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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, 1995 or
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[ ] 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.
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(Exact name of Registrant as specified in its Charter)
Delaware 23-1462070
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
organization)
Five Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 657-4000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
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
6 3/4% Convertible Class B Preferred Stock, Series 1995
(Stock Appreciation Income Linked Securities (SAILS)(SM))
- - ------------------------------------------------------------------------------
(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
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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 [ ].
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Advanta Corp. and Subsidiaries
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.)
$ 577,899,664.50 as of March 1, 1996 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, 1996 there were 17,508,520 shares of the Registrant's
Class A Common Stock, $.01 par value, outstanding and 24,080,365 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 1996 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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Advanta Corp. and Subsidiaries
PART I
ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. (the "Company") serves consumers and small businesses through
innovative products and services primarily via direct, cost effective delivery
systems. The Company primarily originates and services credit cards and
mortgages. Other products include small-ticket equipment leasing, credit
insurance and deposit products. The Company utilizes customer information
attributes including credit assessments, usage patterns, and other
characteristics enhanced by proprietary information to match customer profiles
with appropriate products. At year end 1995 assets under management totaled
$14 billion.
Approximately 73% of total revenues are derived from credit cards
marketed through carefully targeted direct mail campaigns. For the past
several years, the Company's strategy has been to market this product in the
form of a no annual fee, low variable-rate gold card. The Company has
successfully grown to one of the ten largest issuers of gold cards and ranks
among the top 15 bankcard issuers worldwide. Mortgage services contributes 9%
of total revenues with a managed loan portfolio of $1.8 billion. Mortgage
loans are originated directly with consumers, as well as through conduit
relationships and wholesale purchases from brokers and other financial
institutions.
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 Five
Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044-0749. The
Company's telephone number at its principal executive office is (215) 657-4000.
References to the Company in this Report include its consolidated subsidiaries
unless the context otherwise requires.
ADVANTA PERSONAL PAYMENT SERVICES
During 1995, the Company's consumer credit card unit adopted the name Advanta
Personal Payment Services, which more appropriately captures the unit's mission
and its goal of expansion into new delivery systems. The credit card, a
vehicle enabling the consumer to transact purchases and facilitate borrowing,
offers utility to the consumer that may move beyond its traditional platform.
For example, "smart" credit cards (credit cards containing a microchip
processor) and on-line payment delivery systems associated with a credit card
account are nascent technologies which may in the future be a part of Advanta
Personal Payment Systems.
The Company, which has been in the credit card business since 1983,
issues gold (i.e., premium) and standard MasterCard(R)* and VISA(R)* credit
cards nationwide. The Company has built a substantial cardholder base which,
as of December 31, 1995, totaled 4.8 million accounts and $10.0 billion in
managed receivables. The gold card strategy has produced a portfolio with 82%
of its balances derived from gold cards. This contrasts with the bankcard
industry as a whole, which is composed of 43% gold (versus standard) cards.
The Company believes its concentration of gold card balances to be the highest
among the top twenty bankcard issuers. The top twenty bankcard issuers, as of
December 31, 1995, accounted for more than 75% of all balances outstanding.
Both gold and standard accounts undergo the same credit analysis, but gold
accounts have higher initial credit limits because of the cardholders' better
credit quality. 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
- - --------------------------
* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.; VISA(R) is a federally registered servicemark of VISA,
U.S.A., Inc.
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Advanta Corp. and Subsidiaries
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. In 1995, the Company chartered Advanta National Bank
("ANB") to complement the credit card activities of Colonial National. ANB is
a type of limited purpose national bank known as a "credit card bank" whose
lending activities are limited to consumer credit card lending. See
"Government Regulation -- Colonial National Bank USA and Advanta National
Bank." Prior to the establishment of ANB, substantially all of the Company's
credit card receivables and bank deposits were originated by Colonial National.
However, at December 31, 1995, ANB accounted for $1.7 billion of the Company's
total of $10.0 billion of managed credit card assets, and $684 million of the
total $1.9 billion of bank deposits. It is anticipated that in 1996, ANB will
grow to represent a larger percentage of the Company's credit card business.
MasterCard and VISA license banks, such as Colonial National and ANB
(together the "Banks") 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. Cardholders may also
use special credit line drafts issued by the Banks to draw against their Visa
or MasterCard credit lines for cash, purchases or balance transfers. Each
credit card transaction 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 appropriate
settlement system. The card issuing bank receives an interchange fee as
compensation for the funding and credit and fraud 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 averaging 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 enhancements they may select, and revenues paid to the
Banks 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, credit lines, quality
service, and payment terms.
While the Company believes that its credit card offers will continue
to appeal to consumers for the reasons stated, the Company also notes that for
several years competition has been increasing in the credit card industry. At
the same time, the U.S. consumer has become a generally more sophisticated and
demanding user of credit. These forces are likely to produce significant
changes in the industry. The Company is devoting substantial resources to
meeting the challenges and taking advantage of the opportunities which
management sees emerging in the industry. In 1994 and 1995, this included
significant focus on balance transfer initiatives, in which the Company
encouraged new and existing customers to transfer account balances they were
maintaining with other credit card issuers to a Colonial National or ANB
account with a lower interest rate. In addition, as part of the strategy to
broaden and deepen its relationship with the consumer, the Company has launched
some proprietary branded credit card products. These products were crafted to
meet an identified long-term consumer need and
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are expected to establish relationships with consumers that will be lasting.
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 either to the prime rate or the London interbank
offered rate ("LIBOR"). This variable rate structure helps the Company
maintain net interest margins in both rising and declining interest rate
environments. As Delaware, the Banks' 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 the Banks may
charge to that state's residents, the enforceability of such regulation is
unclear and is currently the subject of litigation in certain states. See
"Government Regulation -- Colonial National Bank USA and Advanta National
Bank."
The following table shows the geographic distribution by state of
total managed credit card receivables among the top five states, together with
the impaired credit card receivables in those states, as of December 31, 1995.
PERCENT OF PERCENT OF PERCENT OF
CREDIT TOTAL TOTAL IMPAIRED TO
CARD TOTAL PORTFOLIO IMPAIRED TOTAL
RECEIVABLES IMPAIRED BY STATE BY STATE RECEIVABLES
----------- -------- -------- -------- -----------
(Dollars in millions)
California $ 1,590.6 $ 20.0 15.9% 19.0% .2%
New York 766.3 9.9 7.6 9.3 .1
Texas 653.9 8.3 6.5 7.9 .1
Florida 581.7 8.2 5.8 7.8 .0
Illinois 436.8 4.1 4.4 3.9 .0
Other 6,001.4 54.9 59.8 52.1 .6
--------- ------ ------ ------ ---
TOTAL $10,030.7 $105.4 100.0% 100.0% 1.0%
========= ====== ===== ===== ===
Since 1988, Colonial National has been active in the credit card
securitization market, and since its inception in 1995 ANB has likewise become
active, together securitizing $3.4 billion of credit card receivables in 1995.
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.
The Banks' securitization program provides a number of benefits:
diversifying the Banks' funding base, providing liquidity, reducing regulatory
capital requirements, lowering the 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,
the Banks continue 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 Banks of the
receivables generated by a pool of credit card accounts to a securitization
trust. Certificates issued by the trust and sold to investors
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represent undivided ownership interests in receivables transferred to the trust.
The securitization results in removal of the receivables from the Banks' and 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 Banks.
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 in certain circumstances. 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. Colonial National services
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 losses and servicing fees) are
first retained to build up a reserve fund to a certain level, after which
amounts are remitted to the Banks. The Banks' relationship with its credit card
customers is not affected by the securitization.
Investors in the trust receive payments only of interest during the
first three to eight and one-half 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
Banks.
ADVANTA PERSONAL FINANCE SERVICES
Formerly designated Advanta Mortgage, the new name Advanta Personal Finance
Services ("APFS") reflects the growing diversification and product array of
this business unit, which in 1995 expanded to include both Advanta Mortgage
and Advanta Finance, and is poised to launch an automobile financing business
(Advanta Auto Finance) in 1996.
Advanta Mortgage Corp. USA originates, purchases, securitizes, and
services non-conforming credit first and second mortgage loans directly,
through its subsidiaries, and for Colonial National's "Advanta Mortgage USA"
Division (collectively, "Advanta Mortgage"). Loan production is generated
through multiple distribution channels including two centralized, direct to
consumer origination centers (each one dedicated to a specific product), a
broker network serviced by selected sales locations, correspondent
relationships and purchases from other financial institutions. In 1995,
Advanta Mortgage developed and tested a Home Equity Line of Credit product.
Loan production volume relating to this product was not material in 1995 but is
expected to grow significantly in 1996.
During 1995 a new business channel, "Advanta Finance," was launched,
offering loans directly to the consumer through a branch office system.
Through December 31, 1995, eighteen branches were opened offering first and
second lien mortgage loans similar to those offered by Advanta Mortgage.
Production activity for the year was not material but is expected to become
significant in 1996. The combined origination volume for APFS for 1995 was
$773 million. Beginning in 1996, Advanta Auto Finance expects to offer loans
secured by automobiles to sub-prime customers, largely through correspondent
relationships.
Advanta Mortgage originates and purchases loans, generally funding
these loans through sales or securitizations which have been structured to
qualify as real estate mortgage investment conduits ("REMICs") under the
Internal Revenue Code. In a securitization, Advanta Mortgage typically sells
receivables to a trust for cash while retaining an interest in the loans
securitized. The cash purchase
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Advanta Corp. and Subsidiaries
price is generated through an offering of pass-through certificates by the
trust. The purchasers of the pass-through certificates are generally entitled
to the principal collected and a portion of the interest collected on the
underlying loans while Advanta Mortgage retains the "excess spread." The
excess spread represents the excess of the interest and fees paid by borrowers
on the underlying loans over the sum of the pass-through rate of interest
payable to the certificate holders, credit losses, a servicing fee which is
paid to the Company in its role as servicer, and certain transaction related
costs. During 1995, Advanta Mortgage securitized $542 million of loans.
The excess spread is received over the life of the loans. However,
in accordance with generally accepted accounting principles ("GAAP"), Advanta
Mortgage recognizes the estimated present value of the excess spread as a
component of mortgage banking income in the fiscal period in which the loans
are sold. The gain recognized reflects estimates of the impact of future credit
losses and loan prepayments. Other basic sources of income to Advanta Mortgage
are net interest income on loans outstanding pending their sale, and loan
servicing income, including "contract servicing" on loans which were never
owned by the Company. See Note 1 of Notes to Consolidated Financial
Statements.
Advanta Mortgage's managed portfolio of receivables includes owned
loans (generally held for sale) as well as the loans it services in which it
retains an interest in the excess spread. At December 31, 1995, owned mortgage
loans receivable totaled $322 million while total managed receivables were
$1,798 million. Loans serviced under contract for a fee are not included in
the Company's "managed portfolio" as the performance of such loans does not
have a material impact on the Company's 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 of Notes to
Consolidated Financial Statements. Total loans serviced at December 31, 1995,
including loans serviced for others for a fee, were $2,421 million.
Approximately 78% of the managed portfolio is secured by first
mortgages and the balance is secured by second mortgages. Approximately 81% of
the managed portfolio is comprised of fixed rate loans while the remainder
represents adjustable rate loans. At December 31, 1995, total mortgage loans
managed, and the nonperforming loans included in these totals, are concentrated
in the following five states:
PERCENT OF
PERCENT OF PERCENT OF NONPERFORMING
MORTGAGE TOTAL PORTFOLIO BY NONPERFORMING BY TO TOTAL
RECEIVABLES NONPERFORMING STATE STATE RECEIVABLES
----------- ------------- ----- ----- -----------
(Dollars in
millions)
California $ 389.0 $ 14.2 21.6% 25.0% 0.8%
New York 182.5 8.7 10.2 15.3 0.5
New Jersey 179.0 11.2 10.0 19.8 0.6
Maryland 159.1 3.7 8.8 6.5 0.2
Pennsylvania 129.3 4.4 7.2 7.8 0.3
Other 758.7 14.5 42.2 25.6 0.8
TOTAL $1,797.6 $ 56.7 100.0% 100.0% 3.2%
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.
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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 the loan grade. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Provision for Credit Losses"
and "-- Credit Risk Management -- Asset Quality."
ADVANTA BUSINESS SERVICES
In late 1994, the Company's subsidiary, Advanta Leasing Corp., changed its name
to Advanta Business Services Corp. ("ABS"), reflecting the Company's intention
to expand its offerings to small business customers. The name change followed
the Company's introduction, in July 1994, of a business purpose MasterCard
credit card as a supplement to its commercial equipment leasing business. Both
lines of business continue to expand.
The commercial equipment leasing business is generated primarily
through third party referrals from manufacturers or distributors of equipment
as well as independent brokers. Most contact with these referral sources is
made from the Company's ABS headquarters in Voorhees, New Jersey, using
extensive direct marketing operations. These operations include a staff of
telephone sales representatives who are assigned to specific industries, and
backed by the Company's direct mail advertising program. Additional business
is also generated from direct contact with customers through these same
channels.
Leasing originations volume, measured by the cost of the equipment
included in new lease contracts, continues to grow, from a total of $190 million
in 1994 to $251 million in 1995. While much of this growth is due to increased
penetration of existing markets, such as office machinery, security systems and
computers, some has been the result of expansion into additional market
segments. The most significant of these are leasing programs for certain
industrial and agricultural equipment and programs for leasing equipment to
agencies of State and local governments. The Company's growth in its
traditional markets has been the result, in part, of an expanded National
Accounts program which seeks referral business from larger distributors and
manufacturers.
The business-purpose credit card operation also continues to grow,
with over 23,000 accounts as of December 31, 1995. Again, direct marketing
techniques, primarily direct mail to prospective customers, are the source of
new accounts. This marketing program is the result of extensive and ongoing
testing of various campaigns, with success of each campaign measured by both
the cost of acquisition of new business, and the credit performance of the
resulting business. The "Advanta business card" is marketed by ABS and issued
by its affiliate, Advanta Financial Corp. (see "Government Regulations --
Advanta Financial Corp.").
During 1995 and continuing into 1996, ABS embarked on an aggressive
systems development program. New systems, scheduled for implementation during
the first half of 1996, will deliver more accurate and timely credit decisions
on new lease applications, provide better portfolio performance analysis tools
for business credit cards, and establish a centralized customer database to
lower marketing costs. These new capabilities are also expected to enhance
cross selling opportunities for current and future products.
ADVANTA INSURANCE COMPANIES
The Company mainly offers specialty credit related insurance products and
services to its existing customer base. The focus of these products is on the
customers' ability to repay their debt in the event of certain circumstances.
Enrollment in these programs is achieved through the utilization of either
direct mail or telemarketing distribution channels.
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Through unaffiliated insurance carriers, the Company generally offers
a combined credit life, disability and unemployment product to Advanta's
lending customers. The Company's insurance subsidiaries reinsure 100% of these
risks from the insurance carriers on a coinsurance basis. In consideration for
assumption of these risks the insurance subsidiaries receive reinsurance
premiums equal to 100% of the net premiums collected by the insurance carriers,
less a ceding fee as defined by the reinsurance treaties, and all acquisition
expenses, premium taxes and loss payments made by the carriers on these risks.
Under the terms of certain reinsurance treaties the subsidiaries are either
obligated to maintain in trust for the benefit of an insurance carrier an
amount equal to 100% of the unearned premiums and all statutory reserves for
future incurred loss payments or have certain of these loss reserves, as
defined, withheld by an insurance carrier.
Credit life insurance for credit card customers insures the life of
the borrower (and any joint borrower) and provides for the payment to the
primary beneficiary (the lender) in the event of the borrower's death of a
benefit generally equal to the unpaid principal balance, subject to a maximum
amount equal to the lesser of the borrower's balance at the date of death or
$10,000. Credit disability and unemployment insurance for credit card customers
generally provide for the payment of the minimum monthly payment required on
the debt outstanding at the commencement of the primary borrower's inability to
work as a result of disability or involuntary unemployment, until the customer
is able to return to work or obtains other employment, subject to a maximum
equal to the lesser of the borrower's balance at the date of unemployment or
disability or $10,000.
Commencing in 1992 and 1995, Colonial National and ANB, respectively,
began offering to their credit card customers in certain states the option to
purchase a debt cancellation agreement entitled Credit Protection Plus(R).
Under the terms of the agreement, Colonial National or ANB will forgive the
credit card borrower's balance in the event of the death or permanent
disability of either the primary or joint (if purchased) credit card borrower
up to the lesser of $10,000, the customer's balance or the customer's credit
limit at the date of death or permanent disability. In addition, the agreement
provides for the suspension of the contractual principal payment obligation and
the wavier of all interest and service fees in the event that either the
primary or joint (if purchased) credit card borrower is unable to work due to
involuntary unemployment or short-term disability commencing from the date of
initial unemployment and disability to the lesser of twelve months or the date
the customer is able to return to work or obtains other employment. The Banks
have purchased from the Company's insurance subsidiaries insurance protection
against excess losses, as defined, incurred from providing these services.
The Company also offers other specialty based insurance products to
its customers. In consideration the lending institution receives an expense
reimbursement percentage of insurance revenues collected. One of the Company's
insurance subsidiaries began direct underwriting of an indemnity policy which
protects ABS's interest in the business equipment leased to its customers
against loss arising from certain perils.
Approximately 90% of the Company's total insurance revenues are
derived from the offering of the combined insurance product to credit card
customers of Colonial National and ANB.
ADVANTA PARTNERS
Advanta Partners LP is a private venture capital equity investment firm formed
in 1994. The firm focuses primarily on growth capital financings,
restructurings and management buyouts in the financial services and information
services industries. The investment objective of Advanta Partners is to earn
attractive returns by building the long-term values of the businesses in which
it invests. Advanta Partners combines transaction expertise, management skills
and a broad contact base with strong industry- specific knowledge which is
further enhanced by its relationship with the Company.
