a percentage of average gross receivables 2.6% 4.6% 4.9%(1) 4.4% 3.8%
- - - -----------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS--OWNED
Reserve for credit losses $ 2,706 $ 2,926 $ 2,447 $ 1,766 $ 1,411
Nonperforming assets 7,090 10,266 11,801 11,603 10,000
Reserve as a percentage of impaired assets 38.2% 28.5% 20.7% 15.2% 14.1%
As a percentage of gross receivables:
Reserve 3.0% 1.4% 1.3% .7% .7%
Nonperforming assets 7.8% 4.8% 6.3% 4.6% 4.7%
Net charge-offs:
Amount $ 2,207 $ 1,451 $ 1,627 $ 1,170 $ 352
As a percentage of average gross receivables 1.4% .8% .8% .5% .2%
- - - -----------------------------------------------------------------------------------------------------------------------
LEASES--OWNED
Reserve for credit losses $ 1,826 $ 1,442 $ 1,119 $ 1,594 $ 1,363
Nonperforming assets 1,335 2,254 3,553 4,808 2,916
Reserve as a percentage of impaired assets 136.8% 64.0% 31.5% 33.2% 46.7%
As a percentage of receivables:
Reserve 3.6% 3.1% 3.1% 1.9% 1.9%
Nonperforming assets 2.6% 4.8% 9.7% 5.8% 4.0%
Net charge-offs:
Amount $ 947 $ 1,267 $ 2,130 $ 2,226 $ 1,247
As a percentage of average receivables 1.6% 2.8% 3.1% 2.8% 1.9%
- - - -----------------------------------------------------------------------------------------------------------------------
(1) The 1991 charge-off rates are normalized to exclude the acceleration of
the charge-off of bankrupt and decedent accounts related to the adoption
of a new credit card charge-off policy in 1991. Including these amounts,
the charge-off rates for 1991 were 4.7% and 5.8% on a consolidated-owned
and credit card-ownedbasis, respectively.
32
29
ADVANTA CORP. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) DECEMBER 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992
- - - -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 31,162 $ 35,753
Federal funds sold 83,700 92,900
Interest-bearing deposits 150,496 219,385
Loan and lease receivables, net:
Available for sale 667,774 473,658
Other loan and lease receivables, net 614,879 503,923
-------------------------------------
Total loan and lease receivables, net 1,282,653 977,581
Investments available for sale 308,026 209,282
Premises and equipment (at cost, less
accumulated depreciation of $25,163
in 1993 and $21,238 in 1992) 17,045 9,460
Amounts due from securitizations 153,082 138,744
Other assets 115,218 91,962
- - - -----------------------------------------------------------------------------------------------------------------------
Total assets $ 2,141,382 $1,775,067
=======================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 33,446 $ 24,748
Interest-bearing 1,221,435 1,179,738
-------------------------------------
Total deposits 1,254,881 1,204,486
Other borrowings 105,327 154,264
Long-term debt 368,372 173,668
Other liabilities 70,061 67,779
- - - -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,798,641 1,600,197
- - - -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
(See Notes 7 and 9)
Preferred stock 1,010 1,010
Class A common stock, $.01 par value;
Authorized - 30,000,000 shares;
Issued - 17,240,064 shares in 1993
and 16,995,453 shares in 1992 172 170
Class B common stock, $.01 par value;
Authorized - 30,000,000 shares;
Issued - 22,603,088 shares in 1993
and 17,206,594 shares in 1992 226 172
Additional paid-in capital, net 166,646 69,174
Retained earnings, net 174,687 104,775
Less: Treasury stock at cost,
20,794 Class A common shares and
16,216 Class B common shares in 1992 0 (431)
- - - -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 342,741 174,870
- - - -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,141,382 $1,775,067
=======================================================================================================================
See Notes to Consolidated Financial Statements.
33
30
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- - - -----------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $ 127,618 $ 139,488 $157,710
Investments:
Taxable 22,083 22,596 19,862
Exempt from federal income tax 1,680 155 819
---------------------------------------------------------
Total investments 23,763 22,751 20,681
---------------------------------------------------------
Total interest income 151,381 162,239 178,391
---------------------------------------------------------
Interest expense:
Deposits 53,389 66,526 80,795
Debt 22,951 23,426 20,239
Other borrowings 2,963 3,593 8,105
---------------------------------------------------------
Total interest expense 79,303 93,545 109,139
---------------------------------------------------------
Net interest income 72,078 68,694 69,252
Provision for credit losses 29,802 47,138 55,461
---------------------------------------------------------
Net interest income after provision for credit losses 42,276 21,556 13,791
Noninterest revenues 255,580 193,144 133,357
Operating expenses 174,601 137,600 107,829
---------------------------------------------------------
Income before income taxes and extraordinary item 123,255 77,100 39,319
Provision for income taxes 45,335 29,063 14,154
---------------------------------------------------------
Net income before extraordinary item 77,920 48,037 25,165
Extraordinary item, net (See Note 10) (1,273) 0 0
---------------------------------------------------------
Net income $ 76,647 $ 48,037 $ 25,165
=======================================================================================================================
Earnings per common share before
extraordinary item (See Note 1) $ 1.95 $ 1.38 $ .81
=======================================================================================================================
Earnings per common share (See Note 1) $ 1.92 $ 1.38 $ .81
=======================================================================================================================
Weighted average common shares outstanding 39,777 34,590 31,044
=======================================================================================================================
See Notes to Consolidated Financial Statements.
34
31
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
- - - ----------------------------------------------------------------------------------------------------------------------------
Unrealized
Class A Class A Class B Additional Invesment Total
Preferred Common Common Paid-In Deferred Holding Gains Retained Treasury Stockholders'
Stock Stock Stock Capital Compensation (Losses) Earnings Stock Equity
- - - ----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1990 $ 1,010 $ 99 $ 99 $ 41,452 $ (2,607) $(663) $ 38,273 (6,768) $ 70,895
Effective stock split 49 49 (98) 0
Purchase of treasury stock
at cost (62) (62)
Change in unrealized
appreciation of equity
investments 430 430
Preferred and common cash
dividends declared (2,111) (2,111)
Exercise of stock options 2 2 1,031 (436) 601 1,200
Issuance of stock:
Public offering 16 16 17,722 2,219 19,973
Benefit plans 482 (5,167) 4,811 126
Amortization of deferred
compensation 1,748 1,748
Termination/Tax
benefit--benefit plans 2,024 358 (86) (801) 1,495
Net Income 25,165 25,165
- - - ----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1991 1,010 166 166 62,613 (5,668) (233) 60,805 0 118,859
Change in unrealized
appreciation of equity
investments 194 194
Preferred and common cash
dividends declared (4,028) (4,028)
Exercise of stock options 4 3 1,724 1,731
Issuance of stock:
Benefit plans 3 3,512 (2,025) 156 1,646
Amortization of deferred
compensation 2,338 2,338
Termination/Tax
benefit--benefit plans 6,462 218 (587) 6,093
Net Income 48,037 48,037
- - - ----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1992 1,010 170 172 74,311 (5,137) (39) 104,814 (431) 174,870
Change in unrealized
appreciation of investment
portfolio 563 563
Preferred and common cash
dividends declared (7,298) (7,298)
Exercise of stock options 2 4 1,866 1,872
Issuance of stock:
Public offering 45 89,980 90,025
Benefit plans 5 9,575 (7,934) 419 2,065
Amortization of deferred
compensation 1,960 1,960
Termination/Tax
benefit--benefit plans 1,922 103 12 2,037
Net Income 76,647 76,647
- - - ----------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1993 $ 1,010 $ 172 $226 $ 177,654 $(11,008) $ 524 $ 174,163 $ 0 $ 342,741
============================================================================================================================
See Notes to Consolidated Financial Statements.
35
32
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
- - - ------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- - - ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 76,647 $ 48,037 $ 25,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of intangibles 5,206 4,855 4,986
Provision for credit losses 29,802 47,138 55,461
Change in other assets and amounts due from securitizations (19,549) (41,182) (19,346)
Change in other liabilities 16,952 31,792 14,508
Gain on securitization of mortgages and leases (19,127) (15,209) (15,830)
Loss on repurchase of senior subordinated debentures 1,928 0 0
- - - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 91,859 75,431 64,944
INVESTING ACTIVITIES
Purchase of investments (1,020,355) (502,853) (177,724)
Proceeds from sales of investments 840,936 352,980 147,063
Proceeds from maturing investments 81,592 87,361 10,144
Change in fed funds sold and interest-bearing deposits 78,089 (188,777) (61,467)
Change in credit card receivables, excluding sales (1,441,397) (692,582) (673,627)
Proceeds from sales/securitizations of receivables 1,686,913 1,396,011 725,206
Purchase of mortgage/lease portfolios (70,014) (25,159) (19,100)
Principal collected on mortgages/loans 21,881 25,950 45,125
Mortgages/loans made to customers (472,724) (443,162) (281,375)
Change in premises and equipment (12,341) (5,017) (3,999)
Excess of cash collections over income
recognized on direct financing leases 20,493 16,907 35,566
Equipment purchased for direct financing lease contracts (90,002) (63,571) (44,063)
- - - ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (376,929) (41,912) (298,251)
FINANCING ACTIVITIES
Increase in demand and savings deposits 18,666 18,171 16,034
Proceeds from sales of time deposits 820,904 621,456 738,220
Payments for maturing time deposits (789,175) (640,176) (601,541)
Change in repurchase agreements 0 (101,847) 70,991
Proceeds from issuance of subordinated debt 135,000 177,321 132,022
Payments on redemption of subordinated debt (103,480) (98,711) (80,916)
Redemption of senior subordinated debentures (36,404) 0 0
Proceeds from issuance of medium-term notes 164,851 0 0
Proceeds from issuance of notes payable to banks 121,069 193,977 78,430
Repayment of notes payable to banks (137,196) (190,663) (146,842)
Proceeds from issuance of stock 93,542 3,377 21,238
Cash dividends paid (7,298) (4,028) (2,111)
- - - ------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 280,479 (21,123) 225,525
- - - ------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (4,591) 12,396 (7,782)
Cash at beginning of year 35,753 23,357 31,139
Cash at end of year $ 31,162 $ 35,753 $ 23,357
========================================================================================================================
See Notes to Consolidated Financial Statements.
36
33
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - - ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Advanta
Corp. (the "Company") and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain prior-period amounts have been reclassified to conform with
current-year classifications.
CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES
CREDIT CARD ORIGINATION COSTS
The Company accounts for credit card origination costs under Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases" ("SFAS 91"). This accounting standard requires certain loan and
lease origination fees and costs to be deferred and amortized over the life of
a loan or lease as an adjustment to interest income. Origination costs are
defined under this standard to include costs of loan origination associated
with transactions with independent third parties and certain costs relating to
underwriting activities and preparing and processing loan documents. The
Company engages third parties to solicit and originate credit card account
relationships. Amounts deferred under these arrangements approximated $29.5
million in 1993, $20.3 million in 1992 and $24.4 million in 1991. For credit
card receivables, deferred origination costs have been amortized over 60
months.
At the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of
the Financial Accounting Standards Board, the task force reached a consensus
regarding the acquisition of individual credit card accounts from independent
third parties (EITF Issue 93-1). The consensus was that credit card accounts
acquired individually should be accounted for as originations under SFAS 91 and
EITF Issue 92-5. Amounts paid to a third party to acquire indi-vidual credit
card accounts should be deferred and netted against the related credit card
fee, if any, and the net amount should be amortized on a straight-line basis
over the privilege period. If a significant fee is charged, the privilege
period is the period that the fee entitles the cardholder to use the card. If
there is no significant fee, the privilege period should be one year.
In accordance with this recent consensus, direct origi-nation costs incurred
related to credit card originations initiated after the May 20, 1993 consensus
date are deferred and amortized over 12 months. Costs incurred for originations
which were initiated prior to May 20, 1993 will continue to be amortized over a
60 month period. Prior to the EITF Issue 93-1 consensus, it was the Company's
practice to write off deferred origination costs related to credit card
receivables that have been securitized. This practice had effectively written
off credit card origination costs much more quickly than the 60 month period
previously utilized. In connection with the prospective adoption of a 12 month
amortization period for deferred credit card origination costs, the Company
will no longer write off deferred origination costs related to credit card
receivables being securitized, as under the EITF Issue 93-1 consensus such
costs are not directly associated with the receivables.
CREDIT CARD SECURITIZATION INCOME
Since 1988, the Company, through its subsidiary Colonial National Bank USA
("Colonial National" or "CNB") has completed 16 credit card securitizations
totalling $3.2 billion in receivables. See Note 3 and Note 16. In each
transaction, credit card receivables were transferred to a trust and interests
in the trust were sold to investors for cash. The Company records excess
servicing income on credit card securitizations representing additional cash
flow from the receivables initially sold based on the repayment term, including
prepayments. Prior to the EITF Issue 93-1 consensus, net gains were not
recorded at the time each transaction was completed as excess servicing income
was offset by the write off of deferred origination costs and the establishment
of recourse reserves. Subsequent to the prospective adoption discussed above,
excess servicing income has been recorded at a lower level at the time of each
transaction, and is predominantly offset by the establishment of recourse
reserves. The lower level of excess servicing income corresponds with the
discontinuance of
37
34
ADVANTA CORP. AND SUBSIDIARIES
deferred origination cost write-offs upon securitization of receivables as
discussed above. During the "revolving period" of each trust, income is
recorded based on additional cash flows from the new receivables which are sold
to the trusts on a continual basis to replenish the investors' interest in
trust receivables which have been repaid by the credit cardholders.
CREDIT CARD FEES
Annual fees on credit cards are deferred and amortized on a straight-line basis
over the fiscal year of the account.
The changes relating to origination costs and securitization income, as
discussed above, in the aggregate did not have a material effect on the
Company's 1993 financial statements.
MORTGAGE LOAN ORIGINATION FEES
The Company generally charges origination fees ("points") for mortgage loans
where permitted under state law. Origi-nation fees are deferred and amortized
over the contractual life of the loan. However, upon the sale or securitization
of the loans, the unamortized portion of such fees is recognized and included
in the computation of the gain on sale.
LOAN AND LEASE RECEIVABLES AVAILABLE FOR SALE
Loan and lease receivables available for sale represent receivables that the
Company generally intends to sell or securitize within the next six months.
These assets are reported at the lower of cost or fair market value.
INVESTMENTS HELD TO MATURITY
Investments held to maturity include those investments that the Company has the
positive intent and ability to hold to maturity. These investments are reported
at cost, adjusted for amortization of premiums or accretions of discounts.
INVESTMENTS AVAILABLE FOR SALE
Investments available for sale include securities that the Company sells from
time to time to provide liquidity and in response to changes in the market. In
1993, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). This statement requires that debt and
equity securities classified as Available for Sale be reported at market value.
This Statement is effective for fiscal years beginning after December 15, 1993,
although a company may elect earlier adoption as of the end of a fiscal year
for which annual statements have not been previously issued. The Company has
elected to adopt this statement as of December 31, 1993, and as such, these
securities are recorded at market value at that date. Unrealized holding gains
and losses on these securities are reported as a separate component of
stockholders' equity and included in retained earnings. These securities are
reported at the lower of cost or market value at December 31, 1992. The market
value was $202,708 at December 31, 1992.
FORWARD CONTRACTS
A short sale of U.S. Treasury securities for forward settlement involves an
agreement between two parties to sell Treasury securities at a specified future
date and at a speci-fied future price. The Company periodically sells U.S.
Treasury securities short for forward settlement for the purpose of hedging the
pricing of anticipated mortgage loan securitizations. Gains or losses are
deferred and included in the measurement of the dollar basis of the assets
sold. The contractual amounts of forward contracts at December 31, 1993 and
1992 were $72 million and $165 million, respectively.
FINANCIAL FUTURES
A financial future is a contract to take or make delivery of the underlying
financial instrument at a specified price at a future date. The Company
periodically sells financial futures contracts expressly for the purpose of
managing and reducing interest rate risk specifically related to the reset of
one-month LIBOR on outstanding credit card securitiza-tions. Gains or losses
are included in securitization income. At December 31, 1993 and 1992, there
were no futures contracts outstanding.
INTEREST RATE SWAPS
An interest rate swap is a contract between two counter-parties to exchange
interest payments on a specified notion-al amount at agreed upon rates. The
Company enters into these agreements for the primary purpose of managing its
interest rate risk. At December 31, 1993, the Company had $500 million notional
amount of interest rate swap agreements fixed at a 4.95% weighted average rate
and $150 million notional amount of floating rate swaps priced at one-month
LIBOR. The fixed rate contracts mature throughout 1994 and the floating rate
contracts mature in 1996.
INCOME FROM MORTGAGE BANKING ACTIVITIES
The Company, through its subsidiaries, sells mortgage loans through both
secondary market securitizations and whole loan sales, typically with servicing
retained. Income is
38
35
ADVANTA CORP. AND SUBSIDIARIES
recognized at the time of sale approximately equal to the present value of the
anticipated future cash flows resulting from the retained yield adjusted for an
assumed prepayment rate, net of any anticipated charge-offs, and allowing for a
normal servicing fee. Changes in the anticipated future cash flows, as well as
the receipt of cash flows which differ from those projected, affect the
recognition of current and future mortgage banking income. Also included in
this income is any difference between the net sales proceeds and the carrying
value of the mortgage loans sold at the time of the transaction. See Note 3 and
Note 16. The carrying value includes deferred loan origination fees and costs
which in-clude certain fees and costs related to acquiring and pro-cessing a
loan held for resale. These deferred origination fees and costs are netted
against income from mortgage banking activities when the loans are sold.
Mortgage banking income also includes loan servicing fees equal to .5% of the
outstanding balance of securitized loans and, beginning in 1992, loan servicing
fees on mortgage loan portfolios which were never owned by the Company
("contract servicing").
INCOME FROM LEASE SECURITIZATIONS
The Company, through its subsidiaries, sells equipment lease receivables
through secondary market securitizations. Income is recorded at the time of
sale approximately equal to the present value of the anticipated future cash
flows net of anticipated charge-offs, partially offset by deferred initial
direct costs, transaction expenses and estimated credit losses under certain
recourse requirements of the trust. Also included in income is the difference
between the net sales proceeds and the carrying amount of the receivables sold.
Subsequent to the initial sale, securitization income is recorded in proportion
to the actual cash flows received from the trusts.
INSURANCE
Insurance premiums, net of commissions on credit life, disability and
unemployment policies on credit cards, are earned monthly based upon the
outstanding balance of the underlying receivables. The cost of acquiring new
rein-surance is deferred and amortized over the reinsurance period in order to
match the expense with the anticipated premium revenue. Insurance claim
reserves are based on estimated settlement amounts for both reported and
incurred but not reported losses.
CREDIT LOSSES
During 1991, the Company adopted a new charge-off policy related to bankrupt,
decedent and fraudulent credit card accounts. Under the previous policy,
whenever the Company received notification that a credit cardholder had filed a
bankruptcy petition or was deceased, a reserve was established equal to the
full balance of the receivable. The receivable, if not paid, would be charged
off at 186 days contractual delinquency. Likewise, receivables in accounts
identified as fraudulent would be reserved against and written off (as an
operating expense) when they became 186 days contractually delinquent. Under
the policy adopted in 1991, bankrupt and decedent accounts are written off
within 30 days of notification, and accounts suspected of being fraudulent are
written off after a 90 day investigation period, unless the investigation shows
no evidence of fraud. During the 1991 transition period, both newly identified
bankrupt, decedent and fraudulent accounts, as well as those previously
identified, were written off.
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.
GOODWILL
Goodwill, representing the cost of investments in subsidiaries and affiliated
companies in excess of net assets acquired at acquisition, is being amortized
on a straight-line basis over 25 years.
INCOME TAXES
Effective January 1, 1993, the Company implemented the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") with no material effect on the financial statements. SFAS 109 utilizes
the liability method and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities given the provisions of the enacted tax laws. Prior
to the implementation of SFAS 109, the Company accounted for income taxes using
Accounting Principles Board Opinion No. 11.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net earnings after preferred
stock dividends by the average number of shares of common stock and common
stock equivalents outstanding during each year. The outstanding preferred stock
is not a common stock equivalent. Earnings
39
36
ADVANTA CORP. AND SUBSIDIARIES
per share in 1992 and 1991 have been adjusted to reflect the effective
three-for-two stock split as a result of the October 15, 1993 stock dividend.
See Note 7.
CASH FLOW REPORTING
For purposes of reporting cash flows, cash includes cash on hand and amounts
due from banks. Cash paid during 1993, 1992 and 1991 for interest was $78.8
million, $94.4 million and $107.7 million, respectively. Cash paid for taxes
during these periods was $30.0 million, $17.7 million and $8.7 million,
respectively.
NOTE 2. LOAN AND LEASE RECEIVABLES
- - - ---------------------------------------------------------------
Loan and lease receivables consisted of the following:
December 31,
- - - ---------------------------------------------------------------
1993 1992
- - - ---------------------------------------------------------------
Credit cards(A) $1,131,367 $737,485
Mortgage loans(B) 91,340 212,273
Leases(C) 51,008 46,712
Other loans 3,590 1,774
- - - ---------------------------------------------------------------
Gross loan and
lease receivables 1,277,305 998,244
- - - ---------------------------------------------------------------
Add: Deferred origination costs,
net of deferred fees(D) 36,575 19,565
Less: Reserve for credit losses:
Credit cards (25,859) (35,743)
Mortgage loans (2,706) (2,926)
Leases (1,826) (1,442)
Other loans (836) (117)
- - - ---------------------------------------------------------------
Total (31,227) (40,228)
- - - ---------------------------------------------------------------
Net loan and lease
receivables $1,282,653 $977,581
===============================================================
(A) Includes credit card receivables available for sale of $564 million and
$250 million in 1993 and 1992, respectively.