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DEVELOPMENTAL INITIATIVES
The Company has initiated a number of new programs focused on creating new
products, entering new markets and expanding the Company's channels of
delivery. As part of the Company's expansion into new markets, in 1995 the
Company formed a joint venture with The Royal Bank of Scotland to market, issue
and service bankcards in the United Kingdom. While initial test mailings have
generated positive response, this effort was not material to the Company in
1995. The Company believes that the joint venture will not be material to
earnings in 1996. Additionally, the Company has developed and launched several
branded credit card products. The Company is continuing to explore new product
concepts and expects to introduce new products in 1996. (See "Advanta Personal
Payment Services"). Simultaneously, the Company is exploring new technologies
and delivery systems related to payment services. In 1995 the Company formed a
unit within Advanta Personal Finance that is expected to conduct business
within automobile finance. The Company continues to engage in research
development activities with respect to products and services outside the
financial services sector.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured deposit products through Colonial
National and ANB and offers uninsured investment products of Advanta Corp.
through both direct retail and underwritten sales of debt securities. In
October 1995, the Company ceased selling subordinated retail investment notes,
and instead began offering senior retail investment notes which (like the
previous subordinated notes) are marketed by print advertising and direct mail
solicitations to existing and prospective individual investors. In addition to
the senior retail investment note program, the Company has filed a senior debt
shelf registration with the Securities and Exchange Commission covering $1
billion of securities. As of December 31, 1995 $655 million was outstanding
and $325 million remained available for sale under this shelf. The Company
also filed a "universal shelf" registration statement in June 1995 for $500
million of debt and/or equity securities. In July 1995, $92.5 million of
6 3/4% Convertible Class B Preferred Stock was issued under that shelf.
Investments in the Company's senior debt securities are primarily marketed to
institutional investors. In addition, the Company has further diversified its
funding capacity through the ability to borrow under a $510 million committed
revolving bank line of credit from a consortium of domestic and international
banks.
Bank deposit products include at Colonial National: demand deposits,
money market savings accounts, statement savings accounts, and retail
certificates of deposit; and at both Colonial National and ANB: large
denomination certificates of deposit (certificates of $100,000 or more).
Consumer deposit business at Colonial National is generated from repeat sales
to existing depositors and from new depositors attracted by newspaper
advertising and direct mail solicitations. ANB is limited to the issuance of
deposits having a minimum size of $100,000.
The deposits and senior debt securities of the Banks continue to have
investment grade ratings from the nationally recognized rating agencies. These
ratings, which were first achieved in 1993 for Colonial National, and in 1995
for ANB, have allowed the Banks to further diversify their funding sources.
The Banks, in September 1995, filed an offering circular with the Office of
the Comptroller of the Currency for $2 billion in senior bank term debt and
$250 million in subordinated bank term debt. As of December 31, 1995, $348
million of senior bank debt was outstanding under that offering circular.
In addition to the funding diversity provided by the debt issuance
capacity of the Company and the debt and deposit raising capabilities of the
Banks, Advanta Financial Corp. ("AFC") has been taking deposits in the form of
certificates of deposit since January 1992. AFC is an FDIC-insured industrial
loan corporation organized under the laws of the State of Utah. As of December
31, 1995, AFC's funding capacity was not material to the Company.
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Advanta Corp. and Subsidiaries
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 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. However,
the Company is actively exploring additional lines of business, some of which
the Company might not be able to pursue as a registered bank holding company
under the BHCA.
Under CEBA, neither ANB nor AFC is considered a "bank" for purposes of
the BHCA, and so the Company's ownership of these institutions does not impact
the Company's exempt status under the BHCA. ANB is a "credit card bank" under
CEBA, and as such is subject to certain restrictions, including that it may only
engage in credit card operations, it may not offer checking or transaction
accounts, and it may only accept time deposits in amounts of $100,000 or more.
However, unlike Colonial National, ANB's growth is not limited to 7% per annum.
COLONIAL NATIONAL BANK USA AND ADVANTA NATIONAL BANK (THE "BANKS")
The Company acquired Colonial National in 1982 and organized ANB in 1995. Both
of the Banks are national banking associations organized under the laws of the
United States of America. Colonial National's headquarters (which is also its
sole branch) is located in Claymont, Delaware, and ANB's only office, its
headquarters, is located in Wilmington, Delaware. ANB was chartered to
complement the credit card activities of Colonial National. ANB is a "credit
card bank," a class of FDIC-insured depository institution created under CEBA,
which can only engage in credit card operations, can only
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Advanta Corp. and Subsidiaries
accept deposits in denominations of $100,000 or more, may not offer transaction
(e.g., checking) accounts, may only maintain one office for the collection of
deposits, and may not engage in commercial lending activities. The Company
conducts substantially all of its consumer credit card lending business through
the Banks, and conducts a large portion of its mortgage lending business
through Colonial National.
Under Federal law, the Banks may "export" (i.e., charge its customers
resident in other states) the finance charges permissible under the law of
their 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,
returned payment check fees and fees for exceeding credit limits) permitted
under Delaware law. There is no precedent clearly applicable to the Banks 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
various credit card issuers in other states, including one such lawsuit filed
against Colonial National in the Court of Common Pleas, Philadelphia County,
Pennsylvania on June 28, 1995, and there can be no assurance that either or
both of the Banks will not also be named as defendants in future lawsuits or
administrative actions challenging the fees and charges which they assess
residents of other states. The Supreme Courts of California, Colorado and New
Jersey have recently handed down decisions in similar actions. The California
and Colorado Supreme courts opined that federal law governed late fees and
found for the respective defendant banks, while the New Jersey Supreme Court
found that late payment fees are not interest, and that, therefore, state law
is not preempted by federal law with respect to such late fees. On January 19,
1996, the U.S. Supreme Court accepted an appeal of the California Supreme Court
decision which found that the charge in question was governed by federal law
and was therefore proper. Such actions and similar actions which may be
brought in other states as a result of such actions, if resolved adversely to
bank credit card issuers and, if supported by the U.S. Supreme Court, could
have the effect of limiting certain charges, other than periodic finance
charges, that could be assessed on credit card accounts of residents of such
states and could require credit card issuers such as the Banks to pay refunds
and civil penalties with respect to charges previously imposed on cardholders
in such states. 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.
The Banks are 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 national banks,
the Banks are subject to provisions of federal law which restrict their ability
to extend credit to their affiliates or pay dividends to their parent company.
See "Dividends and Transfers of Funds."
The Banks are 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, 1995, the minimum required 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
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Advanta Corp. and Subsidiaries
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, 1995,
Colonial National's Tier 1 capital ratio was 7.30%, its combined Tier 1 and
Tier 2 capital ratio was 11.56%, and its leverage ratio was 6.79%. At December
31, 1995, ANB's Tier 1 capital ratio was 8.04%, its combined Tier 1 and Tier 2
capital ratio was 12.28%, and its leverage ratio was 7.87%.
Recognizing that the risk-based capital standards address only credit
risk (and 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, both of the
Banks' respective capital levels currently exceed the minimum standards. To
date, the Comptroller has not required either of the Banks 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 Improvement
Act of 1991 ("FDICIA") and regulations promulgated thereunder, FDIC insured
institutions such as the Banks 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, both
of the Banks are currently "well-capitalized," and the Company intends to
maintain both Banks as "well-capitalized" institutions.
ADVANTA FINANCIAL CORP.
In January 1992, Advanta Financial Corp. ("AFC") opened for business and began
accepting deposits. AFC is an FDIC-insured industrial loan corporation
organized under the laws of the State of Utah and is subject to examination and
regulation by both the FDIC and the Utah Department of Financial Institutions.
At December 31, 1995, AFC had deposits of $38 million and total assets of $78
million. Currently, AFC's principal activities consist of small ticket
equipment lease financing and issuance of the "Advanta business card" credit
card marketed by ABS. The Company anticipates that AFC's managed receivables
base of Advanta business card loans will grow significantly in 1996.
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 Community
Reinvestment 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, require the Company's FDIC-insured depository institutions to
serve the banking needs of their local communities, and regulate the
dissemination and use of information relating to a borrower's creditworthiness.
Certain of these statutes and regulations also apply to the Company's leasing
activities. In addition, Advanta Mortgage, Advanta Finance and their
respective subsidiaries are subject to licensure and regulation in various
states as mortgage bankers, mortgage brokers, and originators, sellers and
servicers of mortgage loans.
DIVIDENDS AND TRANSFERS OF FUNDS
There are various legal limitations on the extent to which Colonial National,
AFC or ANB 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 either of the
Banks in any calendar year exceeds that institution's net profits (as defined)
for that year combined with its retained
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Advanta Corp. and Subsidiaries
net profits for the preceding two years, less any required transfers to surplus
accounts. In addition, neither Colonial National nor ANB may 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, AFC and ANB are also subject to restrictions under
Sections 23A and 23B of the Federal Reserve Act. These restrictions limit the
transfer of funds by the depository institution 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 the
depository institution's transactions with its affiliates be on terms no less
favorable to the bank than comparable transactions with unrelated third
parties. These transfers by any one institution to the Company or any single
affiliate are limited in amount to 10% of the depository institution's capital
and surplus and transfers to all affiliates are limited in the aggregate to 20%
of the depository institution's capital and surplus. 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, neither Colonial National nor ANB may make any loans to the Company
or any of its subsidiaries.
REGULATION OF INSURANCE
The insurance subsidiaries are subject to the laws and regulations of, and
supervision by, the states in which they are domiciled or have obtained
authority to transact insurance business. These states have adopted laws and
regulations which govern all marketing, administration and financial operations
of an insurance company, including dividend payments and financial solvency. In
addition, the insurance subsidiaries have registered as an Arizona Holding
Company which requires approval of transactions between all affiliated
entities.
The maximum dividend that any of the insurance subsidiaries can
distribute to its parent in any twelve month period without prior approval of
the State of Arizona Department of Insurance is the lesser of 10% of the
subsidiary's statutory surplus or its net income for any given twelve month
period (if a life insurance company) or net investment income (if a property
and casualty insurance company).
The State of Arizona has adopted minimum risk-based capital standards
as developed by the National Association of Insurance Commissioners.
Risk-based capital is the quantification of an insurer's surplus requirements
based on financial balances and underwriting activity risks. The ratio of an
insurer's total adjusted capital and surplus, as defined, is compared to
various levels of risk-based capital to determine what intervention, if any, is
required by either the insurance company or an insurance department. All of
the insurance companies meet all risk-based capital standards and require no
action by any party.
The Company's insurance subsidiaries reinsure risks whose underwriting
insurance practices and rates are regulated in part or fully by state insurance
departments. These rates are continually being reviewed and modified by the
state insurance departments based on prior historical experience. Any
modifications may impact the future profitability of the Company's insurance
subsidiaries.
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 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.
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Advanta Corp. and Subsidiaries
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 affiliations between
banks and commercial or securities firms, and proposals which would place new
restrictions on a lender's ability to utilize prescreening 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 1994, Congress adopted the Interstate Banking and Branching
Efficiency Act, which statute permits nationwide interstate bank acquisitions
beginning in 1995, and interstate bank branching in 1997 (or earlier at a
state's option). The Company does not currently believe that the changes in
the country's banking system wrought by this statute will materially impact the
Company's business.
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 both domestic and international VISA and MasterCard markets, the
Company competes with national, regional, and local issuers. Additionally,
American Express, and the Discover Card represent additional competition in the
general purpose credit card markets in the United States. The Company does not
believe that single purpose credit cards such as oil company, department store
or telephone credit cards represent a significant competitive threat. A large
segment of customers have been attracted to credit card issuers largely on the
basis of product features, including price and credit limit; as such, customer
loyalty may be limited. As a result, account and balance attrition can be
significant factors in the credit card industry.
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, 1995, the Company had 2,409 employees, up from 1,753
employees at the end of 1994. The Company believes that it has good
relationships with its employees. None of its employees are represented by a
collective bargaining unit.
CAUTIONARY STATEMENTS
Information or statements provided by the Company from time to time may contain
certain "forward-looking information" including information relating to
anticipated growth in earnings per share, anticipated
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Advanta Corp. and Subsidiaries
returns on equity, anticipated growth in managed loans outstanding and credit
card accounts, anticipated net interest margins, anticipated operations costs
and employment growth, anticipated marketing expense or anticipated
delinquencies and charge-offs. The cautionary statements provided below are
being made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995 (the "Act") and with the intention of obtaining the benefits
of the "safe harbor" provisions of the Act for any such forward-looking
information. Many of the following important factors discussed below as well
as other factors have also been discussed in the Company's prior public
filings.
The Company cautions readers that any forward-looking information
provided by the Company is not a guarantee of future performance and that
actual results may differ materially from those in the forward-looking
information as a result of various factors, including but not limited to:
-- The impact of repricing accounts and the overall product mix of
accounts on the Company's net interest margins; the actual amount of
accounts (and related loan balances) repriced and the level and type
of account originations at that time; and the ability of the Company
on a competitive basis to use account management techniques to
retain repriced accounts and the related loan balances. If the
repriced accounts experience greater attrition than expected it
could have an adverse financial effect on the Company.
-- Increased credit losses (including increases due to a worsening of
general economic conditions and decreases in property values),
increased collection costs associated with rising delinquency
levels, costs associated with an increase in the number of customers
seeking protection under the bankruptcy laws, resulting in accounts
being charged off as uncollectible, and costs and other effects of
fraud by third parties or customers.
-- Intense and increasing competition from numerous providers of
financial services who may employ various competitive strategies.
The Company faces competition from national, regional and local
issuers of bankcards in each of its markets, some of which have
substantially greater resources than the Company. Additionally,
the Company competes with other general purpose credit card
providers. More of the Company's competitors have begun pricing
credit card products at attractive interest rates, including rates
at or below those currently charged by the Company.
-- The effects of interest rate fluctuations on the Company's net
interest margin and the value of its assets and liabilities; the
impact of the level of interest rates on mortgage prepayment
activity; the continued legal or commercial availability of
techniques (including interest rate swaps and similar financial
instruments, loan repricing, hedging and other techniques) used by
the Company to manage the risk of such fluctuations and the
continuing operational viability of those techniques.
-- Difficulties or delays in the securitization of the Company's
receivables and the resulting impact on the cost and availability
of such funding. Such difficulties and delays may result from
changes in the availability of credit enhancement in
securitizations, the current legal, regulatory, accounting and tax
environment and adverse change in the performance of the
securitized assets.
-- Changes in the Company's aggregate accounts or loan balances and the
growth rate thereof, including changes resulting from factors such
as shifting product mix, amount of actual marketing investment made
by the Company, attrition of accounts and loan balances (to
competing card issuers in connection with repricing of customers or
otherwise) and general economic conditions and other factors beyond
the control of the Company. For customers that are attracted to
credit card issuers largely on the basis of price, customer loyalty
may be limited.
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Advanta Corp. and Subsidiaries
-- The impact of "seasoning" (the average age of a lender's portfolio)
on the Company's level of delinquencies and losses which may
require higher loan loss provisions and one or two reserves for
on-balance sheet assets, and may adversely impact credit card,
mortgage and leasing securitization income. The addition of
account originations or balances and the attrition of such accounts
or balances could significantly impact the seasoning of the overall
portfolio.
-- The amount, and rate of growth in, the Company's expenses
(including employee and marketing expenses) as the Company's
business develops or changes and the Company expands into new
market areas; the acquisition of assets (interest-earning, fixed or
other); and the impact of unusual items resulting from the
Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures.
-- The amount, type and cost of financing available to the Company,
and any changes to that financing; the effects of changes within
the Company's organization or in its compensation and benefit
plans; the activities of parties with which the Company has
agreements or understandings, including any activities affecting
any investment.
-- Difficulties or delays in the development, production, testing and
marketing of products or services, including, but not limited to, a
failure to implement new product or service programs when
anticipated, the failure of customers to accept these products or
services when planned, losses associated with the testing of new
products or services or financial, legal or other difficulties as
may arise in the course of such implementation.
-- The effects of, and changes in, monetary and fiscal policies, laws
and regulations (financial, consumer regulatory or otherwise),
other activities of governments, agencies and similar
organizations, and social and economic conditions, such as
inflation, and changes in taxation of the Company's earnings.
-- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims and changes in
those items, developments or assertions by or against the Company
or its subsidiaries; adoptions of new, or changes in existing,
accounting policies and practices and the application of such
policies and practices.
ITEM 2. PROPERTIES.
The Company leases an aggregate of approximately 213,000 square feet of office
space in five office buildings located in Horsham, Pennsylvania, a Philadelphia
suburb, and owns three buildings in Horsham aggregating approximately 218,000
square feet. The Company also leases an aggregate of approximately 88,000
square feet of office space for its Advanta Mortgage and Advanta Finance
offices in Arizona, California, Colorado, Maryland, Missouri, Pennsylvania and
Virginia. In New Jersey, Advanta Business Services owns a 56,000 square foot
building and leases an aggregate of approximately 21,000 square feet of office
space. In Utah, Advanta Financial Corp. leases an aggregate of approximately
7,000 square feet of office space.
The Company's principal executive offices are currently located in
approximately 33,000 square feet of owned space in Horsham, Pennsylvania.
ANB's and Colonial National's respective principal operating offices are
currently located in approximately 88,000 square feet of leased space in two
office buildings in Delaware.
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Advanta Corp. and Subsidiaries
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.
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Advanta Corp. and Subsidiaries
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
NAME AGE OFFICE ELECTED
---- --- ------ -------
Dennis Alter 53 Chairman of the Board 1972
Alex W. Hart 55 Chief Executive Officer and 1995
Director
Richard A. Greenawalt 52 President, Chief Operating Officer and 1987
Director
William A. Rosoff 52 Vice Chairman 1996
James J. Allhusen 47 Executive Vice President 1995
James W. John 45 Senior Vice President, Administration 1994
Arthur D. Kranzley 45 Senior Vice President 1995
Albert E. Lindenberg 43 President and Director, Advanta 1988
Business Services
Robert A. Marshall 55 Executive Vice President and Group 1993
Executive, Advanta Personal Payment
Services
Charles H. Podowski 49 President and Director, Advanta 1995
Insurance Companies
Milton Riseman 59 President and Director, Advanta 1994
Mortgage Corp. USA and Subsidiaries
John W. Roblin 50 Senior Vice President and Chief 1995
Information Officer, Advanta Personal
Payment Services
David D. Wesselink 53 Senior Vice President and Chief 1993
Financial Officer
Ronald W. Averett 39 Vice President 1988
Jeffrey D. Beck 47 Vice President and Treasurer 1992
John J. Calamari 41 Vice President, Finance 1988
Katharin S. Dyer 38 Vice President, Marketing 1992
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Advanta Corp. and Subsidiaries
Michael A. Girman 46 Vice President, Audit and Control 1991
John B. Hofmann 49 Vice President, Human Resources 1987
Edward E. Millman 44 Vice President and Chief Financial 1993
Officer, Advanta Personal Payment
Services
Gene S. Schneyer 42 Vice President, Secretary and General 1989
Counsel
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, and in August 1995 he relinquished the
title of Chief Executive Officer.
Mr. Hart joined the Company in March 1994 as a Director and Executive Vice
Chairman. He became Chief Executive Officer in August 1995. For the five
years prior to joining the Company 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. Rosoff, age 52, joined the Company in January 1996 as a Director and Vice
Chairman. Prior to joining the Company, Mr. Rosoff was a long time partner of
the law firm of Wolf, Block, Schorr and Solis-Cohen, the Company's outside
counsel, where he advised the Company for over 20 years. While at Wolf, Block,
Schorr and Solis-Cohen he served as Chairman of its Executive Committee and,
immediately before joining the Company, as a member of its Executive Committee
and Chairman of its Tax Department. Mr. Rosoff is a Trustee of RPS Realty Trust.