(B) Includes mortgage loan receivables available for sale of $74.6 million and
$190.5 million in 1993 and 1992, respectively.
(C) Includes lease receivables available for sale of $28.6 million and $31.5
million in 1993 and 1992, respectively, and is net of unearned income of
$11.9 million and $10.8 million in 1993 and 1992, respectively, and also
includes residual interest for both years.
(D) Includes approximately $.6 million and $1.7 million in 1993 and 1992,
respectively, related to loan and lease receivables available for sale.
Receivables serviced for others consisted of the following items:
December 31,
- - - ----------------------------------------------------------
1993 1992
- - - ----------------------------------------------------------
Credit cards $2,790,719 $1,934,008
Mortgage loans 1,058,524 696,683
Leases 137,680 91,035
- - - ----------------------------------------------------------
Total $3,986,923 $2,721,726
==========================================================
The geographic concentration of managed receivables was as follows:
December 31,
- - - ----------------------------------------------------------------------------
1993 1992
------------------------- --------------------------
Receivables % Receivables %
- - - ----------------------------------------------------------------------------
California $ 988,178 18.8% $697,001 18.7%
New York 455,036 8.6 346,992 9.3
New Jersey 333,064 6.3 264,442 7.1
Texas 261,991 5.0 178,766 4.8
Illinois 254,250 4.8 169,253 4.6
All other 2,971,709 56.5 2,063,516 55.5
- - - ----------------------------------------------------------------------------
Total managed
receivables $ 5,264,228 100.0% 3,719,970 100.0%
============================================================================
In the normal course of business, the Company makes commitments to extend
credit to its credit card customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
conditions established in the contract. The Company does not require collateral
to support this financial commitment. At December 31, 1993 and 1992, the
Company had $16.0 billion and $11.7 billion, respectively, of commitments to
extend credit outstanding for which there is potential credit risk. The Company
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 the
Company's experience to date. At December 31, 1993 and 1992, out-standing
managed credit card receivables represented 24% and 23%, respectively, of
outstanding commitments.
40
37
ADVANTA CORP. AND SUBSIDIARIES
NOTE 3. CREDIT CARD, MORTGAGE LOAN AND
EQUIPMENT LEASE SECURITIZATIONS
- - - ---------------------------------------
Colonial National has completed 16 sales of credit card receivables through
asset-backed securitizations aggregating $3.2 billion. In each transaction,
credit card receivables were transferred to a trust which issued certificates
representing ownership interests in the trust to institutional investors.
Colonial National retained a participation interest in each trust, reflecting
the excess of the total amount of receivables transferred to the trust over the
portion represented by certificates sold to investors. The retained
participation interests in the credit card trusts were $371.8 million and
$393.5 million at December 31, 1993 and 1992, respectively. Although Colonial
National continues to service the underlying credit card accounts and maintain
the customer relationships, these transactions are treated as sales for
financial reporting purposes to the extent of the investors' interests in the
trusts. According-ly, the associated receivables are not reflected on the
balance sheet.
Colonial National is subject to certain recourse provi-sions in
connection with these securitizations. At December 31, 1993 and 1992, Colonial
National had reserves of $96.4 million and $108.8 million, respectively, related
to these recourse provisions. These reserves are netted against the excess
servicing-credit card securitization. See Note 16. At December 31, 1993, the
Company had amounts receivable from credit card securitizations, which include
the related interest-bearing deposits, excess servicing and other amounts
related to securitization of $191.0 million, $104.7 million of which was subject
to liens by the providers of the credit enhancement facilities for the
individual securitizations. At December 31, 1992, the amounts receivable and
amounts subject to lien were $192.0 million and $106.5 million, respectively.
Through December 31, 1993, the Company had sold, through securitizations
and whole loan sales, approximately $1.7 billion of mortgage loan receivables
which sales are subject to certain recourse provisions. The Company had reserves
of $32.1 million and $10.1 million at year end 1993 and 1992, respectively,
related to these recourse provisions which are netted against the excess
mortgage servicing rights. See Note 16. At December 31, 1993, the Company had
amounts receivable from mortgage loan sales and securitizations of $102.8
million, $39.7 million of which was subject to liens. At December 31, 1992, the
amounts receivable and amounts subject to lien were $82.0 million and $32.8
million, respectively.
Through December 31, 1993, the Company had securitized approximately
$196 million of equipment lease receiv-ables which are subject to certain
recourse provisions. The asset-backed certificates carry a fixed rate to
investors. There were reserves of $5.3 million and $3.1 million at year end 1993
and 1992, respectively, related to these recourse provisions which are netted
against the excess servicing-lease securitizations. See Note 16. The Company had
accounts receivable from lease securitizations of $9.7 million at year end 1993
and $4.0 million at year end 1992, of which $5.9 million and $1.7 million,
respectively, were subject to liens by the providers of the credit enhancement
facility. Total interest in residuals for lease assets sold was $9.6 million and
$7.7 million at December 31, 1993 and 1992, respectively, and is also subject to
recourse provisions.
NOTE 4. RESERVE FOR CREDIT LOSSES
- - - --------------------------------------
The reserve for credit losses for lending and leasing transactions is
established to reflect losses anticipated from delinquencies that have
already occurred. Any adjustments to the reserves are reported in the
Income Statements in the periods they become known.
During 1993, the Company used $11 million of its on-balance sheet
unallocated reserves to increase its off-balance sheet mortgage loan recourse
reserves, which are a component of excess mortgage servicing rights.
In 1992, the Company used $3.3 million of its on-balance sheet
unallocated reserves to increase its off-balance sheet mortgage loan recourse
reserves.
41
38
ADVANTA CORP. AND SUBSIDIARIES
The following table displays five years of reserve history:
RESERVE FOR CREDIT LOSSES YEAR ENDED DECEMBER 31,
- - - ------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- - - ------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 40,228 $ 36,355 $31,701 $23,108 $ 30,664
Provision for credit losses 29,802 47,138 55,461 42,411 26,047
Reserve on other receivables sold or acquired 0 0 0 (383) (8,931)
Transfer of reserves to recourse reserves (12,027) (3,300) 0 0 0
Gross credit losses:
Credit cards (33,805) (46,477) (52,798) (34,848) (25,595)
Mortgage loans (2,247) (1,488) (1,635) (1,188) (382)
Leases (1,376) (1,930) (3,205) (4,038) (3,760)
Other loans (93) (73) (155) (126) (3,304)
- - - ------------------------------------------------------------------------------------------------------------------------
Total credit losses (37,521) (49,968) (57,793) (40,200) (33,041)
Recoveries:
Credit cards 10,182 9,095 5,546 4,403 4,971
Mortgage loans 40 37 8 18 30
Leases 429 663 1,075 1,811 2,513
Other loans 94 208 357 533 855
- - - ------------------------------------------------------------------------------------------------------------------------
Total recoveries 10,745 10,003 6,986 6,765 8,369
Net credit losses (26,776) (39,965) (50,807) (33,435) (24,672)
- - - ------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 31,227 $ 40,228 $36,355 $31,701 $ 23,108
========================================================================================================================
NOTE 5. INVESTMENTS AVAILABLE FOR SALE
- - - -----------------------------------------------------------------------------------------------------------------
Investments available for sale consisted of the following:
DECEMBER 31,
- - - -----------------------------------------------------------------------------------------------------------------
1993 1992
-------------------------------------------- ---------------------------------------
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 $154,873 $ 225 $(177) $154,921 $ 38,575 $ 248 $ (73) $ 38,750
State and
municipal
securities 75,797 868 0 76,665 2,942 139 0 3,081
Collateralized
mortgage
obligations 21,288 42 (60) 21,270 101,913 902 (319) 102,496
Mortgage-backed
securities 45,611 0 (42) 45,569 58,089 232 (66) 58,255
Equity
securities 6,947 0 0 6,947 5,539 32 0 5,571
Other 2,704 0 (50) 2,654 2,224 0 0 2,224
- - - -----------------------------------------------------------------------------------------------------------------
Total $307,220 $1,135 $(329) $308,026 $209,282 $ 1,553 $(458) $210,377
=================================================================================================================
DECEMBER 31,
- - - ----------------------------------------------------------------------
1991
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- - - ----------------------------------------------------------------------
U. S. Treasury
& other U. S.
government
securities $15,584 $ 88 $ 0 $ 15,672
State and
municipal
securities 2,560 122 0 2,682
Collateralized
mortgage
obligations 83,352 4,019 0 87,371
Mortgage-backed
securities 31,051 903 0 31,954
Equity
securities 11,588 33 0 11,621
Other 2,625 0 0 2,625
- - - ----------------------------------------------------------------------
Total 146,760 $5,165 $ 0 $151,925
======================================================================
42
39
ADVANTA CORP. AND SUBSIDIARIES
At December 31, 1993, investment securities with a book value of $17,473
were pledged as collateral for swap and hedge transactions. At December 31,
1991, investment securities with a book value of $101,847 were pledged as
collateral for repurchase transactions. There were no investment securities
pledged as collateral at December 31, 1992. At December 31, 1993, 1992 and 1991,
investment securities with a book value of $7,927, $9,147 and $8,748,
respectively, were deposited with insurance regu-latory authorities to meet
statutory requirements or held by a trustee for the benefit of primary
insurance carriers. At December 31, 1993, $806 of net unrealized gains on
securities was included in investments available for sale. During 1993, the net
change in unrealized gains on available for sale securities included as a
separate component of stockholders' equity was $563.
Maturity of investments available for sale at December 31, 1993:
- - - ----------------------------------------------------------
Amortized Market
Cost Value
- - - ----------------------------------------------------------
Due in 1 year $ 62,379 62,386
Due after 1 but within 5 years 169,950 170,806
Due after 5 but within 10 years 1,045 1,048
Due after 10 years 0 0
- - - ----------------------------------------------------------
Subtotal 233,374 234,240
Mortgage-backed-CMO and MBS 66,899 66,839
Equity securities 6,947 6,947
- - - ----------------------------------------------------------
Total investments $307,220 $308,026
==========================================================
Proceeds from sales of available for sale securities during 1993 were
$841,000. Gross gains of $3,430 and losses of $888 were realized on these
sales. Proceeds during 1992 were $353,000. Gross gains of $2,414 and losses of
$427 were realized on these sales. Proceeds during 1991 were $147,000. Gross
gains of $1,085 and losses of $508 were realized on these sales. The specific
identification method was the basis on which cost was determined in computing
realized gains and losses. Equity securities primarily includes FRB, FHLB and
FNMA stock that the Company is required to hold.
NOTE 6. DEBT
- - - ----------------------------------------------------------
Debt consisted of the following:
DECEMBER 31,
- - - ----------------------------------------------------------
1993 1992
- - - ----------------------------------------------------------
12 3/4% senior
subordinated debentures,
due 1998 $ 0 $ 33,150
7% CNB subordinated notes,
due 2003 49,620 0
5 1/8% medium-term notes,
due 1996 149,851 0
RediReserve money
market subordinated
certificates 5,843 5,337
Six-month subordinated
notes 7,354 12,708
One-year subordinated
notes 39,436 59,264
Eighteen-month
subordinated notes 14,261 16,264
Two-, four- and five-year
subordinated notes 133,401 132,201
Thirty-month
subordinated notes 41,281 34,719
Other notes 25,165 10,675
- - - ----------------------------------------------------------
Total debt 466,212 304,318
Less short-term debt
and certificates (97,840) (130,650)
- - - ----------------------------------------------------------
Long-term debt $368,372 $173,668
==========================================================
The annual maturities of long-term debt at December 31, 1993 for the years
ending December 31 are as follows: $70.4 million in 1995; $180.7 million in
1996; $51.4 million in 1997; $10.4 million in 1998; and $55.5 million
thereafter. The average interest cost of the Company's debt during 1993, 1992
and 1991 was 7.59%, 9.01% and 10.27%, respectively.
NOTE 7. STOCK DIVIDENDS
- - - ------------------------------------
On April 24, 1992, the Company's shareholders approved a dual class stock plan
pursuant to which the Company's Common Stock was reclassified as Class A Common
Stock and a new class of non-voting stock, Class B Common Stock, was
authorized. Promptly following shareholder approval, the Board of Directors
declared a dividend of one share of Class B Common Stock on each outstanding
share of Class A Common Stock to shareholders of record as of April 24, 1992,
which dividend was paid on May 5, 1992.
43
40
ADVANTA CORP. AND SUBSIDIARIES
On September 23, 1993, the Board of Directors approved a three-for-two stock
split in the form of a 50% stock dividend on both the Class A and Class B
Common Stock to shareholders of record as of October 4, 1993, which dividend
was paid on October 15, 1993. All share and per share amounts have been
adjusted to reflect the three-for-two stock split as a result of the stock
dividend. The balance sheet presentation of stockholders' equity for prior
years and earnings per share for the years ended December 31, 1992 and 1991,
have been adjusted to reflect the impact of this dividend, as if it had already
occurred at such respective dates.
Note 8. Capital Stock
- - - -----------------------------------------------------------
The number of shares of capital stock was as follows:
DECEMBER 31,
- - - -----------------------------------------------------------
ISSUED AND OUTSTANDING
------------------------
1993 1992
- - - -----------------------------------------------------------
(In thousands)
Class A preferred--
$1,000 par value;
Authorized, 1,010 1 1
===========================================================
Class B preferred--
$.01 par value;
Authorized, 1,000,000 0 0
===========================================================
Class A common stock--
$.01 par value;
Authorized, 30,000,000 17,240 16,995
Class B common stock--
$.01 par value;
Authorized, 30,000,000 22,603 17,207
===========================================================
Less treasury stock:
Class A 0 21
Class B 0 16
- - - -----------------------------------------------------------
39,844 34,166
===========================================================
The 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. Dividends were declared on the Class A
Preferred Stock for the first time in 1989 and have continued through 1993 as
the Company paid dividends on its common stock. The redemption price of the
Class A Preferred Stock is equivalent to the par value.
NOTE 9. ISSUANCE OF COMMON STOCK
- - - ------------------------------------
On March 24, 1993, in a public offering, the Company sold 2,575,000 shares
(pre-split) of Class B Common Stock. Proceeds from the offering, net of the
underwriting discount, were $77.5 million. On April 21, 1993, the underwriters
of the offering purchased an additional 450,000 shares (pre-split) of Class B
Common Stock, pursuant to the overallotment option granted to them by the
Company. This brought the Company's total proceeds of the offering, net of
related expenses, to approximately $90 million. The Company used the proceeds
of the offering for general corporate purposes, including to finance the growth
of its subsidiaries.
NOTE 10. EXTRAORDINARY ITEM
- - - ------------------------------------
In April of 1993, the Company repurchased the remaining $33.2 million of its 12
3/4% Senior Subordinated Debentures at a price equal to 104% of par. This
transaction resulted in an extraordinary loss of $1.3 million (net of a tax
benefit of $.7 million) or $.03 per share for the year ended December 31, 1993.
NOTE 11. INCOME TAXES
- - - ----------------------------------------------------------
Income tax expense consisted of the following components:
YEAR ENDED DECEMBER 31,
- - - ----------------------------------------------------------
1993 1992 1991
- - - ----------------------------------------------------------
Current:
Federal $40,736 $21,853 $6,802
- - - ----------------------------------------------------------
State 4,184 3,077 885
44,920 24,930 7,687
- - - ----------------------------------------------------------
Deferred:
Federal (1,829) 2,999 5,160
State 2,244 1,134 1,307
415 4,133 6,467
- - - ----------------------------------------------------------
Total tax expense before
extraordinary item $45,335 $29,063 14,154
==========================================================
Current tax payable includes earnings of certain subsidiaries which are not
included in the consolidated federal income tax return. In 1993 and 1992, the
tax provision includes $2.0 million and $6.5 million of direct entries to
equity accounts, respectively.
44
41
ADVANTA CORP. AND SUBSIDIARIES
In 1991, the Company's consolidated tax return reflects alternative minimum
taxes payable.
The reconciliation of the statutory federal income tax to the consolidated
tax expense is as follows:
YEAR ENDED DECEMBER 31,
- - - ---------------------------------------------------------
1993 1992 1991
- - - ---------------------------------------------------------
Statutory federal
income tax $43,139 $26,217 $13,368
State income taxes,
net of federal income
tax benefit 4,178 2,784 1,447
Nontaxable investment
income (675) (46) (281)
Other (1,307) 108 (380)
- - - ---------------------------------------------------------
Consolidated tax
expense before
extraordinary item $ 45,335 $29,063 $14,154
- - - ---------------------------------------------------------
Tax benefit on loss
from repurchase
of debentures (656) 0 0
- - - ---------------------------------------------------------
Consolidated tax
expense $44,679 $29,063 $14,154
=========================================================
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws. The net deferred tax
liability is comprised of the following:
- - - ------------------------------------------------------------
December 31, January 1,
1993 1993
- - - ------------------------------------------------------------
Deferred taxes:
Gross assets $ 25,755 $ 20,784
Gross liabilities (43,815) (38,460)
- - - ------------------------------------------------------------
Total deferred
taxes $(18,060) $(17,676)
============================================================
The Company did not record any valuation allowances against deferred
tax assets at December 31, 1993. The tax effect of significant temporary
differences representing deferred tax assets and liabilities is as follows:
- - - ------------------------------------------------------------
December 31, January 1,
1993 1993
- - - ------------------------------------------------------------
SFAS 91 $(13,344) $ (7,038)
Loan losses 23,631 18,706
Mortgage banking income (2,395) (7,413)
Securitization income (25,817) (22,295)
Insurance underwriting (2,258) (1,714)
Deferred compensation 592 55
Other 1,531 2,023
- - - ------------------------------------------------------------
Net deferred tax liabilities $(18,060) $(17,676)
============================================================
NOTE 12. BENEFIT PLANS
- - - ----------------------------------
In 1991, the Company adopted the Advanta Management Incentive Plan With Stock
Election II ("AMIPWISE II"), which plan was designed to provide incentives to
participating employees to remain in the employ of the Company and devote
themselves to its success. Under the plan, employees eligible to participate in
the Advanta Management Incentive Plan (a bonus program) were given the
opportunity to elect to take portions of their anticipated or "target" bonus
payments for 1993, 1994 and 1995 in the form of restricted shares of common
stock. To the extent such elections were made, restricted shares were issued to
the employees, with the number of shares granted to each employee determined by
dividing the amount of future bonus payments the employee had elected to
receive in stock by the market price of the stock on February 7, 1991 ($4.75).
The restricted shares are subject to forfeiture should the employee terminate
employment with the Company prior to vesting. Restricted shares vest 10 years
from the date of grant, but vesting was and will be accelerated annually with
respect to one-third of an employee's restricted shares, to the extent that the
employee and the Company met or meet their respective performance goals for
each of 1993, 1994 and 1995. When newly eligible employees elect to participate
in AMIPWISE II, the number of restricted shares issued to them with respect to
their "target" bonus payments for the relevant years is determined based on the
average market price of the stock for the 90 days prior to eligibility. Under
the plan, 1,062,009 shares of restricted stock have been issued, of which
283,130 shares were vested as the result of 1993 performance bonus awards.
45
42
ADVANTA CORP. AND SUBSIDIARIES
In 1992, the Company implemented a plan similar to AMIPWISE II, for key
employees below the management level, under which eligible employees were
awarded shares of restricted Class B common stock with respect to "target"
bonus payments for 1992, 1993, 1994 and 1995. The num-ber of shares issued to
them with respect to their "target" bonus payments for the relevant years was
determined based on the average market price of the stock for the year ended
December 31, 1991 ($7.07). Under this plan, a total of 83,853 restricted shares
of Class B common stock have been issued, of which 35,531 shares have vested as
the result of 1992 and 1993 bonus awards. In 1993, the Company adopted a plan
substantially similar to AMIPWISE II ("AMIPWISE III") under which elections
were made to take "target" bonus payments for 1996, 1997 and 1998 in shares of
Class B common stock. The number of shares was determined using the market
price of the stock on the election date ($17.00). Under this plan, 386,304
shares of restricted Class B common stock have been issued. At December 31,
1993, a total of 1,229,829 shares issued under these plans and under the
predecessor plan to AMIPWISE II (with respect to which employees made elections
with respect to "target" bonuses for 1990, 1991 and 1992) were subject to
restrictions and were included in the number of shares outstanding. These
shares are considered common stock equivalents in the calculation of earnings
per share. Deferred compensation of $11.0 million and $5.1 million related to
these plans is reflected as a reduction of equity at December 31, 1993 and
1992, respectively.
The Company has an Employee Stock Purchase Plan which allows employees
and directors to purchase Advanta common stock at a 15% discount from the market
price without paying brokerage fees. The Company reports this 15% discount as
compensation expense. During 1993, shares were issued under the plan from
unissued stock at the average market price on the day of purchase. Effective
with the stock dividend on May 5, 1992, only Class B shares are issued for this
plan.
The Company has two Stock Option Plans which together authorize the
grant to employees and directors, of options to purchase an aggregate of
7,425,000 shares of common stock. In connection with the implementation of the
dual class stock plan described in Note 7, each option granted prior to the May
5, 1992 stock dividend was converted into two options, each covering an equal
number of Class A common shares and Class B common shares as were covered by the
original option, and each with an exercise price per share equal to one-half the
original exercise price. In connection with the October 15, 1993 stock dividend,
the number of options and the exercise price of each option were modified to
reflect the three-for-two stock split. Although under these plans options issued
after the May 5, 1992 dividend date may be for either Class A or Class B common
stock, the Company presently intends only to issue options to purchase Class B
common stock. Beginning in 1992, options generally vest over a four-year period,
and expire 10 years after the date of grant.