Mr. Allhusen was elected Executive Vice President of the Company in October
1995. Prior to joining the Company, from 1990 Mr. Allhusen served Standard
Chartered Bank in various capacities, most recently as General Manager for the
Middle East and South Asia region located in Dubai, United Arab Emirates.
Prior to joining Standard Chartered Bank, Mr. Allhusen worked for Household
Bank from 1986 to 1990 as its President, Midwest Division.
Mr. John joined the Company in June 1994 as Senior Vice President,
Administration. From April 1989 until joining the Company, Mr. John was with
MasterCard International where he was Executive Vice President responsible for
Canada, Latin America, and the Caribbean Regions. From 1983 until joining
MasterCard International, Mr. John was Vice President of First Interstate
Bancorp where he was responsible for a wide range of activities in consumer
banking and operations.
Mr. Kranzley was elected Senior Vice President of the Company in October 1995.
For five years prior to joining the Company Mr. Kranzley was Senior Vice
President and General Manager of Debit Products for MasterCard International.
In this capacity Mr. Kranzley also served as President and Chief Executive
Officer of Maestro U.S.A., Inc., the membership corporation of the Maestro
global, on-line point-of-sale debit program in the United States.
21
21
Advanta Corp. and Subsidiaries
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 Business Services, 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. Marshall joined the Company in January 1988 and was elected Senior Vice
President in February 1988. In August 1993 he was elected Executive Vice
President and Group Executive, Advanta Personal Payment Services. 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. Podowski was elected President of Advanta Insurance Companies in April
1995. Prior to joining the Company Mr. Podowski served CIGNA Corporation in
various capacities for seventeen years, most recently as Senior Vice President
in their International Division, with responsibility for CIGNA's life
subsidiaries in Asia and Australia. Prior to joining CIGNA Mr. Podowski worked
for The Chase Manhattan Bank, N.A.
Mr. Riseman came to the Company in June 1992 as Senior Vice President,
Administration. In February 1994, Mr. Riseman became President and Director of
Advanta Mortgage Corp. USA and its subsidiaries. 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. Roblin became Senior Vice President and Chief Information Officer, Advanta
Personal Payment Services, in December 1994. Prior to joining the Company, Mr.
Roblin spent nineteen years with the Chubb Group of Insurance Companies in
Warren, New Jersey holding a variety of positions. He was the Chief
Information Office and a Managing Director of Chubb from 1986 through 1991. In
1991 he joined USF&G in Baltimore as Chief Information Officer and Senior Vice
President until 1993. After a year as an independent consultant, he briefly
joined the Personal Lines Division of the Travelers Insurance Companies in
Hartford, Connecticut as Chief Information Officer from May, 1994 to November,
1994.
Mr. Wesselink joined the Company in November 1993 as Senior Vice President and
Chief Financial Officer after serving as Vice President and Treasurer of
Household International for the previous seven years. Prior to that, he served
in various capacities at Household from 1971, including Vice President and
Director of Research, Group Vice President and Chief Financial Officer, and
Senior Vice President and Chief Financial Officer of Household Finance
Corporation.
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 at Fidelity Bank, 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.
22
22
Advanta Corp. and Subsidiaries
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. 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, Inc. from March 1981 until
October 1984.
Mr. Millman joined the Company in September 1989 and was elected Assistant
Treasurer in July 1990. 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. Millman was elected Vice President, Corporate
Funds Management in August 1991, and Vice President and Chief Financial
Officer, Advanta Personal Payment Services in December 1993.
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.
23
Advanta Corp. and Subsidiaries
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market(SM) under the symbols ADVNB (non-
voting common stock) and ADVNA (voting common stock).
Following are the high, low and closing sale prices and cash dividends
declared for the last two years as they apply to each class of stock:
Cash
Dividends
Quarter Ended: High Low Close Declared
- - --------------------------------------------------------
March 1994 $33.25 $26.00 $29.25 $ .06
June 1994 37.50 28.75 32.25 .06
September 1994 34.75 26.50 29.25 .06
December 1994 30.50 23.25 25.25 .08
March 1995 32.25 24.50 31.25 .08
June 1995 38.75 30.75 37.75 .08
September 1995 42.50 36.00 42.50 .08
December 1995 45.00 35.13 36.38 .108
- - --------------------------------------------------------
Class A:
- - --------------------------------------------------------
March 1994 $36.00 $26.50 $31.50 $ .05
June 1994 41.75 30.50 35.63 .05
September 1994 37.50 28.25 30.13 .05
December 1994 33.50 24.25 26.25 .067
March 1995 34.75 25.50 33.50 .067
June 1995 42.50 33.00 41.69 .067
September 1995 46.25 39.50 45.00 .067
December 1995 48.88 37.50 38.25 .09
========================================================
At December 31, 1995, the Company had approximately 930 and 700
holders of record of Class B and Class A common stock, respectively.
ITEM 6. SELECTED FINANCIAL DATA.
Financial Highlights
(In thousands, except per share amounts) Year Ended December 31,
- - ---------------------------------------------------------------------------------------------------------------------------
Five-Year
1995 1994 1993 1992 1991 1990 CAGR(2)
- - ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net operating revenues(1) $ 615,914 $ 447,837 $ 334,224 $ 266,320 $ 207,347 $ 139,948 34%
Net interest income 72,900 70,381 78,644 73,176 73,990 62,964 3
Noninterest revenues 543,014 395,808 255,580 193,144 133,357 85,894 45
Provision for credit losses 53,326 34,198 29,802 47,138 55,461 42,411 5
Operating expenses 350,685 266,784 181,167 142,082 112,567 83,917 33
Income before income taxes and
extraordinary items 211,903 165,207 123,255 77,100 39,319 22,530 57
Income before extraordinary items 136,677 106,063 77,920 48,037 25,165 15,095 55
Net income 136,677 106,063 76,647 48,037 25,165 15,095 55
- - ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Income before
extraordinary items $ 3.20 $ 2.58 $ 1.95 $ 1.38 $ .81 $ .53 43%
Net income 3.20 2.58 1.92 1.38 .81 .53 43
Cash dividends declared(3)
Class B .348 .260 .200 .104 N/A N/A *
Class A .290 .217 .167 .107 .063 .037 51
Book value 14.35 11.12 8.82 5.22 3.70 2.60 41
Average shares used to
compute EPS(4) 42,670 41,046 39,777 34,590 31,044 28,053 9
Closing stock price
Class B 36.38 25.25 29.00 19.33 N/A N/A *
Class A 38.25 26.25 33.25 21.58 11.50 3.33 63
- - ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION--YEAR END
Investments and money
market instruments $ 1,090,047 $ 671,661 $ 542,222 $ 521,567 $ 270,267 $ 187,631 42%
Gross receivables
Owned 2,762,927 1,964,444 1,277,305 998,244 1,273,420 1,129,493 20
Securitized 9,452,428 6,190,793 3,968,856 2,721,726 1,573,164 980,856 57
Managed 12,215,355 8,155,237 5,246,161 3,719,970 2,846,584 2,110,349 42
Total assets
Owned 4,524,259 3,113,048 2,140,195 1,775,067 1,716,350 1,450,942 26
Managed 13,976,687 9,303,841 6,109,051 4,496,793 3,289,514 2,431,798 42
Deposits 1,906,601 1,159,358 1,254,881 1,204,486 1,205,035 1,052,322 13
Long-term debt 587,877 666,033 368,372 173,668 112,609 80,990 49
Stockholders' equity 672,964 441,690 342,741 174,870 118,859 70,895 57
Stockholders' equity and
long-term debt 1,260,841 1.107,723 711,113 348,538 231,468 151,885 53
- - ---------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Return on average assets 4.06% 4.47% 3.91% 2.82% 1.63% 1.09% *
Return on average common equity 26.15 26.97 27.50 33.32 27.09 23.28 *
Return on average total equity 24.75 26.97 27.50 33.32 27.09 23.28 *
Equity/Managed assets 4.81 4.75 5.61 3.89 3.61 2.92 *
Equity/Owned assets 14.87 14.19 16.01 9.85 6.93 4.88 *
Dividend payout 9.97 9.24 9.56 7.69 7.85 6.90 *
Managed net interest margin(5) 5.87 6.72 7.77 8.05 7.54 6.70 *
As a percentage of managed
receivables:
Total loans 30 days or
more delinquent 3.3 2.7 3.6 5.0 5.6 6.0 *
Net charge-offs 2.2 2.3 2.9 3.4 3.2 2.7 *
Other operating expenses 2.9 3.7 4.1 4.4 4.6 4.5 *
===========================================================================================================================
(1) Excludes gains on sales of credit card accounts in 1990 and 1994.
(2) Compound annual growth rate from December 31, 1990.
(3) 1992 cash dividends include dividends for three quarters on the Class
B common stock and the full year on the Class A common stock.
(4) Includes common stock equivalents. 1995 amount includes equivalent
shares related to convertible preferred Class B stock.
(5) Combination of owned interest-earning assets/interest-bearing
liabilities and securitized credit card assets/liabilities.
* Not meaningful.
24
Advanta Corp. and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1995 of $136.7 million increased $30.6 million or 29% from the
$106.1 million reported for 1994. Earnings per share of $3.20 advanced 24% from
the $2.58 reported for 1994. The higher earnings resulted primarily from
substantial growth in average managed receivables, partially offset by the
contraction in the managed net interest margin. Additionally, disciplined cost
management and continued strong credit quality performance enhanced the
financial results.
Earnings grew in 1995 primarily as a result of a 56% increase in
average managed receivables, from $6.1 billion in 1994 to $9.5 billion in 1995,
partially offset by an approximate 13% contraction in the managed net interest
margin. As a majority of the receivables continue to be securitized, the
Company records the net earnings on these securitized receivables as
noninterest revenues. Noninterest revenues of $543.0 million in 1995 increased
$147.2 million or 37% from $395.8 million in 1994. This increase was primarily
due to a 62% increase in average securitized receivables. In 1995, the
Company's venture capital unit, Advanta Partners LP, recorded $15.4 million of
equity securities gains which are included in noninterest revenues. In 1994,
noninterest revenues included an $18.4 million gain on the sale of $150 million
of credit card customer relationships. Total other operating expenses
(excluding the amortization of credit card deferred origination costs, net)
increased only 22% despite the 56% growth in average managed receivables. Thus,
the operating expense ratio decreased to 2.9% in 1995 from 3.7% in 1994. The
total managed charge-off rate for 1995 fell to 2.2% from 2.3% in 1994.
Average managed receivables have tripled from the $3.2 billion
reported in 1992. This receivable growth has greatly contributed to higher 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 40% or more in 1996. A significant component of this growth
strategy is the Company's continuing efforts to market "risk-adjusted" credit
card products, whereby 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 pricing strategy"). The Company's pricing structure on its
credit card products also reflects low "introductory" credit card rates, which
reprice upwards after an introductory period of up to one year. In 1995, as in
1994, the impact of these introductory rates was to reduce the managed net
interest margin, as the success of the Company's marketing campaigns resulted
in substantial growth of new receivables earning interest at the introductory
rates. It is estimated that approximately $2.2 billion of receivables will
reprice upwards in the first quarter of 1996. At repricing, most of the
receivables on these credit cards will have been securitized, and consequently,
the enhanced revenues on those receivables will be recorded primarily as
increased noninterest revenues (securitization income). Although this will not
affect the owned net interest margin, it is expected that it will positively
impact the managed net interest margin.
Net income for 1994 rose to $106.1 million or $2.58 per share. This
reflects increases of 38% and 34%, respectively, from the $76.6 million or
$1.92 per share reported in 1993. Earnings for 1994 increased primarily as a
result of a $1.9 billion or 45% increase in average managed receivables,
improvements in credit quality with the total managed charge-off rate
decreasing from 2.9% in 1993 to 2.3% in 1994, and controlled growth in
operating expenses. The 45% increase in average managed receivables and an
$18.4 million gain on the sale of credit card customer relationships were the
major factors in the $140.2 million or 55% increase in noninterest revenues to
$395.8 million in 1994, from $255.6 million in 1993. Disciplined cost
management resulted in other operating expenses increasing only 30% while
average managed receivables grew 45%, lowering the operating expense ratio to
3.7% for 1994 from 4.1% in 1993.
EARNINGS PER SHARE
[GRAPH]
1991 1992 1993 1994 1995
---------------------------------------------------
.81 1.38 1.92 2.58 $3.20
25
Advanta Corp. and Subsidiaries
NET INTEREST INCOME
Net interest income represents the excess of income generated from interest
earning assets, including receivables, investments and money market instruments
over the interest paid on interest-bearing liabilities, primarily deposits and
debt.
Net interest income of $72.9 million for 1995 increased $2.5 million
or 4% from 1994 as a result of a $737 million or 37% increase in average
interest earning assets, largely offset by a lower owned net interest margin,
which fell to 2.80% in 1995 from 3.67% in 1994. The lower owned net interest
margin primarily resulted from a 124 basis point increase in the cost of funds.
The yield on average interest earning assets increased 45 basis points, but
would have been considerably higher had it not been for the volume of credit
card receivables issued at low "introductory" rates.
Net interest income of $70.4 million for 1994 decreased $8.3 million
or 11% from 1993 as a result of a lower owned net interest margin partially
offset by a $336 million increase in average earning asset balances. The
significant increase in credit cards offered at low "introductory" rates in
1994 compared to the previous year contributed to the lower owned net interest
margin.
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 proportionately increasing the balance sheet levels of new
lower-yielding receivables and money market assets. 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 $7.7 billion for 1995
increased $3.0 billion or 64% from 1994. This increase resulted from the very
successful marketing of low introductory rate credit cards which generated
approximately 1.7 million new accounts and from large volumes of balance
transfers from both new and established cardholders. In 1995, average owned
credit card receivables were $1.6 billion compared to $1.2 billion in 1994.
Owned receivable balances would have been higher in both years had it not been
for the securitization of $3.4 billion of credit card receivables in 1995 and
$2.2 billion in 1994.
Average managed mortgage loans increased to $1.5 billion in 1995, a
26% increase from $1.2 billion in 1994. The average balance of owned mortgage
loans increased to $184.9 million in 1995 from $120.0 million in 1994 partially
due to the strategic decision not to securitize mortgages in the fourth quarter
of 1995. Mortgage loan originations of $773 million in 1995 were up $280
million or 57% from 1994. Yields on owned mortgage loans increased to 9.38%
from 8.18% in 1994 reflecting a lower proportion of nonperforming loans on the
balance sheet in 1995 versus the prior year. During 1994, the Company initiated
a program to repurchase nonperforming loans from the securitization trusts (see
discussion under "Provision for Credit Losses").
Average managed lease receivables of $315 million increased $113
million or 56% from 1994. Average owned balances of leases increased only $24
million or 39% during 1995 due to the securitization of $146 million of lease
receivables in 1995. Yields on owned leases decreased to 12.59% in 1995 from
14.36% in 1994.
An increase in the owned average cost of funds occurred in 1995 as the
cost of funds rose to 6.46% from 5.22% in 1994. The full effect of the rising
rate environment that began in the first quarter of 1994 was experienced in
1995, as the Federal Funds rate (the rate at which banks borrow from one
another) increased from 3.0% in early 1994 to 6.0% in midyear 1995.
Consequently, the rollover of deposits and debt during 1995 was at higher rates
than in 1994. The Company has utilized derivatives to manage the impact of
rising rates on net income (see discussion under "Derivatives Activities").
The following table provides an analysis of both owned and managed
interest income and expense data, average balance sheet data, net interest
spread (the difference between the yield on interest-earning assets and the
average rate paid on interest-bearing liabilities), and net interest margin
(the difference between the yield on interest-earning assets and the average
rate paid to fund interest-earning assets) for 1993 through 1995. Average owned
loan and lease receivables and the related interest revenues include certain
loan fees.
26
Advanta Corp. and Subsidiaries
Interest Rate Analysis
($ in thousands) Year Ended December 31,
- - -------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - -------------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET
Interest-earning assets:
Receivables:
Credit cards $1,580,352 $ 163,637 10.35% $1,171,266 $117,661 10.05% $ 899,650 $108,518 12.06%
Mortgage loans 184,855 17,334 9.38 119,919 9,809 8.18 154,210 15,286 9.91
Leases 84,216 10,603 12.59 60,437 8,681 14.36 57,877 10,825 18.70
Other loans 5,979 446 7.46 3,893 280 7.19 1,911 177 9.26
---------- --------- ---------- -------- ---------- --------
Total receivables 1,855,402 192,020 10.35 1,355,515 136,431 10.06 1,113,648 134,806 12.10
Federal funds sold 141,031 8,210 5.82 103,674 4,437 4.28 93,507 2,831 3.03
Interest-bearing
deposits 371,826 22,243 5.98 196,468 10,216 5.20 177,942 7,927 4.45
Tax-free securities(1) 60,412 3,654 6.05 81,761 4,858 5.94 42,669 2,585 6.06
Taxable investments 296,700 16,121 5.43 250,535 11,899 4.75 223,991 11,324 5.06
---------- --------- ---------- -------- ---------- --------
Total interest-earning
assets(2) $2,725,371 $ 242,248 8.89% $1,987,953 $167,841 8.44% $1,651,757 $159,473 9.65%
========== ========= ===== ========== ======== ===== ========== ======== =====
Interest-bearing
liabilities:
Deposits:
Savings $ 270,550 $ 17,728 6.55% $ 269,583 $ 11,411 4.23% $ 214,351 $ 6,984 3.26%
Time deposits
under $100,000 547,710 31,618 5.77 560,015 27,543 4.92 686,159 35,676 5.20
Time deposits
of $100,000 or more 380,918 23,466 6.16 217,683 9,314 4.28 268,064 10,729 4.00
---------- --------- ---------- -------- ---------- --------
Total deposits 1,199,178 72,812 6.07 1,047,281 48,268 4.61 1,168,574 53,389 4.57
Debt 981,816 67,908 6.92 583,317 36,347 6.23 302,430 22,951 7.59
Other borrowings 388,340 25,312 6.52 185,298 10,143 5.47 59,957 2,963 4.94
---------- --------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 2,569,334 166,032 6.46 1,815,896 94,758 5.22 1,530,961 79,303 5.18
Net noninterest-
bearing liabilities 156,037 172,057 120,796
---------- ---------- ----------
Sources to fund
interest-earning
assets $2,725,371 $ 166,032 6.09% $1,987,953 $ 94,758 4.77% $1,651,757 $ 79,303 4.80%
========== ========= ===== ========== ======== ===== ========== ======== =====
Net interest spread 2.43% 3.22% 4.47%
===== ===== =====
Net interest margin 2.80% 3.67% 4.85%
===== ===== =====
OFF-BALANCE SHEET
Average balance on
securitized:
Credit cards $6,105,575 $3,507,801 $2,110,583
Mortgage loans 1,355,383 1,105,610 895,237
Leases 230,696 141,421 87,875
---------- ---------- ----------
Total average securi-
tized receivables 7,691,654 4,754,832 3,093,695
---------- ---------- ----------
Total average managed
receivables $9,547,056 $6,110,347 $4,207,343
========== ========== ==========
MANAGAGED NET
INTEREST ANALYSIS(3)
Interest-earning
assets $8,830,946 $1,081,779 12.25% $5,495,754 $665,009 12.10% $3,762,340 $479,799 12.75%
Interest-bearing
liabilities $8,674,909 $ 563,385 6.49% $5,323,697 $295,880 5.56% $3,641,544 $187,269 5.14%
Net interest spread 5.76% 6.54% 7.61%
Net interest margin 5.87% 6.72% 7.77%
========================================================================================================================
(1) Interest and average rate computed on a tax equivalent basis using a
statutory rate of 35%.