Shares available for future grant aggregated 2,051,508 at December 31,
1993, and 2,629,209 at December 31, 1992. Transactions under the plans for the
two years ended December 31, 1993, were as follows:
- - - ----------------------------------------------------------------
Number of Shares Price Range Per Share
- - - ----------------------------------------------------------------
(In thousands)
Options outstanding at
December 31, 1991 2,742 $ .98 - $10.57
Options granted 1,047 $ 8.83 - $16.33
Options exercised (719) $ .98 - $ 8.25
Options terminated (22) $ 4.50 - $12.33
- - - ----------------------------------------------------------------
Options outstanding at
December 31, 1992 3,048 $ .98 - $16.33
Options granted 588 $19.33 - $27.50
Options exercised (586) $ .98 - $12.83
Options terminated (11) $12.33 - $20.92
- - - ----------------------------------------------------------------
Options outstanding at
December 31, 1993 3,039 $ .98 - $27.50
================================================================
The Company also has outstanding, options to purchase 718,500 shares of
common stock at a price range of $1.52 to $11.00 per share, which were not
issued pursuant to either of the predecessor plans and generally vest over a
three-year period.
At December 31, 1993, 1,547,115 of the 3,039,000 out-standing options
issued under the Stock Options Plans had vested and 709,500 of the 718,500
issued outside the Plans had vested.
The Company has a tax-deferred employee savings plan which provides
employees savings and investment opportunities, including the ability to invest
in the Company's common stock. The employee savings plan provides for
discretionary Company 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, 1993, 1992 and 1991, the Company contributions equalled 100% of the
first 5% of participating employees' compensation contributed to the plan. The
expense for this plan totalled
46
43
ADVANTA CORP. AND SUBSIDIARIES
$1,189, $882 and $753 in 1993, 1992 and 1991, respectively. At December 31,
1993, 133,018 of the 337,500 shares of common stock reserved for issuance
under the employee savings plan had been purchased by the plan from the Company
at the market price on each purchase date. All other shares purchased by the
plan for the three years ended December 31, 1993, 1992 and 1991 were purchased
on the open market.
NOTE 13. COMMITMENTS AND CONTINGENCIES
- - - --------------------------------------------
The Company leases office space in several states under leases accounted for as
operating leases. Total rent expense for all of the Company's locations for the
years ended December 31, 1993, 1992 and 1991 was $4.8 million, $3.5 million and
$3.1 million, respectively. The future minimum lease payments of all
non-cancellable operating leases are as follows:
YEAR ENDED DECEMBER 31,
- - - ----------------------------------------------------------
1994 $4,230
- - - ----------------------------------------------------------
1995 4,142
- - - ----------------------------------------------------------
1996 3,753
- - - ----------------------------------------------------------
1997 2,687
- - - ----------------------------------------------------------
1998 1,187
- - - ----------------------------------------------------------
Thereafter 47
- - - ----------------------------------------------------------
In January 1994, the Company hired a new senior executive and agreed to
the following compensation arrangement. In addition to a base salary, the
executive received 200,000 restricted shares of Class B common stock and an
option to purchase 100,000 shares of Class B common stock at $27.75 per share.
The restricted shares, which as of the date of the grant had a market value of
$5.6 million, will vest at the rate of 25% per annum for four years, and the
options will become exercisable at the same rate. Should the executive leave the
Company's employ before four years have passed, these benefits will vest upon
the departure, except in certain limited circumstances. The executive is also to
receive a guaranteed one-time bonus of $525, other annual benefits and
perquisites estimated at $250, and will also be eligible to receive annual
bonuses under AMIPWISE II and AMIPWISE III (see Note 12).
NOTE 14. OTHER BORROWINGS
- - - ---------------------------------
The Company had lines of credit and term funding arrangements of $63.5
million at December 31, 1993, which were collateralized by lease receivables, as
well as equipment under operating lease. At December 31, 1992, the Company had
lines of credit and term funding arrangements of $208.7 million which were
collateralized by lease receivables and mortgage loans. These facilities carry
variable interest rates which range from 1 1/4 % above LIBOR to 1 1/4% above the
prime rate. There is a quarterly facility fee of 1/4 to 1/2 of 1% of the average
unused portion on the lines of credit.
The composition of other borrowings was as follows:
December 31,
- - - ------------------------------------------------------------
1993 1992
- - - ------------------------------------------------------------
Short-term debt $ 97,840 $130,650
Lines of credit and
term funding
arrangements 7,487 16,548
Other short-term
borrowings 0 7,066
- - - ------------------------------------------------------------
Total $105,327 $154,264
============================================================
The following table displays information related to selected types of
short-term borrowings:
- - - ------------------------------------------------------------
1993 1992
------------- --------------
Amount Rate Amount Rate
- - - ------------------------------------------------------------
At year end:
Securities sold
under repurchase
agreements $ 0 0% $ 0 0%
Other short-term
borrowings 0 0 7,066 7.02
- - - ------------------------------------------------------------
Total $ 0 0% $ 7,066 7.02%
============================================================
Average for the year:
Securities sold
under repurchase
agreements $42,649 3.07% $25,216 3.98%
Other short-term
borrowings 17,337 5.62 9,871 6.76
- - - ------------------------------------------------------------
Total $59,986 3.81% $35,087 4.76%
============================================================
Maximum month-end
balance:
Securities sold
under repurchase
agreements 166,481 124,337
Other short-term
borrowings 45,355 17,299
============================================================
47
44
ADVANTA CORP. AND SUBSIDIARIES
The weighted average interest rates were calculated by dividing the
interest expense for the period for such borrowings by the average amount
outstanding during the period.
NOTE 15. SELECTED INCOME STATEMENT INFORMATION
- - - ----------------------------------------------------------
NONINTEREST REVENUES YEAR ENDED DECEMBER 31,
- - - ----------------------------------------------------------
1993 1992 1991
- - - ----------------------------------------------------------
Credit card
securitization income $ 135,785 $ 80,761 $ 42,422
Credit card
servicing income 41,593 28,634 15,362
Income from mortgage
banking activities 24,146 24,633 21,417
Credit card
interchange income 18,843 30,693 31,819
Other credit card
revenues 11,545 11,752 11,966
Leasing
revenues, net 10,317 6,170 3,492
Insurance
revenues, net 9,249 7,406 5,851
Securities gains 2,542 1,869 410
Other 1,560 1,226 618
- - - ----------------------------------------------------------
Total noninterest
revenues $ 255,580 $193,144 $133,357
==========================================================
OPERATING EXPENSES YEAR ENDED DECEMBER 31,
- - - ----------------------------------------------------------
1993 1992 1991
- - - ----------------------------------------------------------
Salaries and
employee benefits $ 65,469 $ 51,599 $ 42,566
Marketing 18,742 13,845 8,135
External processing 16,604 12,993 10,871
Credit card
fraud losses 13,779 13,134 10,820
Professional fees 10,761 5,700 3,236
Postage 9,818 7,806 6,278
Credit and collection
expense 7,055 5,273 4,140
Equipment expense 6,550 5,629 5,433
Occupancy expense 6,247 5,272 4,591
Telephone expense 5,402 4,379 3,346
Amortization
of goodwill 315 325 329
Other 13,859 11,645 8,084
- - - ----------------------------------------------------------
Total operating
expenses $ 174,601 $137,600 $107,829
==========================================================
NOTE 16. SELECTED BALANCE SHEET INFORMATION
- - - ----------------------------------------------------------
INTEREST-BEARING DEPOSITS December 31,
- - - ----------------------------------------------------------
1993 1992
- - - ----------------------------------------------------------
Amounts due from credit
card trusts(A) $104,714 $106,452
Amounts due from
mortgage trusts(A) 39,718 32,755
Amounts due from
leasing trusts(A) 5,915 0
Certificates of deposit 149 128
Other interest-
bearing deposits 0 80,050
- - - ----------------------------------------------------------
Total interest-bearing deposits $150,496 $219,385
==========================================================
(A) Represents initial deposits and subsequent excess collections up to the
required amount on each of the credit card, mortgage and leasing
securitizations.
Amounts Due From Securitizations December 31,
- - - ----------------------------------------------------------
1993 1992
- - - ----------------------------------------------------------
Excess servicing-
credit card securitization $ 64,309 $ 59,128
Excess mortgage
servicing rights 57,017 40,699
Excess servicing-
leasing securitization 1,289 1,663
Due from trustees 30,467 37,254
- - - ----------------------------------------------------------
Amounts due from
securitizations $153,082 $138,744
==========================================================
OTHER ASSETS DECEMBER 31,
- - - ----------------------------------------------------------
1993 1992
- - - ----------------------------------------------------------
Accrued interest receivable $ 57,247 $ 43,176
Prepaid assets 16,307 9,420
Goodwill 5,648 5,934
Deferred costs 5,583 3,933
Other real estate(A) 1,447 1,100
Other 28,986 28,399
- - - ----------------------------------------------------------
Total other assets $115,218 $ 91,962
==========================================================
(A) Carried at the lower of cost or fair market value.
48
45
ADVANTA CORP. AND SUBSIDIARIES
OTHER LIABILITIES DECEMBER 31,
- - - ----------------------------------------------------------
1993 1992
- - - ----------------------------------------------------------
Current and deferred
income taxes $37,844 23,161
Accounts payable and
accrued expenses 15,139 13,440
Accrued interest payable 8,387 7,796
Other 8,691 23,382
- - - ----------------------------------------------------------
Total other liabilities $70,061 $67,779
==========================================================
NOTE 17. CASH, DIVIDEND AND LOAN RESTRICTIONS
- - - -------------------------------------------------
In the normal course of business, the Company and its subsidiaries enter into
agreements, or are subject to regulatory requirements, that result in cash,
debt and dividend restrictions.
At December 31, 1992, Advanta Leasing had $6.3 million of cash related
to its securitizations which is restric-ted as to its use. This cash represents
the initial deposits and subsequent excess collections up to the required amount
on each of the equipment lease-backed securitizations. In 1993, this amount is
included in interest-bearing deposits.
The Federal Reserve Act imposes various legal limitations on the extent
to which banks that are members of the Federal Reserve System can finance or
otherwise supply funds to certain of their affiliates. In particular, Colonial
National is subject to certain restrictions on any extensions of credit to, or
other covered transactions, such as certain purchases of assets, with the
Company or its affiliates. Such restrictions prevent Colonial National from
lending to the Company and its affiliates unless such extensions of credit are
secured by U.S. Government obligations or other specified collateral. Further,
such secured extensions of credit by Colonial National are limited in amount:
(a) as to the Company or any such affiliate, to 10 percent of Colonial
National's capital and surplus, and (b) as to the Com-pany and all such
affiliates in the aggregate, to 20 percent of Colonial National's capital and
surplus.
Under certain grandfathering provisions of the Competitive Equality
Banking Act of 1987, the Company is not required to register as a bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so
long as the Company and Colonial National continue to comply with certain
restrictions on their activities. With respect to Colonial National, these
restric-tions include limiting the scope of its activities to those in which it
was engaged prior to March 5, 1987. Since Colonial National was not making
commercial loans at that time, it must continue to refrain from making
commercial loans--which would include any loans to the Company or any of its
subsidiaries--in order for the Company to maintain its grandfathered exemption
under the BHCA. The Company has no present plans to register as a bank holding
company under the BHCA. Colonial National is subject to various legal
limitations on the amount of dividends that can be paid to its parent, Advanta
Corp. Colonial National 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 defined. During 1993, Colonial National paid $75.0
million of dividends to Advanta Corp., while $30.5 million of dividends were
paid during 1992.
The Office of the Comptroller of the Currency requires that Colonial
National maintain a risk-based capital ratio of at least 8%. Colonial National's
risk-based capital ratio of 12.06% at December 31, 1993 was in excess of the
required level and exceeded the minimum required capital level of 10% for
designation as a "well capitalized" depository institution.
49
46
ADVANTA CORP. AND SUBSIDIARIES
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
- - - ------------------------------------------------
The estimated fair values of the Company's financial instruments are as
follows:
- - - --------------------------------------------------------------------------
1993 1992
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- - - --------------------------------------------------------------------------
Financial assets:
Cash $ 31,162 $ 31,162 $ 35,743 $ 35,743
Federal funds
sold 83,700 83,700 92,900 92,900
Interest-bearing
deposits 150,496 150,496 219,385 219,385
Investments 308,026 308,026 209,282 210,377
Loans, net
of reserve
for credit
losses 1,282,653 1,327,455 977,581 1,035,601
Excess servicing rights:
Credit
cards 64,309 125,309 59,128 99,998
Mortgage
loans 57,017 59,217 40,699 42,299
Financial liabilities:
Demand and
savings
deposits $ 254,153 $ 254,153 $ 235,486 $ 235,486
Time deposits
and debt 1,466,940 1,488,660 1,240,167 1,264,081
Senior
subordinated
debentures 0 0 33,150 34,536
Other
borrowings 7,487 7,487 23,614 23,614
Off-balance sheet
financial instruments:
Interest rate swaps
(payable
position) $ 0 $ (5,693) $ 0 $ (5,306)
Forward
contracts (175) (64) (515) (1,202)
Intangibles:
Customer
relationships--
on-and off-
balance
sheet $ 0 $ 502,670 $ 0 $ 342,196
- - - --------------------------------------------------------------------------
The above values do not necessarily reflect the premium or discount that
could result from offering for sale at one time the Company's entire holdings of
a particular instrument. In addition, these values, derived from the methods and
assumptions described below, do not consider the potential income taxes or other
expenses that would be incurred on an actual sale of an asset or settlement of a
liability.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
CASH, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable estimate
of the fair value.
INVESTMENTS
For investment securities held to maturity and those available for sale, fair
values are based on quoted market prices, dealer quotes or estimated using
quoted market prices for similar securities.
LOANS, NET OF RESERVE FOR CREDIT LOSSES
For credit card receivables and mortgage loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value for credit card receivables
and mortgage loans also includes the estimated value of the portion of the
interest payments and fees which are not sold with the securities backed by
these types of loans. The value of the retained interest payments (i.e., excess
servicing) is estimated by discounting the future cash flows, adjusted for
prepayments, net of anticipated charge-offs and allowing for the value of the
servicing. The value of direct finance lease receivables and other loans are
estimated based on the market prices of similar receivables with similar
characteristics.
EXCESS SERVICING-CREDIT CARD AND MORTGAGE SERVICING RIGHTS
The fair values of excess mortgage servicing rights and credit card excess
servicing rights are estimated by dis-counting the future cash flows at rates
which management believes to be reasonable. However, because there is no active
market for these financial instruments, management
50
47
ADVANTA CORP. AND SUBSIDIARIES
has no basis to determine whether the fair values presented above would be
indicative of the value negotiated in an actual sale. The future cash flows
used to estimate the fair values of these financial instruments are adjusted
for prepayments, net of anticipated charge-offs under recourse provisions, and
allow for the value of servicing.
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 the benefit that results from the low cost of funding provided by these
deposits compared to the cost of borrowing funds in the market.
TIME DEPOSITS AND DEBT
The fair value of fixed-maturity certificates of deposit and notes are
estimated using the rates currently offered for deposits and notes of similar
remaining maturities.
SENIOR SUBORDINATED DEBENTURES
The fair value of the senior subordinated debentures is based on dealer
quotations.
OTHER BORROWINGS
The other borrowings are all at variable interest rates and therefore the
carrying value approximates a reasonable estimate of the fair value.
INTEREST RATE SWAPS AND FORWARD CONTRACTS
The fair value of interest rate swaps and forward contracts (used for hedging
purposes) is the estimated amount that the Company would pay to terminate the
agreement at the reporting date, taking into account current interest rates and
the current creditworthiness of the counterparty.
CUSTOMER RELATIONSHIPS (BOTH ON- AND OFF-BALANCE SHEET)
The fair value of the credit card relationships, which are not financial
instruments, is estimated using a credit card valuation model which considers
the value of the existing receivables together with the value of new
receivables and the associated fees generated from existing cardholders over
the remaining life of the portfolio.
COMMITMENTS TO EXTEND CREDIT
Although the Company had $12.1 billion of unused commitments to extend credit,
there is no market value associated with these financial instruments, as any
fees charged are consistent with the fees charged by other companies at the
reporting date to enter into similar agreements.
NOTE 19. CALCULATION OF EARNINGS PER COMMON SHARE
- - - --------------------------------------------------------
The following table shows the calculation of earnings per common share for the
years ended December 31, 1993, 1992 and 1991:
- - - ----------------------------------------------------------
1993 1992 1991
- - - ----------------------------------------------------------
Net income $76,647 $48,037 $25,165
less: preferred dividends (141) (141) (141)
- - - ----------------------------------------------------------
Net income
available to
common shares $76,506 $47,896 $25,024
Average common
stock outstanding 37,170 32,054 28,893
Common stock
equivalents 2,607 2,536 2,151
- - - ----------------------------------------------------------
Weighted
average shares
outstanding 39,777 34,590 31,044
==========================================================
Earnings per
common share $ 1.92 $ 1.38 $ .81
==========================================================
51
48
ADVANTA CORP. AND SUBSIDIARIES
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, 1993 and 1992, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. 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 generally accepted auditing
standards. 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, 1993 and 1992, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
/S/ ARTHUR ANDERSEN & CO.
-------------------------
Philadelphia, PA
January 25, 1994
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
contained in this Annual Report. These financial statements have been pre-pared
in accordance with generally accepted accounting principles and as such, must,
by necessity, include amounts based upon estimates and judgments made by
management. The other financial information in the Annual Report 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 in this Annual Report have been audited by
Arthur Andersen & Co., independent public accountants. Their audits were
conducted in accordance with generally accepted auditing standards and
considered the Company'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/ RICHARD A. GREENAWALT /S/ David D. Wesselink /S/ JOHN J. CALAMARI
------------------------- ------------------------ ---------------------
Richard A. Greenawalt David D. Wesselink John J. Calamari
President and Chief Senior Vice President Vice President,
Operating Officer and Chief Financial Officer Finance
52
49
ADVANTA CORP. AND SUBSIDIARIES
QUARTERLY DATA (UNAUDITED)
(In thousands, except per share data)
1993
- - - -----------------------------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
- - - -----------------------------------------------------------------------------------------------------------------------
Interest income $35,823 $41,189 $38,377 $ 35,992
Interest expense 19,733 19,676 19,665 20,229
-------------------------------------------------------
Net interest income 16,090 21,513 18,712 15,763
Provision for credit losses 8,230 8,027 6,364 7,181
-------------------------------------------------------
Net interest income after provision for credit losses 7,860 13,486 12,348 8,582
Noninterest revenues 75,243 64,948 58,338 57,051
Operating expenses 48,224 44,719 41,650 40,008
-------------------------------------------------------
Income before income taxes and extraordinary item 34,879 33,715 29,036 25,625
Net income before extraordinary item 23,020 20,285 18,471 16,144
Extraordinary item, net 0 0 (1,273) 0
- - - -----------------------------------------------------------------------------------------------------------------------
Net income $23,020 $20,285 $17,198 $ 16,144
=======================================================================================================================
Earnings per common share before extraordinary item $ 0.56 $ 0.50 $ 0.46 $ 0.45
=======================================================================================================================
Earnings per common share $ 0.56 $ 0.50 $ 0.43 $ 0.45
=======================================================================================================================
Weighted average common shares outstanding 41,243 40,732 40,299 35,829
=======================================================================================================================
1992
- - - -----------------------------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
- - - -----------------------------------------------------------------------------------------------------------------------
Interest income $34,652 $39,100 $42,248 $ 46,239
Interest expense 21,957 23,096 23,147 25,345
-------------------------------------------------------
Net interest income 12,695 16,004 19,101 20,894
Provision for credit losses 8,300 12,329 10,849 15,660
-------------------------------------------------------
Net interest income after provision for credit losses 4,395 3,675 8,252 5,234
Noninterest revenues 59,454 52,187 41,972 39,531
Operating expenses 40,259 33,695 33,557 30,089
-------------------------------------------------------
Income before income taxes 23,590 22,167 16,667 14,676
- - - -----------------------------------------------------------------------------------------------------------------------
Net income $14,861 $13,744 $10,331 $ 9,101
=======================================================================================================================
Earnings per common share $ 0.43 $ 0.40 $ 0.30 $ 0.26
=======================================================================================================================
Weighted average common shares outstanding 34,899 34,425 34,322 34,434
=======================================================================================================================
54
50
ADVANTA CORP. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES
Allocation of Reserve for Credit Losses
(Dollars in thousands) December 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------
Reserve Reserve Reserve Reserve Reserve
Amount % Amount % Amount % Amount % Amount %
- - - -----------------------------------------------------------------------------------------------------------------------
Credit cards $25,859 83% $35,743 89% $31,193 86% $27,247 86% $19,247 83%
Mortgage loans 2,706 9 2,926 7 2,447 7 1,766 6 1,411 6
Leases 1,826 6 1,442 4 1,119 3 1,594 5 1,363 6
Other loans 836 2 117 -- 200 -- 200 -- 200 1
Unallocated 0 -- 0 -- 1,396 4 894 3 887 4
- - - -----------------------------------------------------------------------------------------------------------------------
Total $31,227 100% $40,228 100% $36,355 100% $31,701 100% $23,108 100%
=======================================================================================================================
COMPOSITION OF GROSS RECEIVABLES
(Dollars in thousands) December 31,
- - - -----------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
-------------- -------------- -------------- -------------- ---------------
Amount % Amount % Amount % Amount % Amount %
- - - -----------------------------------------------------------------------------------------------------------------------
Credit cards $1,131,367 89% $ 737,485 74% $1,048,325 82% $ 791,447 70% $ 657,032 69%
Mortgage loans 91,340 7 212,273 21 186,820 15 252,339 22 214,843 23
Leases 51,008 4 46,712 5 36,510 3 83,557 8 72,626 8
Other loans 3,590 -- 1,774 -- 1,765 -- 2,150 -- 2,501 --
- - - -----------------------------------------------------------------------------------------------------------------------
Total $1,277,305 100% $ 998,244 100% $1,273,420 100% $1,129,493 100% $ 947,002 100%
=======================================================================================================================
YIELD AND MATURITY OF INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1993
(Dollars in thousands)
- - - -----------------------------------------------------------------------------------------------------------------------
Maturing
- - - -----------------------------------------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
--------------- ----------------- ----------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
- - - -----------------------------------------------------------------------------------------------------------------------
U. S. Treasury and other
U.S. Government
securities $59,859 3.38% 95,062 4.48% $ 0 0.00% $ 0 0.00%
State and municipal
securities(A) 0 0.00 75,667 4.70 998 6.92 0 0.00
Other 2,527 3.17 12,305 6.02 28,776 5.97 32,832 5.87
- - - -----------------------------------------------------------------------------------------------------------------------
Total $62,386 3.37% 183,034 4.68% $29,774 6.00% $32,832 5.87%
=======================================================================================================================
(A) Yield computed on a taxable equivalent basis using a statutory rate of 35%
in 1993.