(2) Includes assets held and available for sale, and nonaccrual loans and
leases.
(3) Combination of owned interest-earning assets/owned interest-bearing
liabilities and securitized credit card assets/liabilities.
27
Advanta Corp. and Subsidiaries
INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
($ in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
- - ---------------------------------------------------------------------------------------------------------------------------
Interest income from
Loan and lease receivables:
Credit cards $42,852 $ 3,124 $45,976 $29,193 $(20,050) $ 9,143
Mortgage loans 5,921 1,604 7,525 (3,068) (2,409) (5,477)
Leases 2,799 (877) 1,922 505 (2,649) (2,144)
Other loans 155 11 661 150 (47) 103
Federal funds sold 1,888 1,885 3,773 335 1,271 1,606
Interest-bearing deposits 10,296 1,730 12,026 874 1,415 2,289
Tax-free securities (1,295) 92 (1,203) 2,325 (52) 2,273
Taxable investments 2,376 1,846 4,222 1,294 (719) 575
------- -------- ------- ------- -------- -------
Total interest income(1) 64,992 9,415 74,407 31,608 (23,240) 8,368
------- -------- ------- ------- -------- -------
Interest expense on
Deposits:
Savings 41 6,276 6,317 2,055 2,372 4,427
Time deposits under $100,000 (593) 4,668 4,075 (6,291) (1,842) (8,133)
Time deposits of $100,000 or more 8,925 5,227 14,152 (2,256) 841 (1,415)
Debt 27,158 4,403 31,561 18,125 (4,729) 13,396
Other borrowings 12,907 2,262 15,169 6,829 351 7,180
------- -------- ------- ------- -------- -------
Total interest expense 48,438 22,836 71,274 18,462 (3,007) 15,455
------- -------- ------- ------- -------- -------
Net interest income $16,554 $(13,421) $ 3,133 $13,146 $(20,233) $(7,087)
===========================================================================================================================
(1) Includes income from assets held and available for sale.
MANAGED PORTFOLIO DATA
The Company analyzes its financial results on a managed assets basis in
addition to analyzing data as reported under generally accepted accounting
principles. The following table provides selected information on a managed
basis, as well as a summary of the effects of credit card securitizations on
selected line items of the Company's Consolidated Income Statements for the
past three years.
($ in thousands)
- - ----------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average managed receivables $ 9,547,056 $6,110,347 $4,207,343
Managed receivables 12,215,355 8,155,237 5,246,161
Total managed assets 13,976,687 9,303,841 6,109,051
Managed net interest margin (on a fully tax equivalent basis) 5.87% 6.72% 7.77%
As a percentage of gross managed receivables:
Total loans 30 days or more delinquent 3.3% 2.7% 3.6%
Net charge-offs 2.2 2.3 2.9
Effects of Credit Card Securitizations on:
Net interest income $ (442,178) $ (296,046) $ (212,360)
Provision for credit losses 157,735 92,530 82,343
======================================================================================================================
With respect to the above information on the effects of credit card
securitizations, net interest income represents the amount by which net
interest income would have been higher had the securitized receivables remained
on the balance sheet. In addition, the provision for credit losses represents
the amount by which the provision for credit losses would have been higher had
the securitized receivables remained as owned and the provision for credit
losses been equal to charge-offs. Both net interest income and the provision
for credit losses described above are netted and included in other noninterest
revenues in the Consolidated Income Statements.
28
Advanta Corp. and Subsidiaries
TOTAL MANAGED RECEIVABLES
($ in millions)
[GRAPH]
1991 1992 1993 1994 1995
- - -------------------------------------------------------------------------------------
Serviced 2,847 3,720 5,246 8,155 $12,215
Owned
- - -------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $53.3 million in 1995 increased $19.1
million or 56% from $34.2 million in 1994. The increase was primarily due to
the Company's desire to maintain a targeted level of reserve coverage of
impaired assets on credit cards as well as to provide additional reserves
against a possible downturn in the economy given an increase in impaired asset
and delinquency levels. The owned impaired asset level on credit cards
increased from $14.7 million in 1994 to $19.9 million in 1995. The total owned
impaired asset level, however, decreased by $4.0 million from $43.3 million in
1994 to $39.3 million at the end of 1995. The higher 1994 level was due to the
repurchase of approximately $50 million of nonperforming mortgage loans from
the securitization trusts, an action undertaken in order to lower funding costs
on those mortgages. In connection with these repurchases, the Company also
transferred $13 million of off-balance sheet recourse reserves to on-balance
sheet reserves. These repurchases increased the owned impaired asset level
while having no impact on either the level of managed impaired assets or the
provision for credit losses. At December 31, 1995, approximately $11.6 million
of the loans repurchased during 1994 remained on the balance sheet as either
nonperforming loans or other real estate owned.
The provision for credit losses of $34.2 million in 1994 increased
only $4.4 million or 15% from $29.8 million in 1993 despite a 22% increase in
average owned receivables. The owned impaired asset level on credit cards was
relatively flat in 1994 compared to 1993.
A description of the credit performance of the loan portfolio is set
forth under the section entitled "Credit Risk Management."
NONINTEREST REVENUES
($ in thousands)
- - --------------------------------------------------------------------
1995 1994 1993
- - --------------------------------------------------------------------
Gain on sale of credit cards $ 0 $ 18,352 $ 0
Other noninterest revenues:
Credit card securitization
income 183,360 149,043 98,521
Credit card servicing income 117,369 68,960 41,593
Credit card interchange
income 92,439 71,740 56,107
Income from mortgage
banking activities 50,541 37,586 24,146
Leasing revenues, net 41,050 21,551 10,317
Insurance revenues, net 27,654 12,734 9,249
Equity securities gains 15,386 0 0
Other credit card revenues 14,230 14,209 11,545
Other 985 1,633 4,102
- - --------------------------------------------------------------------
Total other noninterest
revenues $543,014 $377,456 $255,580
- - --------------------------------------------------------------------
Total noninterest revenues $543,014 $395,808 $255,580
====================================================================
Noninterest revenues of $543.0 million in 1995 increased $147.2
million or 37% from $395.8 million in 1994. This improvement resulted from a
74% growth in average securitized credit card receivables, a 63% growth in
average securitized lease receivables and a $15.4 million equity securities
gain on an investment held by the Company's venture capital unit, partially
offset by a contraction in the net interest margin on the securitized credit
card portfolio. The 1994 total reflected an $18.4 million gain on the sale of
credit card customer relationships.
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 23% to $183.4 million from $149.0 million in 1994 as a result of a
74% increase in average securitized credit card receivables from $3.5 billion
in 1994 to $6.1 billion in 1995, partially offset by a contraction in the net
interest margin. See Note 1 to Consolidated Financial Statements for further
description of securitization income.
Credit card securitization income is the excess of revenue collected
on the securitized receivables, including interest and certain fees, over the
related securitization trust expenses, including interest payments to investors
in the trusts, charge-offs, servicing costs and transaction expenses. Credit
card servicing income which represents fees paid to the Company for continuing
to service accounts which
29
Advanta Corp. and Subsidiaries
NONINTEREST REVENUES
($ in millions)
[GRAPH]
1991 1992 1993 1994 1995
- - ------------------------------------------------------------------------------------------------
Other Noninterest Revenues 133 193 256 396 $543
Credit Card Securitization Income
- - ------------------------------------------------------------------------------------------------
have been securitized, increased to $117.4 million in 1995 from $69.0 million in
1994. Such fees generally approximate 2% of securitized receivables.
Interchange income represents fees that are payable by merchants to
the credit card issuer for sale transactions. For 1994 and 1993, interchange
income on securitized credit cards has been reclassified from credit card
securitization income to credit card interchange income. Total interchange
income, which represents approximately 1.4% of credit card purchases, increased
29% to $92.4 million in 1995 from $71.7 million in 1994.
During 1995, the Company securitized $542 million of mortgage loans
compared to $456 million in 1994. Mortgage banking income of $50.5 million for
1995 increased 34% from $37.6 million in 1994. See Note 1 to Consolidated
Financial Statements for a description of mortgage banking income.
Leasing revenues, net, increased $19.5 million to $41.1 million in
1995 primarily due to a 63% growth in average securitized lease receivables
from 1994. Insurance revenues, net, were $27.7 million in 1995, an increase of
$15.0 million over 1994. This strong growth is attributed to the successful
marketing of insurance products in the credit card, mortgage and leasing
businesses.
Noninterest revenues of $395.8 million in 1994 increased $140.2
million or 55% from $255.6 million in 1993, primarily due to increases in
credit card securitization, servicing and interchange income, the gain on the
sale of the credit card customer relationships, and higher leasing and
insurance revenues.
OPERATING EXPENSES
($ in thousands)
- - ----------------------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------------------
Amortization of credit card
deferred origination
costs, net $ 72,258 $ 39,381 $ 6,566
Other operating expenses:
Salaries and employee
benefits 116,681 88,681 65,469
External processing 28,407 22,618 16,604
Marketing 25,374 32,339 18,742
Credit card fraud losses 20,029 16,654 13,779
Postage 18,518 12,732 9,818
Professional fees 14,937 10,985 10,761
Equipment expense 12,751 9,293 6,550
Telephone expense 11,959 8,615 5,402
Occupancy expense 9,254 8,425 6,247
Credit and collection
expense 9,039 7,604 7,055
Other 11,478 9,457 14,174
- - ----------------------------------------------------------------------------
Total other operating
expenses $278,427 $227,403 $174,601
- - ----------------------------------------------------------------------------
Total operating
expenses $350,685 $266,784 $181,167
============================================================================
At year end:
Number of accounts
managed (000's) 5,031 3,968 2,827
Number of employees 2,409 1,753 1,614
For the year:
Other operating expenses
as a percentage of
average managed
receivables 2.9% 3.7% 4.1%
============================================================================
The amortization of credit card deferred origination costs, net,
increased from $39.4 million in 1994 to $72.3 million in 1995. This increase
resulted primarily from amortization related to the $80.6 million of credit
card origination costs that were deferred since the fourth quarter of 1994 (see
Note 1 of Notes to Consolidated Financial Statements).
Total other operating expenses of $278.4 million for 1995 were up
$51.0 million or 22% from $227.4 million in 1994. The increase in total other
operating expenses resulted from a $28.0 million or 32% increase in salaries
and employee benefits, partially due to the addition of senior management to
assist in the strategic growth of the various business units. Other factors
affecting the increase in other operating expenses were a $5.8 million or 26%
increase in external processing resulting primarily from a 27% increase in the
number of accounts managed year-to-year, and an overall increase in credit card
related costs due to a 26% increase in the number of managed credit card
accounts.
30
Advanta Corp. and Subsidiaries
The amortization of credit card deferred origination costs, net,
increased from $6.6 million in 1993 to $39.4 million in 1994, primarily due to
a $25.7 million increase in amounts deferred under third party agreements.
Total other operating expenses of $227.4 million for 1994 rose $52.8 million or
30% from 1993. This overall growth was a result of a $23.2 million or 35%
increase in salaries and employee benefits as well as increases in marketing,
external processing and other credit card related costs, as a result of the 42%
increase in the number of managed credit card accounts in 1994.
OPERATING EXPENSE RATIO
(in percent)
[GRAPH]
1991 4.6
1992 4.4
1993 4.1
1994 3.7
1995 2.9%
As a result of continued investments in developmental initiatives, in
1995, the Company entered into a joint venture agreement with The Royal Bank of
Scotland ("RBS"), for the purpose of issuing credit cards in the United
Kingdom. This new company, RBS Advanta, first began issuing bankcards in
October 1995. The net results from the operations are not currently material to
the Company and are not expected to be so in 1996. However, the Company expects
that the anticipated receivable growth will favorably impact future earnings.
Income Taxes
The Company's consolidated income tax expense was $75.2 million for 1995, or an
effective tax rate of 36%, compared to tax expense of $59.1 million, or a 36%
effective rate, in 1994 and tax expense of $45.3 million, or a 37% effective
rate, in 1993. The decrease in the effective tax rate from 1993 to 1994
resulted from a higher level of tax-free income and lower levels of state
income taxes.
ASSET/LIABILITY MANAGEMENT
The financial condition of Advanta Corp. is managed with a focus on maintaining
high credit quality standards, disciplined interest rate risk management and
prudent levels of leverage and liquidity.
Interest Rate Sensitivity
Interest rate sensitivity refers to managed net interest income variability
resulting from mismatches between asset and liability indices (basis risk) and
the effects which changes in market interest rates have on asset and liability
repricing mismatches (gap risk).
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 receivables, sells and purchases assets, alters the
mix and term structure of its funding base, changes its investment portfolio
and short-term investment position, and uses derivative financial instruments.
Derivative financial instruments are used for the express purpose of managing
exposures to changes in interest rates and foreign exchange rates. Derivative
financial instruments, by policy, are not used for any speculative purposes
(see discussion under "Derivatives Activities"). The Company has primarily
utilized variable rate funding in pricing its credit card securitization
transactions in an attempt to match the variable rate pricing dynamics of the
underlying receivables sold to the trusts. Variable rate funding is used on the
balance sheet as well, in support of unsecuritized receivables which carry
variable rates. Although credit card receivable rates are generally set at a
spread over a floating rate index, they often 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 addition, the Company
at times offers fixed rate pricing to consumers for the introductory rate
period of its credit cards. In instances when a significant portion of credit
card receivables carry fixed rate introductory pricing or are at their floors,
the Company may convert part of
31
Advanta Corp. and Subsidiaries
the underlying funding to a fixed rate by using interest rate hedges, swaps and
fixed rate securitizations. In pricing mortgage and lease securitizations, both
fixed rate and variable rate funding are used depending upon the
characteristics of the underlying receivables. Additionally, basis risk exists
in on-balance sheet funding as well as in securitizing credit card receivables
at a spread over the London interbank offered rate ("LIBOR") when the rate on
the underlying assets is indexed to the prime rate. The Company measures the
basis risk resulting from potential variability in the spread between prime and
LIBOR and incorporates such risk into the asset and liability management
process. During 1995, substantially all new credit cards were issued using
LIBOR as the repricing index. The effect of this change will be the reduction
of prime/LIBOR basis risk over time. The Company continues to seek
cost-effective alternatives for minimizing this risk.
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 interest 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
fluctuating 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
1995, the Company, through its subsidiaries, securitized $3.4 billion of credit
card receivables, $542 million of mortgage loans and $146 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 borrowings and to fund future credit card, mortgage
loan and lease receivable growth. See the Consolidated Statements of Cash Flows
for more information regarding liquidity, funding and capital resources. In
addition, see Note 5 to the Consolidated Financial Statements and the
Supplemental Schedules thereto for additional information regarding the
Company's investment portfolio.
Over the last eight years, the Company has successfully accessed the
securitization market to efficiently support its growth strategy. While
securitization should continue to be a reliable source of funding for the
Company, other funding sources are available and include deposits, medium-term
notes, senior and subordinated debt, repurchase agreements, committed and
uncommitted bank lines, bank notes, federal funds purchased and the ability to
sell assets and raise additional equity.
In February 1995, the Company's wholly owned subsidiary, Advanta
National Bank ("Advanta National"), a Delaware-based credit card bank,
commenced operations. The Company's initial capitalization of Advanta National
was $50 million, consisting of $25 million in common stock and $25 million of
additional paid-in-capital. Additional capital infusions totaling $39 million
took place during 1995. As a credit card bank, Advanta National is limited to
one office, can engage only in consumer credit card operations and cannot
accept deposits other than savings and time deposits of $100,000 or more. It is
anticipated that Advanta National will continue to be the originator of a
substantial portion of the Company's credit cards. Advanta National had total
assets of $1.1 billion at December 31, 1995.
Funding diversification is an essential component of the Company's
liquidity management. The debt securities of Advanta Corp., Colonial National
Bank USA ("Colonial National"), and Advanta National have achieved
investment-grade ratings from the nationally recognized rating agencies. These
ratings have allowed the Company to further diversify its funding sources.
Efforts continue to develop new sources of funding, both through previously
untapped customer segments and through developing new financing structures.
In 1994, the Company obtained revolving credit facilities totaling
$255 million from a consortium of banks and $255 million in money market bid
lines. In the second quarter of 1995, the Company's $255 million revolving
credit facilities were replaced with a new $510 million revolving credit
facility which is available to Advanta National as well. The Company may also
sell up to $325 million of medium-term notes as needed.
In August 1995, in a public offering, the Company sold 2,500,000
depositary shares each representing a one-hundredth interest in a share of
Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a
series of the Company's Class B Preferred Stock, designated as 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (SAILS). On September 15,
1999, unless either previously redeemed by the Company or converted at the
option of the holder,
32
Advanta Corp. and Subsidiaries
each share of the SAILS will automatically convert into 100 shares of Class B
Common Stock. Proceeds from the offering, net of underwriting discount, were
approximately $90 million. The Company used the proceeds of the offering for
general corporate purposes, including financing the growth of its subsidiaries.
In September 1995, Colonial National and Advanta National (the
"Banks") established a $2.25 billion bank note program. The Banks may issue an
aggregate of $2.0 billion of senior bank notes and $250 million of subordinated
bank notes. These notes may have maturities ranging from seven days to fifteen
years from date of issuance. In the fourth quarter of 1995, Advanta National
sold $323 million of senior notes through this program.