55
51
ADVANTA CORP. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands) December 31,
- - - ----------------------------------------------------------
1993
- - - ----------------------------------------------------------
Maturity:
3 months or less $ 66,250
Over 3 months through 6 months 43,450
Over 6 months through 12 months 24,203
Over 12 months 20,263
- - - ----------------------------------------------------------
Total $154,166
==========================================================
53
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the caption "Election of
Directors" and the last paragraph under the caption "Security Ownership of
Management" are hereby incorporated herein by reference, as is the text in Part
I of this Report under the caption, "Executive Officers of the Registrant".
Graeme K. Howard, Jr., age 61, who has served as a director of the Company
since 1985, will not stand for re-election when his term expires in May 1994.
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive
Compensation" and "Committees, Meetings and Compensation of the Board of
Directors" 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 third paragraph under the caption "Election of
Directors -- Nominees for Election for a Term Expiring in 1997" in the Proxy
Statement is hereby incorporated herein by reference.
54
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, 1993 and 1992.
2. Consolidated Income Statements for each of the three years
for the period ended December 31, 1993.
3. Consolidated Statements of Changes in Stockholders' Equity for
each of the three years for the period ended December 31, 1993.
4. Consolidated Statements of Cash Flows for each of the three
years for the period ended December 31, 1993.
5. Notes to Consolidated Financial Statements.
(a) (2) Schedules
1. Schedule I -- Marketable Securities.
2. Schedule III -- Condensed Financial Information of Registrant
3. Schedule VIII -- Valuation and Qualifying Accounts.
4. Schedule IX -- Short-Term Borrowings.
5. Report of Independent Public Accountants on Supplemental
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.
(a) (3) Exhibits.
3-a Restated Certificate of Incorporation of Registrant, as
amended (incorporated by reference to Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1988 and Exhibit 3 to the Company's Quarterly
Report on Form 10- Q for the period ended March 31, 1992).
3-b By-Laws of the Registrant, as amended (incorporated by
reference to Exhibit 3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1989).
4-a* Trust Indenture dated April 22, 1981 between Registrant and
CoreStates Bank, N.A. (formerly, The Philadelphia National
Bank), 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,
55
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 of the Registrant's Registration Statement on Form S-3 (No.
33-50883), filed November 2, 1993.
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 Advanta Corp. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10-t to the Registrant's Registration
Statement on Form S-3, Registration No. 33-58660, filed
February 23, 1993).
10-c Pooling and Servicing Agreement between Colonial National Bank
USA and Bankers Trust Company, as Trustee, dated as of May 1,
1991 (incorporated by reference to Exhibit 4.1 to Colonial
National's Registration Statement on Form S-1 (No. 33-40368),
filed with Amendment No.1 thereto on May 21, 1991)
10-d Registrant's Advanta Management Incentive Plan (incorporated
by reference to Exhibit 10-n to the Registrant's Registration
Statement on Form S-2, Registration No.33-39343, filed March
8, 1991).**
10-e* Application for membership in VISA U.S.A. Inc. and Membership
Agreement executed by Colonial National Bank USA on March 25,
1983.
10-f* Application for membership in MasterCard International, Inc.
and Card Member License Agreement executed by Colonial
National Bank USA on March 25, 1983.
10-g* Indenture of Trust dated May 11, 1984 between Linda M.
Ominsky, as settlor, and Dennis Alter, as trustee.
10-g(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 A. Ominsky, 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, Registration No. 33-58660, filed
February 23, 1993).
10-h Agreement dated as of January 21, 1994 betweenn the Registrant
and Alex W. "Pete" Hart (filed herewith).**
10-i 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 (No.
33-33350) filed February 21, 1990).**
10-j Pooling and Servicing Agreement between Colonial National Bank
USA and Bankers Trust Company, as Trustee, dated as of August
1, 1990 (incorporated by reference to Exhibit 4 to the
Registrant's Report on Form 8-K filed September 11, 1990).
10-k Pooling and Servicing Agreement between Colonial National Bank
USA and Bankers Trust Company, as Trustee, dated as of
November 15, 1990 (incorporated by reference to Exhibit 4 to
the Registrant's Report on Form 8-K filed November 30, 1990).
56
10-l Registrant's 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, Registration
No. 33-39343, filed March 8, 1991).**
10-m Pooling and Servicing Agreement between Colonial National Bank
USA and Banker's Trust Company, as Trustee, dated as of
September 1, 1991 (incorporated by reference to Exhibit 4.1 to
Colonial National's Registration Statement on Form S-1 (No.33-
42682), filed with Amendment No. 1 thereto on September 23,
1991).
10-n Pooling and Servicing Agreement between Colonial National Bank
USA and Banker's Trust Company, as Trustee, dated as of
February 1, 1992 (incorporated by reference to Exhibit 4.1 to
Colonial National's Registration Statement on Form S-1 (No.33-
45306), filed with Amendment No.1 thereto on February 3,
1992).
10-o Amended and Restated Master Pooling and Servicing Agreement
between Colonial National Bank USA and Chemical Bank, as
Trustee, dated as of April 1, 1992 (incorporated by reference
to Exhibit 4.1 to Colonial National's Registration Statement
on Form S-1 (No. 33-49602), filed with Amendment No. 1
thereto on August 19, 1992).
10-p Advanta Management Incentive Plan with Stock Election III
(incorporated by reference to Exhibit 10-s to the Registrant's
Registration Statement on Form S-3, Registration No. 33-58660,
filed February 23, 1993).**
10-q Life Insurance Benefit for Certain Key Executives and
Directors (incorporated by reference to Exhibit 10-u to the
Registrant's Registration Statement on Form S-3, Registration
No. 33-58660, filed February 23, 1993).**
10-r $122.5 Million 364-day Unsecured Revolving Credit Agreement
dated as of March 24, 1994 among the Registrant, Mellon Bank,
N.A. as Agent and the several bank parties thereto (filed
herewith).
10-s $122.5 Million 3-year Unsecured Revolving Credit Agreement
dated as of March 24, 1994 among the Registrant, Mellon Bank,
N.A. as Agent and the several bank parties thereto (filed
herewith).
11 Inapplicable.
12 Inapplicable.
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 of Messrs. Bellis, Botel, Braemer, Brenner,
Dunkelberg and Naples (filed herewith).
57
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 Form 8-K was filed by the Registrant
on October 25, 1993 regarding consolidated
earnings of the Registrant and its
subsidiaries for the fiscal quarter ended
September 30, 1993. Summary earnings and
balance sheet information as of that date
were filed with such report.
2. A Report Form 8-K was filed by the Registrant
on December 3, 1993 regarding the
commencement of the Registrant's $500,000,000
medium-term note program. No financial
statements were filed with such Report.
3. A Report Form 8-K was filed by the Registrant
on January 20, 1994 regarding consolidated
earnings for the Registrant and its
subsidiaries for the fiscal quarter ended and
fiscal year ended December 31, 1993. Summary
earnings and balance sheet information as of
that date were filed with such report.
58
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.
Dated: March 28, 1994 By: /S/ Dennis Alter
-------------------
Dennis Alter, Chairman
of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 1994.
Name Title
/S/ Dennis Alter Chairman of the Board and Chief
- - - ------------------- Executive Officer
Dennis Alter
/S/ Alex W. "Pete" Hart Executive Vice Chairman and
- - - ----------------------- Director
Alex W. "Pete" Hart
/S/ Richard A. Greenawalt President, Chief Operating
- - - ------------------------- Officer and Director
Richard A. Greenawalt
/S/ Warren Kantor Vice Chairman and Director
- - - -----------------
Warren Kantor
/S/ David D. Wesselink Senior Vice President and
- - - ---------------------- Chief Financial Officer
David D. Wesselink
/S/ John J. Calamari Vice President, Finance and
- - - -------------------- Chief Accounting Officer
John J. Calamari
* Director
- - - ----------------------------
Arthur P. Bellis
* Director
- - - ----------------------------
Max Botel
* Director
- - - ----------------------------
Richard Braemer
* Director
- - - ----------------------------
Anthony Brenner
* Director
- - - ----------------------------
William C. Dunkelberg, Ph.D.
Director
- - - ----------------------------
Graeme K. Howard, Jr.