In addition, at the Advanta parent company level, steady building of
liquidity and capital in 1995 and 1994 was achieved as a result of $66.1
million of dividends from subsidiaries in 1995 and $39.6 million in 1994, and
retained earnings of $121.2 million in 1995 and $96.2 million in 1994. The
Board of Directors currently intends to have the Company pay regular quarterly
dividends to its shareholders, maintaining an approximate 20% premium on the
dividend paid on the Class B common shares; however, the Company plans to
reinvest the majority of its earnings to support future growth.
At December 31, 1995, the Company was carrying $1.1 billion of loans
available for sale. The fair value of such loans was in excess of their
carrying value at year end. In connection with liquidity and asset/liability
management, the Company had $533 million of investments available for sale at
December 31, 1995. See Note 18 to the Consolidated Financial Statements for
fair value disclosures.
The following tables detail the composition of the deposit base and
the composition of debt and other borrowings at year end for each of the past
five years.
COMPOSITION OF DEPOSIT BASE
($ in millions) As of December 31,
- - ---------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- - ---------------------------------------------------------------------------------------------------------------
Demand deposits $ 91.7 5% $ 64.5 5% $ 33.4 3% $ 24.8 2% $ 20.2 2%
Money market savings 277.5 14 301.7 26 220.7 17 210.7 17 197.1 16
Time deposits of
$100,000 or less 965.5 51 691.0 60 961.4 77 926.8 77 932.5 77
Time deposits of
more than $100,00 571.9 30 102.2 9 39.4 3 42.4 4 55.2 5
- - ---------------------------------------------------------------------------------------------------------------
Total deposits $1,906.6 100% $1,159.4 100% $1,254.9 100% $1,204.5 100% $1,205.0 100%
===============================================================================================================
COMPOSITION OF DEBT AND OTHER BORROWINGS
($ in millions) As of December 31,
- - ---------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- - ---------------------------------------------------------------------------------------------------------------
Subordinated notes and
certificates $ 76.2 4% $ 282.1 20% $301.3 63% $271.1 83% $192.6 55%
Senior notes and
certificates 200.6 11 0 0 0 0 0 0 0 0
Subordinated debentures 0 0 0 0 0 0 33.2 10 33.2 10
Short-term bank notes 25.0 1 85.0 6 0 0 0 0 0 0
Medium-term bank notes 322.7 18 0 0 0 0 0 0 0 0
5 1/8% notes, due 1996 150.0 8 149.9 11 149.9 32 0 0 0 0
Medium-term notes 504.7 28 359.7 25 15.0 3 0 0 0 0
Term fed funds 443.0 25 309.0 22 0 0 0 0 0 0
Securities sold under
agreements to repurchase 0 0 86.5 6 0 0 0 0 101.8 29
Lines of credit and term
funding arrangements 0 0 50.0 4 7.5 2 16.5 5 14.0 4
Other borrowings 81.8 5 80.9 6 0 0 7.1 2 6.3 2
- - ---------------------------------------------------------------------------------------------------------------
Total debt and other
borrowings $1,804.0 100% $1,403.1 100% $473.7 100% $327.9 100% $347.9 100%
===============================================================================================================
33
Advanta Corp. and Subsidiaries
As a grandfathered institution under the Competitive Equality Banking Act
of 1987 ("CEBA"), the Company must limit Colonial National's average on-balance
sheet asset growth to 7% per annum. For the fiscal CEBA year ended September
30, 1995, Colonial National's average assets did not exceed the allowable
amount and, accordingly, Colonial National was in full compliance with CEBA
growth limits. The timing and size of securitizations, on-balance sheet
liability structure and rapid changes in balance sheet structure are frequently
due to the management of Colonial National's balance sheet within this growth
constraint.
In addition to Colonial National's total deposits of $1.3 billion,
deposits at December 31, 1995 included $612 million of time deposits at Advanta
National and $38 million of deposits at Advanta Financial Corp. ("AFC"), a Utah
state-chartered, FDIC-insured industrial loan corporation. AFC's assets and
operations are not currently material to the Company, and the Company does not
expect them to become material in the near term.
While there are no specific capital requirements for Advanta Corp.,
the Office of the Comptroller of the Currency requires that Colonial National
and Advanta National maintain a risk-based capital ratio of at least 8%. Both
banks were in excess of the required level and exceeded the minimum capital
level of 10% required for designation as a "well-capitalized" depository
institution. At December 31, 1995 and 1994, Colonial National's risk-based
capital ratio was 11.56% and 12.04%, respectively. Advanta National's
risk-based capital ratio at December 31, 1995 was 12.28%. The Company intends
to take the necessary actions to maintain Colonial National and Advanta
National as "well-capitalized" banks. In addition, the Company's insurance
subsidiaries are subject to certain capital, deposit and dividend rules and
regulations as prescribed by state jurisdictions in which they are authorized
to operate. At December 31, 1995 and 1994 the insurance subsidiaries were in
compliance with all requisite rules and regulations.
CAPITAL EXPENDITURES
The Company spent $20.6 million for capital expenditures in 1995, primarily for
the purchase of land in Delaware, additional space in existing buildings,
office and voice communication equipment and furniture and fixtures. This
compared to $24.1 million for capital expenditures in 1994 and $13.3 million in
1993.
In 1996, the Company anticipates capital expenditures to exceed those
of 1995 as its facilities are expanding and the Company is continuing to
upgrade its voice and communication systems. The Company also anticipates that
its 1996 marketing expenditures will exceed those of 1995 as the Company
continues to originate new accounts, manage account retention and develop new
consumer products for its customers.
DERIVATIVES ACTIVITIES
The Company utilizes derivative financial instruments for the purpose of
managing its exposure to interest rate and foreign currency risks. The Company
has a number of mechanisms in place that enable it to monitor and control both
market and credit risk from these derivatives activities. At the broader level,
all derivatives strategies are managed under a hedging policy approved by the
Board of Directors that details the use of such derivatives and the individuals
authorized to execute derivatives transactions. All derivatives strategies must
be approved by the Company's senior management (President, Chief Executive
Officer, Chief Financial Officer and Treasurer).
As part of this approval process, a market risk analysis is completed
to determine the potential impact on the Company from severe negative
(stressed) movements in the market. By policy, derivatives transactions may
only be used to manage the Company's exposure to interest rate and foreign
currency risks or for cost reduction and may not be used for speculative
purposes. As such, the impact of any derivatives transaction is calculated
using the Company's asset/liability model to determine its suitability.
The Company's Investment Committee (a management committee) has a
counterparty credit policy. This policy details the maximum credit exposure,
transaction limit and transaction term for counterparties based on an
internally assigned Investment Committee credit rating. Counterparty internal
credit ratings reflect the credit ratings from nationally recognized rating
agencies, as well as other significant credit factors where appropriate. Each
counterparty's credit quality is reviewed as new information becomes available,
and, in any case, at least quarterly. Activities with counterparties will be
suspended if there is reason to believe that their credit quality is below the
Company's set standards.
For each individually approved counterparty, a credit exposure amount,
representing the maximum aggregate credit exposure from derivatives
transactions the Company is willing to accept from that counterparty, is
calculated for a hypothetical stress environment.
34
Advanta Corp. and Subsidiaries
To manage counterparty exposure, the Company also uses negotiated agreements
that establish threshold exposure amounts for each counterparty above which the
Company has the right to call for and receive collateral for the amount of such
excess, thereby limiting its exposure to the threshold amount. The threshold
levels can be fixed or may change as the credit rating of the counterparty
changes, and in all cases, the threshold levels are well below the maximum
allowable exposure amounts described above.
Counterparty master agreements and any collateral agreements, by
policy, must be signed prior to the execution of any derivatives transactions
with a counterparty. To date, substantially all master agreements with
counterparties have included bilateral collateral agreements. As such, the
potential exposure from a particular counterparty is limited to the maximum
threshold level for that counterparty.
The Company has a treasury middle office independent of the trading
function, which measures, monitors, and reports on credit, market, and
liquidity risk exposures from hedging and derivative product activities. It is
the responsibility of this department to ensure compliance with respect to the
hedging policy, including the counterparty transaction limits, transaction
terms and trader authorizations. In addition, this department marks each
derivatives position to market on a weekly basis using both internal and
external models. These models have been benchmarked against a sample of
derivatives dealers' valuation models for accuracy. Position and counterparty
exposure reports are generated and used to manage collateral requirements of
the counterparty and the Company.
All of these procedures and processes are designed to provide
reasonable assurance that prior to and after the execution of any derivatives
strategy, market, credit and liquidity risks are fully analyzed and
incorporated into the Company's asset/liability and risk measurement models and
the proper accounting treatment for the transaction is identified and executed.
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
economic 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, Amounts due from Credit Card
Securitizations and Other Assets. Recourse reserves are intended to cover all
probable credit losses over the life of the securitized receivables. Management
evaluates both its on-balance sheet and recourse reserve requirements and, as
appropriate, effects transfers between these accounts.
The reserve for credit losses on a consolidated basis was $53.5
million, or 1.9% of receivables, at December 31, 1995, compared to $41.6
million, or 2.1% of receivables, at December 31, 1994. The reserve coverage of
impaired assets (nonperforming assets and accruing loans past due 90 days or
more on credit cards) increased to 136.3% at December 31, 1995, from 96.1% at
December 31, 1994. Reserve coverage of impaired credit card assets was 185.8%
at December 31, 1995, relatively even with 186.5% at year end 1994.
The reserve for credit losses on a consolidated basis was $41.6
million, or 2.1% of receivables, in 1994, compared to $31.2 million, or 2.4% of
receivables, in 1993.
35
Advanta Corp. and Subsidiaries
ASSET QUALITY
Impaired assets include both nonperforming assets (mortgage loans and leases
past due 90 days or more, real estate owned, bankrupt, decedent and fraudulent
credit card accounts, 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 $167.1 million,
or 1.4% of receivables, at year end 1995 compared to $102.4 million, or 1.3% of
receivables, in 1994. Nonperforming assets on the total managed portfolio were
$82.2 million, or .7% of receivables, compared to $61.6 million, or .8%, in
1994. The total managed charge-off rate for 1995 was 2.2%, compared to 2.3% for
1994. The charge-off rate on managed credit cards was 2.5% for 1995, flat with
1994.
On the total owned portfolio, impaired assets were $39.3 million, or
1.4% of receivables in 1995, compared to $43.3 million, or 2.2%, in 1994. Gross
interest income that would have been recorded in 1995 and 1994 for owned
nonperforming assets, had interest been accrued throughout the year in
accordance with the assets' original terms, was approximately $4.0 million and
$5.1 million, respectively. The amount of interest on nonperforming assets
included in income for 1995 and 1994 was $1.3 million and $1.7 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
status when they become 90 days past due. Owned credit card receivables past
due 90 days or more and still accruing interest were $17.4 million or .7% of
receivables at December 31, 1995, compared to $11.2 million, or .6% of
receivables, a year ago.
During 1991, the Company adopted a new policy for the charge-off of
bankrupt, decedent and fraudulent credit card accounts. Under the new policy,
the Company charges off bankrupt or decedent accounts within 30 days of
notification and accounts suspected of being fraudulent after a 90-day
investigation period, unless the investigation shows no evidence of fraud.
Under the previous policy, such accounts were charged off in accordance with
the Company's normal credit card charge-off policy at 186 days contractual
delinquency. Consequently, in 1991, both newly identified bankrupt, decedent
and fraudulent accounts, as well as those previously identified, were written
off. The 1991 charge-off rates included in the following tables exclude the
effect of this acceleration.
During 1994, the Company implemented a new policy for the charge-off
of mortgage loans. Under this policy, when a nonperforming mortgage loan
becomes twelve months delinquent, the Company writes down the loan to its net
realizable value, regardless of anticipated collectibility. Consequently, in
1994, all mortgage loans that had been twelve or more months delinquent, as
well as any mortgages that became twelve months delinquent during the year were
written down to their net realizable value. Thus, 1994's managed mortgage loan
charge-off rate of 1.7% was unusually high compared to the 1995 level of .9%.
36
Advanta Corp. and Subsidiaries
The following tables provide a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
($ in thousands) December 31,
- - ----------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- - ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED--MANAGED
Nonperforming assets $ 82,171 $ 61,587 $ 63,589 $ 57,797 $ 47,587
Accruing loans past due 90 days or more 84,892 40,837 31,514 34,890 33,250
Impaired assets 167,063 102,424 95,103 92,687 80,837
Total loans 30 days or more delinquent 404,072 220,390 186,297 184,670 159,345
As a percentage of gross receivables:
Nonperforming assets .7% .8% 1.2% 1.6% 1.7%
Accruing loans past due 90 days or more .7% .5% .6% .9% 1.2%
Impaired assets 1.4% 1.3% 1.8% 2.5% 2.8%
Total loans 30 days or more delinquent 3.3% 2.7% 3.6% 5.0% 5.6%
Net charge-offs:
Amount $212,865 $139,676 $122,715 $108,606 $ 89,072
As a percentage of gross receivables 2.2% 2.3% 2.9% 3.4% 3.2%(1)
- - ----------------------------------------------------------------------------------------------------------------
CREDIT CARDS--MANAGED
Nonperforming assets $ 20,516 $ 14,227 $ 10,881 $ 7,592 $ 5,586
Accruing loans past due 90 days or more 84,878 40,721 31,489 34,890 33,239
Impaired assets 105,394 54,948 42,370 42,482 38,825
Total loans 30 days or more delinquent 262,299 133,121 94,035 99,308 97,100
As a percentage of gross receivables:
Nonperforming assets .2% .2% .3% .3% .3%
Accruing loans past due 90 days or more .8% .6% .8% 1.3% 1.6%
Impaired assets 1.1% .8% 1.1% 1.6% 1.9%
Total loans 30 days or more delinquent 2.6% 2.0% 2.4% 3.7% 4.8%
Net charge-offs:
Amount $193,160 $115,218 $105,966 $100,465 $ 84,113
As a percentage of gross receivables 2.5% 2.5% 3.5% 4.5% 4.4%(1)
- - ----------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS--MANAGED(2)
Nonperforming assets $ 56,743 $ 44,678 $ 50,418 $ 46,755 $ 37,371
Total loans 30 days or more delinquent 106,223 65,966 75,747 69,962 51,137
As a percentage of gross receivables:
Nonperforming assets 3.2% 3.3% 4.4% 5.1% 5.2%
Total loans 30 days or more delinquent 5.9% 4.9% 6.6% 7.7% 7.1%
Net charge-offs:
Amount $ 13,836 $ 20,709 $ 13,991 $ 5,924 $ 3,031
As a percentage of gross receivables .9% 1.7% 1.3% .8% .5%
- - ----------------------------------------------------------------------------------------------------------------
LEASES--MANAGED
Nonperforming assets $ 4,912 $ 2,682 $ 2,290 $ 3,432 $ 4,625
Total loans 30 days or more delinquent 35,274 20,972 16,476 15,320 11,048
As a percentage of receivables:
Nonperforming assets 1.3% 1.0% 1.3% 2.5% 4.5%
Total loans 30 days or more delinquent 9.3% 7.9% 9.7% 11.1% 10.8%
Net charge-offs:
Amount $ 5,846 $ 3,747 $ 2,759 $ 2,352 $ 2,130
As a percentage of receivables 1.9% 1.9% 1.9% 2.2% 2.5%
================================================================================================================
(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 3.8% and 5.3% on a
consolidated-managed and credit card-managed basis, respectively.
(2) In 1994, the Company implemented a new mortgage loan charge-off policy
(see Asset Quality).
37
Advanta Corp. and Subsidiaries
($ in thousands) December 31,
- - ---------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- - ---------------------------------------------------------------------------------------------------------------
CONSOLIDATED--OWNED
Reserve for credit losses $53,494 $41,617 $31,227 $40,228 $36,355
Nonperforming assets 21,856 31,949 11,487 15,318 18,367
Accruing loans past due 90 days or more 17,399 11,354 11,038 16,270 20,989
Impaired assets 39,255 43,303 22,525 31,588 39,356
Reserve as a percentage of impaired assets 136.3% 96.1% 138.6% 127.4% 92.4%
As a percentage of gross receivables:
Reserve 1.9% 2.1% 2.4% 4.0% 2.9%
Nonperforming assets .8% 1.6% .9% 1.5% 1.4%
Accruing loans past due 90 days or more .6% .6% .9% 1.6% 1.7%
Impaired assets 1.4% 2.2% 1.8% 3.2% 3.1%
Net charge-offs:
Amount $42,549 $35,293 $26,776 $39,965 $50,807
As a percentage of gross receivables 2.3% 2.6% 2.4% 3.9% 4.0%(1)
- - ---------------------------------------------------------------------------------------------------------------
CREDIT CARDS--OWNED
Reserve for credit losses $36,889 $27,486 $25,859 $35,743 $31,193
Nonperforming assets 2,466 3,502 3,062 2,780 3,008
Accruing loans past due 90 days or more 17,385 11,238 11,013 16,270 20,978
Impaired assets 19,851 14,740 14,075 19,050 23,986
Reserve as a percentage of impaired assets 185.8% 186.5% 183.7% 187.6% 130.0%
As a percentage of gross receivables:
Reserve 1.6% 1.6% 2.3% 4.8% 3.0%
Nonperforming assets .1% .2% .3% .4% .3%
Accruing loans past due 90 days or more .7% .6% 1.0% 2.2% 2.0%
Impaired assets .8% .9% 1.2% 2.6% 2.3%
Net charge-offs:
Amount $35,425 $22,688 $23,623 $37,382 $47,252
As a percentage of gross receivables 2.2% 1.9% 2.6% 4.6% 4.9%(1)
- - ---------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS--OWNED(2)
Reserve for credit losses $ 3,360 $ 5,164 $ 2,706 $ 2,926 $ 2,447
Nonperforming assets 18,676 27,379 7,090 10,266 11,801
Reserve as a percentage of impaired assets 18.0% 18.9% 38.2% 28.5% 20.7%
As a percentage of gross receivables:
Reserve 1.0% 3.6% 3.0% 1.4% 1.3%
Nonperforming assets 5.8% 19.2% 7.8% 4.8% 6.3%
Net charge-offs:
Amount $ 5,962 $11,689 $ 2,207 $ 1,451 $ 1,627
As a percentage of gross receivables 3.2% 9.7% 1.4% .8% .8%
- - ---------------------------------------------------------------------------------------------------------------
LEASES--OWNED
Reserve for credit losses $ 977 $ 1,076 $ 1,826 $ 1,442 $ 1,119
Nonperforming assets 714 1,068 1,335 2,254 3,553
Reserve as a percentage of impaired assets 136.8% 100.7% 136.8% 64.0% 31.5%
As a percentage of receivables:
Reserve 1.0% 1.2% 3.6% 3.1% 3.1%
Nonperforming assets .8% 1.2% 2.6% 4.8% 9.7%
Net charge-offs:
Amount $ 1,139 $ 914 $ 947 $ 1,267 $ 2,130
As a percentage of receivables 1.4% 1.5% 1.6% 2.8% 3.1%
===============================================================================================================
(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-owned basis, respectively.