* Director
- - - ----------------------------
Ronald J. Naples
59
Director
- - - ----------------------------
Phillip Turberg
*By: /s/ Gene S. Schneyer
---------------------
Gene S. Schneyer
Attorney-in-Fact
60
FINANCIAL SCHEDULES AND
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT THEREON
61
Schedule I
ADVANTA CORP. & SUBSIDIARIES
Marketable Securities
December 31, 1993
(Dollars in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Amount at which
each portfolio
equity security
Market value issues and each
Number of shares or of each issue other security
Name of issuer and or units-principal Cost of at balance issue is carrie
title of each issue of bonds & notes each issue sheet date the balance she
- - - ------------------------------------------------------ -------------------------------
US Treasury and
other US Govt Secs $154,388 par $154,656 $154,921 $154,921
State and other
municipal securitie $74,370 par 76,077 76,665 76,665
Collateralized
mortgage obligation $21,206 par 21,422 21,270 21,270
Mortgaged backed
securities $44,671 par 45,778 45,569 45,569
Equity securities 197,679 shares 6,947 6,947 6,947
Other $2,073 par 2,709 2,654 2,654
-----------------------------------------
TOTAL $307,589 $308,026 $308,026
=========================================
62
ADVANTA CORP. & SUBSIDIARIES
December 31, 1993
Schedule III - Condensed Financial Information of Registrant
Parent Company Only
CONDENSED BALANCE SHEETS
(Dollars in thousands)
December 31,
--------------------
1993 1992
---- ----
ASSETS
Cash $ 44,561 $ 13,130
Interest-bearing deposits 0 24,350
Investments 136,523 61,824
Other assets, principally investments in and
advances to wholly owned subsidiaries 582,846 386,589
-------- --------
Total assets $763,930 $485,893
======== ========
LIABILITIES
Accrued expenses and other liabilities $ 4,597 $ 6,705
Subordinated debt and other borrowings 416,592 304,318
-------- --------
Total liabilities 421,189 311,023
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 398 342
Other stockholders' equity 341,333 173,518
-------- --------
Total stockholders' equity 342,741 174,870
-------- --------
Total liabilities and stockholders
equity $763,930 $485,893
======== ========
63
Schedule III (cont'd)
Parent Company Only
CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
Year Ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Income:
Interest $ 8,545 $ 4,807 $ 3,759
Other 4,163 5,359 4,381
--------- --------- ---------
Total Income 12,708 10,166 8,140
--------- --------- ---------
Expenses:
General and administrative 57,051 30,097 17,834
Interest 21,544 23,434 20,247
--------- --------- ---------
Total Expenses 78,595 53,531 38,081
--------- --------- ---------
Loss before income taxes,
equity in subsidiaries,
and extraordinary item (65,887) (43,365) (29,941)
Benefit for income taxes 25,147 16,728 12,552
--------- --------- ---------
Loss before equity in
subsidiaries and
extraordinary item (40,740) (26,637) (17,389)
Equity in net profit of
subsidiaries 118,660 74,674 42,554
--------- --------- ---------
Net income before
extraordinary item 77,920 48,037 25,165
Extraordinary item, net (1,273) 0 0
--------- --------- ---------
Net income $ 76,647 $ 48,037 $ 25,165
========= ========= =========
64
Schedule III (Cont'd)
Parent Company Only
Statement of Cash Flows
Year Ended December 31,
---------------------------------------
1993 1992 1991
----------- ------------ -----------
OPERATING ACTIVITIES
Net Income $ 76,647 $ 48,037 $ 25,165
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation 335 328 359
Change in other assets (101,210) (98,683) (46,536)
Change in accrued liabilities 1,955 4,078 (9,929)
Loss on repurchase of senior
subordinated debentures 1,928 0 0
- - - --------------------------------------------------------------------------------------------
Net cash used by operating activities (20,345) (46,240) (30,941)
INVESTING ACTIVITIES
Net change in premises & equipment (454) 39 (342)
Purchase of investments (291,548) (61,119) (40,869)
Proceeds from sales of investments 186,051 0 14,788
Proceeds from maturing investments 31,715 22,444 2,942
Principal collected on loans 0 0 10
Capital contribution to subsidiaries 0 0 (12,475)
Dividends received from subsidiaries 61,986 25,239 0
Change in interest-bearing deposits 24,350 (22,722) 35,776
- - - --------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities 12,100 (36,119) (170)
FINANCING ACTIVITIES
Proceeds from issuance of subordinated debt 85,380 177,321 132,022
Payments on redemption of subordinated debt (103,480) (98,711) (80,916)
Increase in affiliate borrowings (156,915) (13,114) (9,900)
Redemption of senior subordinated debt (36,404) 0 0
Proceeds from issuance of medium-term
notes 164,851 0 0
Cash dividends paid (7,298) (4,028) (2,111)
Purchase of treasury stock 0 0 (62)
Issuance of stock 93,542 3,377 21,300
- - - --------------------------------------------------------------------------------------------
Net cash provided by financing activities 39,676 64,845 60,333
- - - --------------------------------------------------------------------------------------------
Net increase/(decrease) in cash 31,431 (17,514) 29,222
Cash at beginning of year 13,130 30,644 1,422
Cash at end of year $ 44,561 $ 13,130 $ 30,644
============================================================================================
65
Schedule VIII
ADVANTA Corp. & Subsidiaries
Valuation & Qualifying Accounts
($000's)
Column A Column B Column C Column D Column E
------------ ------------ ----------------------- ------------ ------------
Additions
-----------------------
Year Balance Charged Charged to Balance
Ended at to Other at
December Beginning Costs and Accounts Deductions End
31, Description of Period Expenses (Describe) (Describe) of Period
- - - ----------------------------------------------------------------------------------------------------------
1993 Reserve for
losses on
securitized
credit cards 108,756 0 69,964 (1) 82,343 (3) 96,377
Reserve for
prepayments
and credit
losses on
securitized HEL 17,861 0 34,436 (1) (2) 11,784 (3) 40,513
Reserve for
losses on
securitized
Leases 3,100 0 4,010 (1) 1,812 (3) 5,298
Reserve for
uncollectable
receivables &
unbillable fees 97 170 0 (1) 244 (3) 23
1992 Reserve for
losses on
securitized
credit cards 48,094 0 123,745 (1) 63,083 (3) 108,756
Reserve for
prepayments
and credit
losses on
securitized HEL 12,081 0 11,203 (1) (4) 5,423 (3) 17,861
Reserve for
losses on
securitized
Leases 2,400 0 1,785 (1) 1,085 (3) 3,100
Reserve for
uncollectable
receivables &
unbillable fees 0 110 0 13 (3) 97
1991 Reserve for
losses on
securitized
credit cards 27,400 0 57,555 (1) 36,861 (3) 48,094
Reserve for
prepayments
and credit
losses on
securitized HEL 10,351 0 3,134 (1) 1,404 (3) 12,081
Reserve for
losses on
securitized
Leases 0 0 2,400 (1) 0 2,400
(1) Amounts netted against securitization income.
(2) Includes $11.0MM transferred from on-balance sheet unallocated reserves.
(3) Relates to net charge-offs.
(4) Includes $3.3MM transferred from on-balance sheet unallocated reserves.
66
Schedule IX
ADVANTA CORP. & SUBSIDIARIES
Short-Term Borrowings
($000's)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Year Category of Weighted Maximum Average amount Weighted average
Ended aggregate Balance average outstanding outstanding interest rate
December short-term at end of interest during during the during the
31, borrowings period rate the period period period
- - - ------------------------------------------------------------------------------------------------------
1993 Securities
sold under
agreements to
repurchase $0 0.00% $166,481 $42,649 3.07%
Notes payable
to banks 0 0.00% 45,355 17,337 5.62%
1992 Securities
sold under
agreements to
repurchase 0 0.00% 124,337 25,216 3.98%
Notes payable
to banks 7,066 7.02% 17,299 9,871 6.76%
1991 Securities
sold under
agreements to
repurchase 101,847 5.10% 101,847 18,836 6.36%
Notes payable
to banks 6,262 7.79% 18,048 8,220 8.87%
67
[ARTHUR ANDERSEN LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL SCHEDULES
To Advanta Corp.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K, and have issued
our report thereon dated January 25, 1994. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
schedules are the responsibility of the company's management and are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial stataments. These schedules have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/S/ ARTHUR ANDERSEN & CO.
Philadelphia, PA
January 25, 1994
68
EXHIBIT INDEX
3-a Restated Certificate of Incorporation of Registrant,
as amended (incorporated by reference to Exhibit 3 to
the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1988 and Exhibit 3 to the
Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1992).
3-b By-Laws of the Registrant, as amended (incorporated
by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989).
4-a* Trust Indenture dated April 22, 1981 between
Registrant and CoreStates Bank, N.A. (formerly, The
Philadelphia National Bank), 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 of the Registrant's Registration Statement
on Form S-3 (No. 33-50883), filed November 2,
1993.
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 Advanta Corp. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10-t to the Registrant's
Registration Statement on Form S-3, Registration No.
33-58660, filed February 23, 1993).
10-c Pooling and Servicing Agreement between Colonial
National Bank USA and Bankers Trust Company, as
Trustee, dated as of May 1, 1991 (incorporated by
reference to Exhibit 4.1 to Colonial National's
Registration Statement on Form S-1 (No. 33-40368),
filed with Amendment No.1 thereto on May 21, 1991)
10-d Registrant's Advanta Management Incentive Plan
(incorporated by reference to Exhibit 10-n to the
Registrant's Registration Statement on Form S-2,
Registration No.33-39343, filed March 8, 1991).**
10-e* Application for membership in VISA U.S.A. Inc. and
Membership Agreement executed by Colonial National
Bank USA on March 25, 1983.
10-f* Application for membership in MasterCard
International, Inc. and Card Member License
Agreement executed by Colonial National Bank USA on
March 25, 1983.
10-g* Indenture of Trust dated May 11, 1984 between Linda
M. Ominsky, as settlor, and Dennis Alter, as trustee.
69
10-g(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 A.
Ominsky, 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, Registration No. 33-58660,
filed February 23, 1993).
10-h Agreement dated as of January 21, 1994 betweenn the
Registrant and Alex W. "Pete" Hart (filed
herewith).**
10-i 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 (No. 33-33350) filed February
21, 1990).**
10-j Pooling and Servicing Agreement between Colonial
National Bank USA and Bankers Trust Company, as
Trustee, dated as of August 1, 1990 (incorporated by
reference to Exhibit 4 to the Registrant's Report on
Form 8-K filed September 11, 1990).
10-k Pooling and Servicing Agreement between Colonial
National Bank USA and Bankers Trust Company, as
Trustee, dated as of November 15, 1990 (incorporated
by reference to Exhibit 4 to the Registrant's Report
on Form 8-K filed November 30, 1990).
10-l Registrant's 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, Registration No. 33-39343,
filed March 8, 1991).**
10-m Pooling and Servicing Agreement between Colonial
National Bank USA and Banker's Trust Company, as
Trustee, dated as of September 1, 1991 (incorporated
by reference to Exhibit 4.1 to Colonial National's
Registration Statement on Form S-1 (No.33-42682),
filed with Amendment No. 1 thereto on September 23,
1991).
10-n Pooling and Servicing Agreement between Colonial
National Bank USA and Banker's Trust Company, as
Trustee, dated as of February 1, 1992 (incorporated
by reference to Exhibit 4.1 to Colonial National's
Registration Statement on Form S-1(No.33-45306),
filed with Amendment No.1 thereto on February 3,
1992).
10-o Amended and Restated Master Pooling and Servicing
Agreement between Colonial National Bank USA and
Chemical Bank, as Trustee, dated as of April 1, 1992
(incorporated by reference to Exhibit 4.1 to Colonial
National's Registration Statement on Form S-1 (No.
33-49602), filed with Amendment No. 1 thereto on
August 19, 1992).
10-p Advanta Management Incentive Plan with Stock Election
III (incorporated by reference to Exhibit 10-s to the
Registrant's Registration Statement on Form S-3,
Registration No. 33-58660, filed February 23,
1993).**
10-q Life Insurance Benefit for Certain Key Executives and
Directors (incorporated by reference to Exhibit 10-u
to the Registrant's Registration Statement on Form
S-3, Registration No. 33-58660, filed February 23,
1993).**
10-r $122.5 Million 364-day Unsecured Revolving Credit
Agreement dated as of March 24, 1994 among the
Registrant, Mellon Bank, N.A. as Agent and the
several bank parties thereto (filed herewith).
70
10-s $122.5 Million 3-year Unsecured Revolving Credit
Agreement dated as of March 24, 1994 among the
Registrant, Mellon Bank, N.A. as Agent and the
several bank parties thereto (filed herewith).
11 Inapplicable.
12 Inapplicable.
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 of Messrs. Bellis, Botel, Braemer,
Brenner, Dunkelberg and Naples (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.