(2) In 1994, the Company initiated a program for repurchasing
nonperforming assets from the securitized mortgage portfolios and
implemented a new mortgage loan charge-off policy (see Asset Quality).
38
Advanta Corp. and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
($ in thousands) December 31,
- - ---------------------------------------------------------------------------------------------------------------
1995 1994
- - ---------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 45,714 $ 43,706
Federal funds sold 146,375 39,050
Interest-bearing deposits 410,709 313,852
Investments available for sale 532,963 318,759
Loan and lease receivables, net:
Available for sale 1,079,478 573,076
Other loan and lease receivables, net 1,699,771 1,406,378
---------------------------
Total loan and lease receivables, net 2,779,249 1,979,454
Premises and equipment (at cost, less accumulated depreciation
of $37,621 in 1995 and $28,906 in 1994) 43,453 33,219
Amounts due from credit card securitizations 190,819 144,483
Other assets 374,977 240,525
- - ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,524,259 $3,113,048
===============================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 91,721 $ 64,510
Interest-bearing 1,814,880 1,094,848
---------------------------
Total deposits 1,906,601 1,159,358
Other borrowings 1,216,127 737,095
Long-term debt 587,877 666,033
Other liabilities 140,690 108,872
- - ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,851,295 2,671,358
- - ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (See Note 8)
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding--1,010 shares in 1995 and 1994 1,010 1,010
Class B preferred stock, $.01 par value:
Authorized--1,000,000 shares;
Issued--25,000 shares in 1995 0 0
Class A common stock, $.01 par value;
Authorized--200,000,000 shares;
Issued--17,481,022 shares in 1995 and 17,347,468 shares in 1994 175 173
Class B common stock, $.01 par value;
Authorized--200,000,000 shares;
Issued--24,007,352 shares in 1995 and 23,131,498 shares in 1994 240 231
Additional paid-in capital, net 280,294 176,465
Retained earnings, net 391,245 263,811
- - ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 672,964 441,690
- - --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,524,259 $3,113,048
===============================================================================================================
See Notes to Consolidated Financial Statements.
39
Advanta Corp. and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data) Year Ended December 31,
- - ----------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $189,983 $135,429 $134,184
Investments:
Taxable 46,574 26,552 22,083
Exempt from federal income tax 2,375 3,158 1,680
-------------------------------
Total investments 48,949 29,710 23,763
-------------------------------
TOTAL INTEREST INCOME 238,932 165,139 157,947
-------------------------------
Interest expense:
Deposits 72,812 48,268 53,389
Debt 67,908 36,347 22,951
Other borrowings 25,312 10,143 2,963
-------------------------------
TOTAL INTEREST EXPENSE 166,032 94,758 79,303
-------------------------------
NET INTEREST INCOME 72,900 70,381 78,644
PROVISION FOR CREDIT LOSSES 53,326 34,198 29,802
-------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 19,574 36,183 48,842
NONINTEREST REVENUES:
Gain on sale of credit cards 0 18,352 0
Other noninterest revenues 543,014 377,456 255,580
-------------------------------
TOTAL NONINTEREST Revenues 543,014 395,808 255,580
-------------------------------
OPERATING EXPENSES:
Amortization of credit card deferred origination costs, net 72,258 39,381 6,566
Other operating expenses 278,427 227,403 174,601
-------------------------------
TOTAL OPERATING EXPENSES 350,685 266,784 181,167
-------------------------------
Income before income taxes and extraordinary item 211,903 165,207 123,255
Provision for income taxes 75,226 59,144 45,335
-------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM $136,677 $106,063 $ 77,920
EXTRAORDINARY ITEM, NET (See Note 9) 0 0 (1,273)
-------------------------------
NET INCOME $136,677 $106,063 $ 76,647
================================================================================================================
EARNINGS PER COMMON SHARE BEFORE EXTRAODINARY ITEM (See Note 1) $ 3.20 $ 2.58 $ 1.95
================================================================================================================
EARNINGS PER COMMON SHARE (See Note 21) $ 3.20 $ 2.58 $ 1.92
================================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,670 41,046 39,777
================================================================================================================
See Notes to Consolidated Financial Statements.
40
Advanta Corp. and Subsidiaries
Consolidated Statements of
Changes in Stockholders' Equity
($ in thousands)
- - ------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Additional
Preferred Preferred Common Common Paid-In Deferred
Stock Stock Stock Stock Capital Compensation
- - ------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1992 $1,010 $0 $170 $172 $ 74,311 $ (5,137)
Change in unrealized
appreciation of
investments
Preferred and common cash
dividends declared
Exercise of stock options 2 4 1,866
Issuance of stock:
Public offering 45 89,980
Benefit plans 5 9,575 (7,934)
Amortization of deferred
compensation 1,960
Termination/Tax
benefit--benefit plans 1,922 103
Net Income
- - ------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1993 1,010 0 172 226 177,654 (11,008)
Change in unrealized
appreciation of
investments
Preferred and common cash
dividends declared
Exercise of stock options 1 2 1,671
Issuance of stock:
Benefit plans 3 11,543 (9,542)
Amortization of deferred
compensation 5,327
Termination--benefit plans (190) 1,010
Net Income
- - ------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1994 1,010 0 173 231 190,678 (14,213)
Change in unrealized
appreciation of
investments
Preferred and common cash
dividends declared
Exercise of stock options 2 3 2,049
Issuance of stock:
Public offering 0 88,927
Benefit plans 6 18,360 (16,523)
Amortization of deferred
compensation 7,661
Termination/Tax
benefit--benefit plans 1,917 1,438
Net Income
- - ------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1995 $1,010 $0 $175 $240 $301,931 $(21,637)
================================================================================================
($ in thousands)
- - -------------------------------------------------------------------------------
Unrealized
Investment Total
Holding Gains Retained Treasury Stockholders'
(losses) Earnings Stock Equity
- - -------------------------------------------------------------------------------
Balance at Dec. 31, 1992 $ (39) $104,814 $ (431) $174,870
Change in unrealized
appreciation of
investments 563 563
Preferred and common cash
dividends declared (7,298) (7,298)
Exercise of stock options 1,872
Issuance of stock:
Public offering 90,025
Benefit plans 419 2,065
Amortization of deferred
compensation 1,960
Termination/Tax
benefit--benefit plans 12 2,037
Net Income 76,647 76,647
- - ----------------------------------------------------------------------------
Balance at Dec. 31, 1993 524 174,163 0 342,741
Change in unrealized
appreciation of
investments (7,062) (7,062)
Preferred and common cash
dividends declared (9,877) (9,877)
Exercise of stock options 184 1,858
Issuance of stock:
Benefit plans 636 2,640
Amortization of deferred
compensation 5,327
Termination--benefit plans (820) 0
Net Income 106,063 106,063
- - ----------------------------------------------------------------------------
Balance at Dec. 31, 1994 (6,538) 270,349 0 441,690
Change in unrealized
appreciation of
investments 6,258 6,258
Preferred and common cash
dividends declared (15,501) (15,501)
Exercise of stock options 59 2,113
Issuance of stock:
Public offering 88,927
Benefit plans 1,296 3,139
Amortization of deferred
compensation 7,661
Termination/Tax
benefit--benefit plans (1,355) 2,000
Net Income 136,677 136,677
- - ----------------------------------------------------------------------------
Balance at Dec. 31, 1995 $ (280) $391,525 $ 0 $672,964
============================================================================
See Notes to Consolidated Financial Statements.
41
Advanta Corp. and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands) Year Ended December 31,
- - ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 136,677 $ 106,063 $ 76,647
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity securities gains (6,776) 0 0
Depreciation and amortization of intangibles 10,802 7,907 5,206
Provision for credit losses 53,326 34,198 29,802
Change in other assets and amounts due from securitizations (127,931) (43,599) (19,549)
Change in other liabilities 51,757 27,616 16,952
Gain on securitization of mortgages and leases (35,652) (27,189) (19,127)
Loss on repurchase of senior subordinated debentures 0 0 1,928
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 82,203 104,996 91,859
INVESTING ACTIVITIES
Purchase of investments available for sale (3,313,555) (1,804,963) (1,020,355)
Proceeds from sale of investments available for sale 1,683,934 623,663 840,936
Proceeds from maturing investments available for sale 1,430,276 1,159,702 81,592
Change in fed funds sold and interest-bearing deposits (202,262) (34,973) 78,089
Change in credit card receivables, excluding sales (4,223,419) (2,790,421) (1,441,397)
Proceeds from sales/securitizations of receivables 4,331,739 2,738,740 1,686,913
Purchase of mortgage/lease portfolios (214,094) (143,804) (70,014)
Principal collected on mortgages 30,945 25,753 21,257
Mortgages made to customers (608,064) (451,892) (472,099)
Purchase of premises and equipment (20,652) (24,088) (13,271)
Proceeds from sale of premises and equipment 20 647 930
Excess of cash collections over income
recognized on direct financing leases 38,910 21,691 20,493
Equipment purchased for direct financing lease contracts (235,773) (160,080) (90,002)
Net change in other loans (4,062) (75) (1)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,306,057) (840,100) (376,929)
FINANCING ACTIVITIES
Increase in demand and savings deposits 3,023 112,048 18,666
Proceeds from deposits sold 30,018 0 0
Proceeds from sales of time deposits 1,322,388 448,624 820,904
Payments for maturing time deposits (608,186) (656,195) (789,175)
Change in repurchase agreements and term fed funds 47,545 395,455 0
Proceeds from issuance of subordinated/senior debt 59,256 39,437 135,000
Payments on redemption of subordinated/senior debt (64,642) (58,618) (103,480)
Redemption of senior subordinated debentures 0 0 (36,404)
Proceeds from issuance of medium-term notes 487,759 344,787 15,000
Proceeds from issuance of 5 1/8% notes 0 0 149,851
Proceeds from issuance of notes payable 465,006 137,276 121,069
Repayment of notes payable (594,983) (9,787) (137,196)
Proceeds from issuance of stock 94,179 4,498 93,542
Cash dividends paid (15,501) (9,877) (7,298)
- - --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,225,862 747,648 280,479
- - --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,008 12,544 (4,591)
Cash at beginning of year 43,706 31,162 35,753
Cash at end of year $ 45,714 $ 43,706 $ 31,162
==========================================================================================================================
See Notes to Consolidated Financial Statements.
42
Advanta Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Advanta Corp. (the "Company"), a Delaware corporation, is a financial services
company which provides a variety of products to consumers and small businesses.
The Company services approximately 5 million customers and manages receivables
in excess of $12.2 billion. The Company issues credit cards primarily through
its two wholly-owned subsidiaries Colonial National Bank USA ("Colonial
National") and Advanta National Bank ("Advanta National"). Substantially all of
the Company's credit card processing is performed by a single outside third
party processor. Total managed credit card receivables at December 31, 1995
totaled $10 billion. The Company also operates through other wholly owned
subsidiaries including: Advanta Mortgage Corp. USA ("AMC") which originates
mortgage loans, Advanta Business Services ("ABS") which provides small ticket
leases to businesses, and Advanta Life Insurance Company which reinsures or
writes various credit insurance products available to the Company's customers.
Total managed receivables for AMC and ABS totaled approximately $1.8 billion
and $.4 billion respectively, at December 31, 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
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 $71.9
million in 1995, $55.2 million in 1994 and $29.5 million in 1993.
The Company amortizes deferred credit card origination costs under the
consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board ("FASB") regarding the
acquisition of individual credit card accounts from independent third parties
(EITF Issue 93-1). The consensus stated 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 individual 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 consensus, direct origination costs incurred related to credit card
account 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 as was the practice prior to the EITF Issue 93-1 consensus.
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
had 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
43
Advanta Corp. and Subsidiaries
amortization period for deferred credit card account origination costs, the
Company no longer writes off deferred origination costs related to credit card
receivables being securitized. 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 subsidiaries Colonial National and,
beginning in 1995, Advanta National have completed 30 credit card
securitizations totaling $8.8 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 estimates of the
repayment term, including prepayments. As these estimates are influenced by
factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. 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 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.
MORTGAGE LOAN ORIGINATION FEES
The Company generally charges origination fees ("points") for mortgage loans
where permitted under state law. Origination fees, net of direct origination
costs, 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 currently
on the balance sheet 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 the amortization of premiums or the accretion of
discounts. At December 31, 1995 and 1994 the Company had no investments
classified as held to maturity.
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.
Debt and equity securities classified as Available for Sale are reported at
market value under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). Under SFAS 115, unrealized gains and losses on these securities (except
those held by the Company's venture capital unit, Advanta Partners LP) are
reported as a separate component of stockholders' equity and included in
retained earnings.
Changes in the fair value of Advanta Partners LP investments are
reported in noninterest revenues as equity securities gains or losses. For
investments that are not publicly traded, estimates of fair value have been
made by management that consider the investees' financial results, conditions
and prospects, and the values of comparable public companies. Because of the
nature of these investments, the equity method of accounting is not used in
situations where the Corporation has a greater than 20 percent ownership
interest.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various derivative financial instruments ("derivatives") such
as interest rate swaps and caps, forward contracts, options on securities, and
financial futures as part of its strategy to reduce interest rate and foreign
currency exposures. Derivatives are classified as hedges or synthetic
alterations of
44
Advanta Corp. and Subsidiaries
specific on-balance sheet items, off-balance sheet items or anticipated
transactions. In order for derivatives to qualify for hedge accounting
treatment the following conditions must be met: 1) the underlying item being
hedged by derivatives exposes the Company to interest rate or foreign currency
risks, 2) the derivative used serves to reduce the Company's sensitivity to
interest rate or foreign currency risks, and 3) the derivative used is
designated and deemed effective in hedging the Company's exposure to interest
rate or foreign currency risks. In addition to meeting these conditions,
anticipatory hedges must demonstrate that the anticipated transaction being
hedged is probable to occur and the expected terms of the transaction are
identifiable.
For derivatives designated as hedges of interest rate exposure, gains
or losses are deferred and included in the carrying amounts of the related item
exposing the Company to interest rate risk and ultimately recognized in income
as part of those carrying amounts. For derivatives designated as hedges of
foreign currency exposure, gains or losses are reported in stockholders'
equity. Accrual accounting is applied for derivatives designated as synthetic
alterations with income and expense recorded in the same category as the
related underlying on-balance sheet or off-balance sheet item synthetically
altered. Gains or losses resulting from early terminations of derivatives are
deferred and amortized over the remaining term of the underlying balance sheet
item or the remaining term of the derivative, as appropriate.
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in noninterest revenues. At December 31, 1995, 1994 and 1993, all the
Company's derivatives qualified as hedges or synthetic alterations.
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 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 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 include certain fees and costs
related to acquiring and processing 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
less amortization of previously recorded mortgage servicing assets 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. As these estimates are influenced by
factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. 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. See Note 3 and Note 16.
INSURANCE
Reinsurance 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. Insurance premiums are
earned ratably over the period of insurance coverage provided. The cost of
acquiring new reinsurance is deferred and amortized over the respective periods
in order to match the expense with the anticipated revenue. Insurance loss
reserves are based on estimated settlement amounts for both reported losses and
incurred but not reported losses.
CREDIT LOSSES
The Company's charge-off policy, as it relates to consumer credit card
accounts, is to charge off a receivable, if not paid, at 186 days contractual
delinquency. Under this policy, bankrupt and decedent
45
Advanta Corp. and Subsidiaries
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 1994, the Company implemented a new policy for the charge-off
of nonperforming mortgage loans. Under this policy, the Company charges off
potential losses on all nonperforming mortgages that have become twelve months
delinquent, regardless of anticipated collectibility. During the 1994
transition period, losses with respect to both mortgages that became twelve
months delinquent in 1994, as well as those mortgages that had been twelve
months or more delinquent, were charged 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 amortized on a
straight-line basis over 25 years.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). 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 basis of assets and liabilities given the provisions of the
enacted tax laws.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net earnings after Class A
preferred stock dividends by the average number of shares of common stock and
common stock equivalents outstanding during each year. The outstanding Class A
preferred stock is not a common stock equivalent. The outstanding Class B
preferred stock is mandatorily convertible into common stock and thus is
considered a common stock equivalent.
CASH FLOW REPORTING
For purposes of reporting cash flows, cash includes cash on hand and amounts
due from banks. Cash paid during 1995, 1994 and 1993 for interest was $147.2
million, $91.5 million and $78.8 million, respectively. Cash paid for taxes
during these periods was $43.9 million, $60.9 million and $30.0 million,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114") and SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan--Income Recognition and Disclosures" ("SFAS 118"), an amendment of SFAS
114. Both statements are effective for fiscal years beginning after December
15, 1994. By their terms, SFAS 114 and SFAS 118 do not apply either to a large
group of smaller-balance homogeneous loans that are collectively evaluated for
impairment (such as the Company's credit card loans and all except an
immaterial amount of the Company's mortgage loan portfolio), or to leases.
In 1995, the Company adopted the American Institute of Certified
Public Accountants Statement of Position ("SOP") 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." This SOP requires the Company to make
certain disclosures regarding the use of estimates in the preparation of its
financial statements.
Effective January 1, 1995, the Company adopted the provisions of SFAS
No. 122 "Accounting for Mortgage Servicing Rights," and capitalized $2.8
million of originated mortgage servicing rights during 1995 which are included
in other assets.
The FASB has issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement is effective for fiscal years beginning after
December 15, 1995, and requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. The required information, if
the Company chooses to continue to apply certain allowable accounting
provisions, will not reflect any adjustments to reported net income or earnings
per share.
46
Advanta Corp. and Subsidiaries
NOTE 2. LOAN AND LEASE RECEIVABLES
Loan and lease receivables consisted of the following:
December 31,
- - -----------------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------------
Credit cards(A) $2,338,280 $1,730,176
Mortgage loans(B) 321,711 142,874
Leases(C) 93,660 86,157
Other loans 9,276 5,237
- - -----------------------------------------------------------------------------
Gross loan and lease receivables 2,762,927 1,964,444
- - -----------------------------------------------------------------------------
Add: Deferred origination costs,
net of deferred fees(D) 69,816 56,627
Less: Reserve for credit losses:
Credit cards (36,889) (27,486)
Mortgage loans (3,360) (5,164)
Leases (977) (1,076)
Other (12,268) (7,891)
- - -----------------------------------------------------------------------------
Total (53,494) (41,617)
- - -----------------------------------------------------------------------------
Net loan and lease receivables $2,779,249 $1,979,454
=============================================================================
(A) Includes credit card receivables available for sale of $776.7 million
and $420.0 million in 1995 and 1994, respectively.
(B) Includes mortgage loan receivables available for sale of $279.4
million and $116.1 million in 1995 and 1994, respectively.
(C) Includes lease receivables available for sale of $18.0 million and
$36.0 million in 1995 and 1994, respectively, and is net of unearned
income of $15.9 million and $17.9 million in 1995 and 1994,
respectively. Also includes residual interest for both years.
(D) Includes approximately $5.3 million and $1.0 million in 1995 and
1994,respectively, related to loan and lease receivables available for
sale.
Receivables serviced for others consisted of the following items:
December 31,
- - -----------------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------------
Credit cards $7,692,463 $4,808,257
Mortgage loans 1,475,871 1,203,226
Leases 284,094 179,310
- - -----------------------------------------------------------------------------
Total $9,452,428 $6,190,793
=============================================================================
The geographic concentration of managed receivables was as follows:
December 31,
- - -----------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------
Receivables % Receivables %
- - -----------------------------------------------------------------------
California $ 2,043,281 16.7% $1,491,094 18.3%
New York 983,832 8.1 648,746 8.0
Texas 692,665 5.7 442,185 5.4
Florida 640,859 5.3 406,240 5.0
New Jersey 599,867 4.9 443,784 5.4
All other 7,254,851 59.3 4,723,188 57.9
- - -----------------------------------------------------------------------
Total managed
receivables $12,215,355 100.0% $8,155,237 100.0%
=======================================================================
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, 1995 and 1994, the
Company had $33.3 billion and $24.7 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, 1995 and 1994, outstanding
managed credit card receivables represented 30% and 26%, respectively, of
outstanding commitments.
NOTE 3. CREDIT CARD, MORTGAGE LOAN AND EQUIPMENT LEASE SECURITIZATIONS
Colonial National and Advanta National together had securitized credit card
receivables outstanding of $7.7 billion at December 31, 1995. In each
securitization transaction, credit card receivables were transferred to a trust
which issued certificates representing ownership interests in the trust
primarily to institutional investors. The Banks 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 $1.5 billion and $1.3 billion at December 31, 1995 and
1994, respectively. Although the Banks continue 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. Accordingly, the associated
receivables are not reflected on the balance sheet.
The Banks are subject to certain recourse provisions in connection
with these securitizations. At December 31, 1995 and 1994, the Banks had
reserves of $167.4 million and $74.5 million, respectively, related to these
recourse provisions. These reserves are netted against the amounts due from
credit card securitizations. At December 31, 1995, the Company had amounts
receivable from credit card securitizations, including the related
interest-bearing deposits, of $453.2 million, $262.4 million of which
constitute amounts subject to liens by the providers of the credit enhancement
facilities for the individual securitizations and amounts to be distributed to
investors. At December 31, 1994, the amounts receivable were $318.6 million
and amounts subject to lien or due to investors were $174.1 million.
At December 31, 1995, the Company had $1.5 billion of securitized
mortgage loan receivables
47
Advanta Corp. and Subsidiaries
outstanding which are subject to certain recourse provisions. The Company had
reserves of $27.2 million and $17.3 million at year end 1995 and 1994,
respectively, related to these recourse provisions which are netted against the
excess mortgage servicing rights. See Note 16. At December 31, 1995, the
Company had amounts receivable from mortgage loan sales and securitizations of
$162.4 million, $58.1 million of which was subject to liens. At December 31,
1994, the amounts receivable and amounts subject to lien were $128.6 million
and $49.1 million, respectively.
At December 31, 1995, the Company had $284 million of securitized
equipment lease receivables outstanding which are subject to certain recourse
provisions. The asset-backed certificates carry both fixed and variable rates
to investors. There were reserves of $15.3 million and $9.7 million at year end
1995 and 1994, respectively, related to these recourse provisions which are
netted against the excess servicing on lease securitizations. See Note 16. The
Company had accounts receivable from lease securitizations of $22.2 million at
year end 1995 and $14.4 million at year end 1994, of which $7.5 million and
$6.4 million, respectively, were subject to liens by providers of the credit
enhancement facilities. Total interest in residuals for lease assets sold was
$22.4 million and $12.0 million at December 31, 1995 and 1994, respectively,
and is also subject to recourse provisions.
As indicated in Note 1, recourse reserves are established at the time
of the securitization transactions based on anticipated future cash flows,
prepayment rates and charge-offs. As these estimates are influenced by factors
outside of the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term.
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. In estimating the reserve, management relies on historical experience
by loan type adjusted for any known trends in the portfolio. As these estimates
are influenced by factors outside of the Company's control, there is
uncertainty inherent in these estimates, making it reasonably possible that
they could change in the near term. Any adjustments to the reserves (net of
transfers between on- and off-balance sheet reserves) are reported in the
Consolidated Income Statements in the periods they become known.
During 1994, the Company initiated a mortgage loan repurchase program
in which nonperforming mortgage loans were repurchased from the securitization
trusts in order to lower the net funding costs on these managed assets. In
accordance with this program, the Company transferred approximately $13 million
of the off-balance sheet mortgage loan recourse reserves associated with these
repurchased mortgages to on-balance sheet mortgage loan reserves (see
discussion in Management's Discussion and Analysis under the caption "Provision
for Credit Losses").
The following table displays five years of reserve history:
RESERVE FOR CREDIT LOSSES Year Ended December 31,
- - -----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- - -----------------------------------------------------------------------------------------------------------
Balance at January 1 $ 41,617 $ 31,227 $ 40,228 $ 36,355 $ 31,701
Provision for credit losses 53,326 34,198 29,802 47,138 55,461
Transfer of reserves from/(to)
recourse reserves 1,100 11,485 (12,027) (3,300) 0
Gross credit losses:
Credit cards (41,779) (28,646) (33,805) (46,477) (52,798)
Mortgage loans (6,038) (11,731) (2,247) (1,488) (1,635)
Leases (1,413) (1,053) (1,376) (1,930) (3,205)
Other loans (38) (44) (93) (73) (155)
- - -----------------------------------------------------------------------------------------------------------
Total credit losses (49,268) (41,474) (37,521) (49,968) (57,793)
Recoveries:
Credit cards 6,354 5,958 10,182 9,095 5,546
Mortgage loans 76 42 40 37 8
Leases 274 139 429 663 1,075
Other loans 15 42 94 208 357
- - -----------------------------------------------------------------------------------------------------------
Total recoveries 6,719 6,181 10,745 10,003 6,986
- - -----------------------------------------------------------------------------------------------------------
Net credit losses (42,549) (35,293) (26,776) (39,965) (50,807)
Balance at December 31 $ 53,494 $ 41,617 $ 31,227 $ 40,228 $ 36,355
===========================================================================================================
48
Advanta Corp. and Subsidiaries
NOTE 5. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
December 31,
- - -------------------------------------------------------------------------------------------------------------
1995 1994
------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Lesses Value Cost Gains Losses Value
- - ------------------------------------------------------------- ----------------------------------------------
U.S. Treasury
& other U.S.
Government
Securities $405,614 $ 70 $(286) $405,398 $192,994 $0 $ (4,509) $188,485
State and
municipal
securities 24,239 52 0 24,291 78,884 0 (1,676) 77,208
Collateralized
mortgage
obligations 8,066 0 (101) 7,965 8,584 0 (672) 7,912
Mortgage-backed
securities 36,599 0 (103) 36,496 34,555 0 (2,829) 31,726
Equity securities:
Venture capital
investments 26,897 4,111 0 31,008 5,000 0 0 5,000
Other equity
securities 10,963 196 (250) 10,909 8,056 0 (372) 7,684
Other 16,897 0 (1) 16,896 745 0 (1) 744
- - -------------------------------------------------------------------------------------------------------------
Total $529,275 $4,429 $(741) $532,963 $328,818 $0 $(10,059) $318,759
- - -------------------------------------------------------------------------------------------------------------
December 31,
- - --------------------------------------------------------------
1993
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Lesses Value
- - --------------------------------------------------------------
U.S. Treasury
& other U.S.
Government
Securities $154,873 $ 225 $(177) $154,921
State and
municipal
securities 75,797 868 0 76,665
Collateralized
mortgage
obligations 21,288 42 (60) 21,270
Mortgage-backed
securities 45,611 0 (42) 45,569
Equity securities:
Venture capital
investments 0 0 0 0
Other equity
securities 6,947 0 0 6,947
Other 2,704 0 (50) 2,654
- - --------------------------------------------------------------
Total $307,220 $1,135 $(329) $308,026
==============================================================
At December 31, 1995, investment securities with a book value of
$4,139 were pledged as collateral for derivatives transactions. At December 31,
1994, investment securities with a book value of $106,582 were pledged as
collateral for repurchase and derivatives transactions. At December 31, 1995,
1994 and 1993, investment securities with a book value of $6,281, $7,133 and
$7,927, respectively, were deposited with insurance regulatory authorities to
meet statutory requirements or held by a trustee for the benefit of primary
insurance carriers. At December 31, 1995, $3,688 of net unrealized gains on
securities was included in investments available for sale. During 1995, the net
change in unrealized gains on available for sale securities included as a
separate component of stockholders' equity was $6,258.
Maturity of investments available for sale at December 31, 1995 was as
follows:
Amortized Market
Cost Value
- - -----------------------------------------------------------------
Due in 1 year $422,907 $422,662
Due after 1 but within 5 years 5,881 5,946
Due after 5 but within 10 years 1,065 1,081
Due after 10 years 0 0
- - -----------------------------------------------------------------
Subtotal 429,853 429,689
Mortgage-backed CMO and MBS 44,665 44,461
Equity and other securities 54,757 58,813
- - -----------------------------------------------------------------
Total investments $529,275 $532,963
=================================================================
During 1995, proceeds from sales of available for sale securities were
$1,689,000. Gross gains of $8,666 and losses of $320 were realized on these
sales. Of the gross gains, $8,610 relates to an investment held by the
Company's venture capital unit. Proceeds during 1994 were $624,000. Gross
gains of $118 and losses of $596 were realized on these sales. Proceeds during
1993 were $841,000. Gross gains of $3,430 and losses of $888 were realized on
these sales. The specific identification method was the basis used to determine
the amortized cost in computing realized gains and losses.
49
Advanta Corp. and Subsidiaries
NOTE 6. DEBT
On December 11, 1995, $184 million of previously issued subordinated notes and
RediReserve certificates were exchanged for senior notes and RediReserve
certificates with similar interest rates and maturities. Total debt consisted
of the following:
December 31,
- - -----------------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------------
SENIOR DEBT
RediReserve certificates $ 4,203 $ 0
6 month senior notes 4,629 0
12 month senior notes 46,372 0
18 month senior notes (4.65%-7.00%) 6,534 0
24 month senior notes (4.88%-7.58%) 37,600 0
30 month senior notes (5.36%-7.14%) 16,730 0
48 month senior notes (5.60%-9.02%) 19,939 0
60 month senior notes (5.83%-10.44%) 55,604 0
5 1/8% notes due 1996 149,955 149,903
Medium-term notes, fixed (5.02%-8.36%) 289,735 264,735
Medium-term notes, floating 215,000 95,000
Short-term bank notes (5.97%) 24,999 84,977
Medium-term bank notes, fixed (5.86%-6.63%) 297,737 0
Medium-term bank notes, floating 24,970 0
Other senior notes 8,961 0
- - -----------------------------------------------------------------------------
Total senior debt $1,202,968 $ 594,615
SUBORDINATED DEBT
RediReserve certificates $ 26 $ 4,829
6 month subordinated notes 65 5,422
12 month subordinated notes 552 34,082
18 month subordinated notes
(4.65%-7.00%) 75 10,113
Two-, four-, and five year subordinated
notes (4.88%-10.44%) 21,676 130,213
30 month subordinated notes
(5.36%-7.14%) 2,878 37,858
7% subordinated bank notes due 2003 49,699 49,659
Other subordinated notes 1,251 10,003
- - -----------------------------------------------------------------------------
Total subordinated debt $ 76,222 $ 282,179
- - -----------------------------------------------------------------------------
Total debt $1,279,190 $ 876,794
Less short-term debt & certificates $ (691,313) $(210,761)
- - -----------------------------------------------------------------------------
Long-term debt $ 587,877 $ 666,033
=============================================================================
The Company's senior floating rate notes were priced based on a factor
of LIBOR or the Federal Funds effective rate. At December 31, 1995 the rates on
these notes varied from 6.01% to 6.41%.
The annual maturities of long-term debt at December 31, 1995 for the
years ending December 31 are as follows: $316.1 million in 1997; $30.5 million
in 1998; $17.9 million in 1999; $151.9 million in 2000; and $71.4 million
thereafter. The average interest cost of the Company's debt during 1995, 1994
and 1993 was 6.92%, 6.23%, and 7.59%, respectively.
NOTE 7. CAPITAL STOCK
The number of shares of capital stock was as follows:
Issued and Outstanding
- - -----------------------------------------------------------------------------
December 31,
- - -----------------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------------
(In thousands)
Class A preferred -- $1,000 par value;
Authorized, 1,010 1 1
=============================================================================
Class B preferred--$.01 par value;
Authorized, 1,000,000 25 0
=============================================================================
Class A voting common stock --
$.01 par value;
Authorized, 200,000,000 17,481 17,347
Class B non-voting common stock --
$.01 par value;
Authorized, 200,000,000 24,007 23,132
- - -----------------------------------------------------------------------------
Total common stock 41,488 40,479
=============================================================================
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 1995 as
the Company paid dividends on its common stock. The redemption price of the
Class A Preferred Stock is equivalent to the par value. The Class B Preferred
Stock pays a 6 3/4% dividend per share per year (equal to $249.75 per share)
and must be paid prior to any dividend on the common stock.
NOTE 8. ISSUANCE OF PREFERRED STOCK
On August 21, 1995, in a public offering, the Company sold 2,500,000 depositary
shares each representing a one-hundredth interest in a share of Stock
Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series
of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible
Class B Preferred Stock, Series 1995 (SAILS). On September 15, 1999, unless
either previously redeemed by the Company or converted at the option of the
holder, each share of the SAILS will automatically convert into 100 shares of
Class B Common Stock. Proceeds from the offering, net of underwriting discount,
were approximately $90 million. The Company used the proceeds of the offering
for general corporate purposes, including financing the growth of its
subsidiaries.
NOTE 9. 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.
50
Advanta Corp. and Subsidiaries
NOTE 10. INCOME TAXES
Income tax expense consisted of the following components:
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------------------------------
Current:
Federal $55,184 $54,246 $40,736
State 4,943 4,948 4,184
----------------------------------------------------------------------------------------------------
60,127 59,194 44,920
----------------------------------------------------------------------------------------------------
Deferred:
Federal 14,316 (613) (1,829)
State 783 563 2,244
----------------------------------------------------------------------------------------------------
15,099 (50) 415
----------------------------------------------------------------------------------------------------
Total tax expense before
extraordinary item $75,226 $59,144 $45,335
=====================================================================================================
Current taxes payable include the earnings of certain subsidiaries
which are not included in the consolidated federal income tax return.
The reconciliation of the statutory federal income tax to the
consolidated tax expense is as follows:
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------------------------------
Statutory federal income tax $74,166 $57,822 $43,139
State income taxes, net of
federal income tax benefit 3,722 3,582 4,178
Nontaxable investment
income (984) (1,149) (675)
Other (1,678) (1,111) (1,307)
----------------------------------------------------------------------------------------------------
Consolidated tax expense
before extraordinary item $75,226 $59,144 $45,335
----------------------------------------------------------------------------------------------------
Tax benefit on loss from
repurchase of debentures 0 0 (656)
----------------------------------------------------------------------------------------------------
Consolidated tax expense $75,226 $59,144 $44,679
====================================================================================================
Deferred taxes are determined based on the estimated future tax
effects of the differences between the financial statement and tax basis of
assets and liabilities given the provisions of the enacted tax laws. The net
deferred tax asset/(liability) is comprised of the following:
December 31,
----------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------
Deferred taxes:
Gross assets $ 75,851 $ 78,602
Gross liabilities (59,445) (52,344)
----------------------------------------------------------------------------
Total deferred taxes $ 16,406 $ 26,258
============================================================================
The Company concluded that a valuation allowance against the
deferred tax asset at December 31, 1995 and 1994 is not necessary. Realization
of the deferred tax asset is dependent on generating sufficient future taxable
income. Although realization is not assured, management believes it is more
likely than not that all of the deferred tax asset will be realized.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
December 31,
-------------------------------------------------------------------------------------------------------
1995 1994
-------------------------------------------------------------------------------------------------------
SFAS 91 $(23,899) $(20,034)
Loan losses 20,197 14,965
Mortgage banking income 9,767 10,174
Securitization income (35,546) (28,949)
Leasing income 41,901 42,473
Other 3,986 7,629
-------------------------------------------------------------------------------------------------------
Net deferred tax assets/(liabilities) $ 16,406 $ 26,258
=======================================================================================================
NOTE 11. BENEFIT PlANS
The Company has adopted several management incentive plans designed to provide
incentives to participating employees to remain in the employ of the Company and
devote themselves to its success. Under these plans, eligible employees were
given the opportunity to elect to take portions of their anticipated or "target"
bonus payments for future years in the form of restricted shares of common
stock. To the extent that such elections were made (or, for executive officers,
were required by the terms of such plans), restricted shares were issued to
employees, with the number of shares granted to employees determined by dividing
the amount of future bonus payments the employee had elected to receive in stock
by the market price as determined under the incentive plans. The restricted
shares are subject to forfeiture should the employee terminate employment with
the Company prior to vesting. Restricted shares vest ten years from the date of
grant, but with respect to the restricted shares issued under each plan, vesting
was and will be accelerated annually with respect to one-third of the shares, to
the extent that the employee and the Company met or meet their respective
performance goals for a given plan performance year. When newly eligible
employees elect to participate in a plan, the number of shares issued to them
with respect to their "target" bonus payments for the relevant plan performance
years is determined based on the average market price of the stock for the 90
days prior to eligibility.
51
Advanta Corp. and Subsidiaries
The following table summarizes the Company's incentive plans:
Plan Original
Performance Stock Shares Shares
Years Covered Price Issued Vested
-------------------------------------------------------------------------------------------------------------
AMIPWISE II 1993--1995 $ 4.75 1,017,127 618,429
KEIPWISE 1992--1995 $ 7.07 73,503 49,458
AMIPWISE III 1996--1998 $17.00 518,412 0
AMIPWISE IV 1999--2001 $25.00 450,321 0
=============================================================================================================
At December 31, 1995, a total of 1,396,764 shares issued under these and
the predecessor plan to AMIPWISE II (for "target" bonuses for 1990--1992) were
were subject to restrictions and were included in the number of shares
outstanding.
The Company has an Employee Stock Purchase Plan which allows employees
employees and directors to purchase Class B common stock at a 15% discount
from the market price without paying brokerage fees. The Company reports this
15% discount as compensation expense. During 1995, shares were issued under
the plan from unissued stock or from treasury stock at the average market
price on the day of purchase.
The Company has two Stock Option Plans which together authorize the
grant to employees and directors of options to purchase an aggregate of 6.5
million shares of 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 96,508 at December 31,
1995, and 1,362,508 at December 31, 1994. Transactions under the plans for
the two years ended December 31, 1995, were as follows:
Number of Price Range
Shares Per Share
-------------------------------------------------------------------------------
(In thousands)
Options outstanding at
December 31, 1993 3,039 $ .98 -- $27.50
Options granted 762 $23.50 -- $35.00
Options exercised (313) $ .98 -- $24.67
Options terminated (73) $11.58 -- $27.38
-------------------------------------------------------------------------------
Options outstanding at
December 31, 1994 3,415 $ .98 -- $35.00
Options granted 1,363 $29.00 -- $43.88
Options exercised (300) $ 1.00 -- $32.00
Options terminated (97) $12.33 -- $31.50
-------------------------------------------------------------------------------
Options outstanding at
December 31, 1995 4,381 $ .98 -- $43.88
===============================================================================
The Company also has outstanding options to purchase 581,500 shares of
common stock at a price range of $1.52 to $4.75 per share, which were not
issued pursuant to either of the Stock Option Plans.
At December 31, 1995, 2,015,319 of the 4,381,000 outstanding options
issued under the Stock Options Plans had vested and all 581,500 options 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 Class B 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, 1995, 1994 and 1993, the Company contributions
equaled 100% of the first 5% of participating employees' compensation
contributed to the plan. The expense for this plan totaled $2,027, $1,565 and
$1,189 in 1995, 1994 and 1993, respectively. All shares purchased by the plan
for the three years ended December 31, 1995 were acquired from the Company at
the market price on each purchase date or were purchased on the open market.
NOTE 12. CREDIT CARD SALE
In April 1994, the Company, through its subsidiary Colonial National, reached
an agreement with NationsBank of Delaware, N.A., to sell certain credit card
customer relationships which at that time represented approximately $150
million of securitized credit card receivables (less than 4% of the Company's
managed credit card receivables as of June 30, 1994). In the second quarter of
1994, the Company recorded an $18.4 million pretax gain on the sale related to
the value associated with the customer relationships. In addition, the Company
deferred a portion of the proceeds related to the excess spread of the
receivables to be generated over the remaining life of the securitization
trust, which terminated in the second quarter of 1995. These proceeds were
recognized as securitization income over the related period.
52
Advanta Corp. and Subsidiaries
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, 1995, 1994 and 1993 was $4.9 million, $5.4
million and $4.8 million, respectively. The future minimum lease payments of
all non-cancelable operating leases are as follows:
Year Ended December 31,
------------------------------------------------------------------
1996 $ 5,825
------------------------------------------------------------------
1997 5,521
------------------------------------------------------------------
1998 4,214
------------------------------------------------------------------
1999 3,105
------------------------------------------------------------------
2000 2,803
------------------------------------------------------------------
Thereafter 10,856
==================================================================
NOTE 14. OTHER BORROWINGS
The Company had a revolving credit facility of $510 million and money market
bid lines of $255 million at December 31, 1995. There is a quarterly facility
fee of up to 1/2 of 1% of the unused portion of the revolving credit facility.
There is no facility fee on the money market bid lines as they are uncommitted
facilities. Under the revolving credit facility, the Company is subject to
various loan covenants, including the maintenance of certain fixed financial
ratios and conditions, limitations on mergers and acquisitions, and
limitations on liens on property and other assets.
The composition of other borrowings was as follows:
December 31,
---------------------------------------------------------------------------
1995 1994
---------------------------------------------------------------------------
Term fed funds $ 443,000 $309,000
Securities sold under
repurchase agreements 0 86,455
Short-term debt 691,313 210,761
Lines of credit and term
funding arrangements 0 50,000
Other borrowings 81,814 80,879
---------------------------------------------------------------------------
Total $1,216,127 $737,095
===========================================================================
The following table displays information related to selected types of
short-term borrowings:
1995 1994
- - -----------------------------------------------------------------
Amount Rate Amount Rate
- - -----------------------------------------------------------------
At year end:
Securities sold under
repurchase
agreements $ 0 0% $ 86,455 6.26%
Term fed funds 443,000 5.83 309,000 6.13
- - -----------------------------------------------------------------
Total $443,000 5.83% $395,455 6.16%
=================================================================
Average for the year:
Securities sold under
repurchase
agreements $ 25,008 5.97% $ 14,111 5.07%
Term fed funds
and fed funds
purchased 199,166 6.10 154,299 4.74
- - -----------------------------------------------------------------
Total $224,174 6.09% $168,410 4.77%
=================================================================
Maximum month-end
balance:
Securities sold under
repurchase
agreements $ 29,813 $ 86,455
Term fed funds
and fed funds
purchased 455,250 309,000
=================================================================
The weighted average interest rates were calculated by dividing the
interest expense for the period for such borrowings by the average amount of
short-term borrowings outstanding during the period.
NOTE 15. SELECTED INCOME STATEMENT INFORMATION
Noninterest Revenues Year Ended December 31,
- - ----------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------
Gain on sale of credit cards $ 0 $ 18,352 $ 0
Other noninterest revenues:
Credit card securitization
income 183,360 149,043 98,521
Credit card servicing
income 117,369 68,960 41,593
Credit card interchange
income 92,439 71,740 56,107
Income from mortgage
banking activities 50,541 37,586 24,146
Leasing revenues, net 41,050 21,551 10,317
Insurance revenues, net 27,654 12,734 9,249
Equity securities gains 15,386 0 0
Other credit card revenues 14,230 14,209 11,545
Other 985 1,633 4,102
- - ----------------------------------------------------------------
Total other noninterest
revenues $543,014 $377,456 $255,580
- - ----------------------------------------------------------------
Total noninterst revenues $543,014 $395,808 $255,580
================================================================
53
Advanta Corp. and Subsidiaries
OPERATING EXPENSES Year Ended December 31,
- - ----------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------
Amortization of credit card
deferred origination
costs, net $ 72,258 $ 39,381 $ 6,566
Other operating expenses:
Salaries and employee
benefits 116,681 88,681 65,469
External processing 28,407 22,618 16,604
Marketing 25,374 32,339 18,742
Credit card fraud losses 20,029 16,654 13,779
Postage 18,518 12,732 9,818
Professional fees 14,937 10,985 10,761
Equipment expense 12,751 9,293 6,550
Telephone expense 11,959 8,615 5,402
Occupancy expense 9,254 8,425 6,247
Credit and collection
expense 9,039 7,604 7,055
Other 11,478 9,457 14,174
- - ----------------------------------------------------------------
Total other operating
expenses $278,427 $227,403 $174,601
- - ----------------------------------------------------------------
Total operating expenses $350,685 $266,784 $181,167
================================================================
Note 16. SELECTED BALANCE SHEET INFORMATION
INTEREST-BEARING DEPOSITS December 31,
- - -----------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------
Amounts due from credit card trusts(A) $262,392 $174,147
Amounts due from mortgage trusts(A) 58,105 49,097
Amounts due from leasing trusts(A) 7,479 6,398
Other interest-bearing deposits 82,733 84,210
- - -----------------------------------------------------------------
Total interest-bearing deposits $410,709 $313,852
=================================================================
(A) Represents initial deposits and subsequent excess collections up
to the required amount on each of the credit card, mortgage and
leasing securitizations. Also includes amounts to be distributed
to investors.
OTHER ASSETS December 31,
------------------------------------------------------------------
1995 1994
------------------------------------------------------------------
Excess mortgage servicing rights $ 96,194 $ 73,223
Prepaid assets 69,170 33,895
Accrued interest receivable 67,681 39,353
Deferred costs 20,670 9,500
Investments in operating leases 11,928 13,123
Excess servicing--leasing 11,813 5,949
Due from trustees--mortgage 8,095 6,295
Current and deferred
federal income taxes 15,823 26,093
Goodwill 4,983 5,318
Other real estate(A) 3,333 4,564
Due from trustees--leasing 2,941 2,010
Other 62,346 21,202
------------------------------------------------------------------
Total other assets $374,977 $240,525
==================================================================
(A) Carried at the lower of cost or fair market value.
At December 31, 1995 and 1994, the Company had $190.8 million and
$144.5 million, respectively, of amounts due from credit card securitizations.
These amounts include excess servicing, accrued interest receivable and other
amounts related to these securitizations and are net of recourse reserves
established.
OTHER LIABILITIES December 31,
-------------------------------------------------------------------
1995 1994
--------------------------------------------------------------------
Deferred fees and other reserves $ 46,058 $ 42,855
Accounts payable and accrued expenses 32,831 31,380
Accrued interest payable 29,012 10,640
Current and deferred state income taxes 9,026 6,813
Other 23,763 17,184
-------------------------------------------------------------------
Total other liabilities $140,690 $108,872
===================================================================
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.
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 and Advanta National are 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
54
Advanta Corp. and Subsidiaries
affiliates. Such restrictions prevent both banks 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 and Advanta National are limited in
amount: (a) as to the Company or any such affiliate, to 10 percent of each
bank's capital and surplus, and (b) as to the Company and all such affiliates
in the aggregate, to 20 percent of each bank'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
restrictions 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 and Advanta National are also subject
to various legal limitations on the amount of dividends that can be paid to
their parent, Advanta Corp. Each bank is eligible to declare a dividend provided
that it is not greater than the current year's net profits plus net profits of
the preceding two years, as defined. During 1995, Colonial National paid $63
million of dividends to Advanta Corp. while $24 million of dividends were paid
during 1994.
Advanta National, as a credit card bank, must also refrain from making
commercial loans which would include any loans to the Company or any of its
subsidiaries.
The Office of the Comptroller of the Currency requires that Colonial
National and Advanta National maintain risk-based capital ratios of at least 8%.
At December 31, 1995, Colonial National's and Advanta National's risk-based
capital ratios of 11.56% and 12.28%, respectively, were in excess of the
required level and exceeded the minimum required capital level of 10% for
designation as "well capitalized" depository institutions.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
-------------------------------------------------------------------------------------------------
1995 1994
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------
Financial assets:
Cash $ 45,714 $ 45,714 $ 43,706 $ 43,706
Federal funds sold 146,375 146,375 39,050 39,050
Interest-bearing deposits 410,709 410,709 313,852 313,852
Investments available for sale 532,963 532,963 318,759 318,759
Loans, net of reserve for credit losses 2,779,249 2,846,166 1,979,454 2,019,418
Amounts due from credit card securitizations 190,819 236,483 144,483 210,107
Excess mortgage servicing rights 96,194 105,024 73,223 89,600
Financial liabilities:
Demand and savings deposits $ 369,224 $ 369,224 $ 366,201 $ 366,201
Time deposits and debt 2,816,567 2,830,590 1,669,951 1,653,979
Other borrowings 524,814 525,246 526,334 526,441
Off-balance sheet financial instruments
Asset/(Liability):
Interest rate swaps $ 0 $ 3,198 $ 0 $ (21,818)
Interest rate options:
Caps purchased 1,228 1,211 3,297 6,032
Caps written (4,330) (1,703) (5,801) (5,767)
Corridors/collars 66 (1,033) 0 785
Forward contracts 0 (1,294) 0 26
Intangibles:
Credit card customer relationships --
on- and off-balance sheet $ 0 $1,841,900 $ 0 $1,135,200
================================================================================================
55
Advanta Corp. and Subsidiaries
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. With respect to the fair value of liabilities, the
above table is prepared on the basis that the amounts necessary to discharge
such liabilities represent fair value. The Company's off-balance sheet financial
instruments relate to managing the interest rate sensitivity and foreign
currency position as described in Note 20.
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, the
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, the fair value is estimated
using 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 is
estimated based on the market prices of similar receivables with similar
characteristics.
AMOUNTS DUE FROM CREDIT CARD SECURITIZATIONS AND EXCESS MORTGAGE SERVICING
RIGHTS
The fair values of the excess servicing rights component of amounts due from
credit card securitizations and excess mortgage servicing rights are estimated
by discounting the future cash flows at rates which management believes to be
reasonable. However, because there is no active market for these financial
instruments, management 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. For the other
components of amounts due from credit card securitizations, the carrying amount
is a reasonable estimate of the fair value.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. This fair value does not
include 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 is estimated
using the rates currently offered for deposits and notes of similar remaining
maturities.
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, OPTIONS AND FORWARD CONTRACTS
The fair value of interest rate swaps, options and forward contracts (used for
managing interest rate and foreign currency risks) is the estimated amount that
the Company would pay or receive to terminate the agreement at the reporting
date, taking into account current interest and foreign exchange rates and the
current creditworthiness of the counterparty.
CREDIT CARD 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.
56
Advanta Corp. and Subsidiaries
COMMITMENTS TO EXTEND CREDIT
Although the Company had $23.3 billion of unused commitments to extend
credit, there is no market value associated with these commitments, 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, 1995, 1994 and 1993:
1995 1994 1993
-------------------------------------------------------------------------------------------
Net income $136,677 $106,063 $76,647
less: Preferred 'A' dividends (141) (141) (141)
-------------------------------------------------------------------------------------------
Net income available to
common shares $136,536 $105,922 $76,506
Average common stock
outstanding 39,723 38,877 37,170
Common stock equivalents:
Restricted stock and options 2,206 2,169 2,607
Mandatorily convertible
Preferred "B" stock
(see Note 8) 741 0 0
-------------------------------------------------------------------------------------------
Weighted average shares
outstanding 42,670 41,046 39,777
===========================================================================================
Earnings per common share $ 3.20 $ 2.58 $ 1.92
===========================================================================================
NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS
In managing its interest rate sensitivity and foreign currency positions,
the Company may use derivative financial instruments. These instruments
are used for the express purpose of managing its interest rate and foreign
currency exposures and are not used for any trading or speculative
activities. As of December 31, 1995 and 1994, all of the Company's
derivatives were designated as hedges or synthetic alterations and were
accounted for as such.
The following table summarizes by notional amounts the Company's
derivatives instruments as of December 31, 1995 and 1994:
1995 1994
----------------------------------------------------------------------------------
Interest rate swaps $ 867,835 $ 459,735
Interest rate options:
Caps written 1,360,000 1,100,000
Caps purchased 270,000 110,000
Corridors/collars 575,000 425,000
Forward contracts 190,652 39,000
----------------------------------------------------------------------------------
$3,263,487 $2,133,735
----------------------------------------------------------------------------------
The notional amounts of derivatives do not represent amounts exchanged by
the counterparties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives
contracts.
Credit risk associated with derivatives arises from the potential for a
counterparty to default on its obligations. The Company attempts to limit
credit risk by only transacting with highly creditworthy counterparties and
requiring master netting and collateral agreements for all interest rate swap
and interest rate option contracts. All derivative counterparties are associated
with organizations having securities rated as investment grade by independent
rating agencies. The list of eligible counterparties, setting of counterparty
limits, and monitoring of credit exposure is controlled by the Investment
Committee, a management committee. The Company's credit exposure to derivatives,
with the exception of caps written, is represented by contracts with a positive
fair value without giving consideration to the value of any collateral exchanged
see Note 18. For caps written, credit exposure does not exist since the
counterparty has performed its obligation to pay the Company a premium payment.
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments without the exchange of the underlying notional
amount on which the interest payments are calculated. Based on its interest rate
sensitivity analyses, the Company enters into interest rate swaps to more
effectively manage the impact of fluctuating interest rates on its net interest
income and noninterest revenues. The Company has used interest rate swaps to
synthetically alter the cash flow characteristics on certain deposit, debt, and
off-balance sheet credit card and leasing securitizations.
As of December 31, 1995, the Company used interest rate swaps for the
following purposes: $250 million to effectively convert certain variable rate
deposits to a fixed rate, $204 million to effectively convert fixed rate debt to
a LIBOR based variable rate, and $414 million to effectively convert certain
off-balance sheet variable pass-through rate credit card and leasing
securitizations to a fixed rate. As of December 31, 1994, the Company used $460
million in notional amounts of interest rate swaps to effectively convert
certain fixed rate debt to a LIBOR based variable rate. In 1995, as part of its
asset/liability risk management process, the Company elected to terminate $285.9
million of interest rate swaps which were effectively converting certain fixed
rate debt to a variable rate based on LIBOR. Gains or losses resulting from
these interest rate swap terminations are
57
Advanta Corp. and Subsidiaries
deferred and amortized to interest expense over the remaining life of the
underlying fixed rate debt. As of December 31, 1995, the remaining
unamortized loss on interest rate swap terminations amounted to $1.3
million and the weighted average amortization period was 10 months.
The following table summarizes by notional amounts the Company's interest
rate swap activity by major category for the periods presented:
Receive Pay
Fixed Rate Fixed Rate Total
- - ------------------------------------------------------------------------------------------------
Balance at 1/01/93 $ 0 $ 500,000 $ 500,000
Additions 150,000 0 150,000
- - ------------------------------------------------------------------------------------------------
Balance at 12/31/93 150,000 500,000 650,000
Additions 309,735 0 309,735
Maturities 0 (500,000) (500,000)
- - ------------------------------------------------------------------------------------------------
Balance at 12/31/94 459,735 0 459,735
Additions 30,000 625,962 655,962
Net accretion 0 38,038 38,038
Terminations (285,900) 0 (285,900)
- - ------------------------------------------------------------------------------------------------
Balance st 12/31/95 $ 203,835 $ 664,000 $ 867,835
================================================================================================
Interest rate options are contracts that grant the purchaser, for a
premium payment, the right to either purchase or sell a financial instrument at
a future date for a specified price from the writer of the option. Interest rate
caps and floors are option-like contracts that require the seller (writer) to
pay the purchaser at specified future dates the amount by which a specified
market interest rate exceeds the cap rate or falls below the floor rate,
multiplied against a notional amount. A corridor is also an option-like contract
which is the simultaneous purchase and sale of separate interest rate caps where
each cap is referenced to a different interest rate index. A collar is an
option-like contract which is the simultaneous purchase of an interest rate cap
and the sale of an interest rate floor using the same reference interest rate
index.
As part of managing its balance sheet and liquidity position, the Company
periodically securitizes and sells credit card and lease receivables. For credit
enhancement purposes, certain variable pass-through rate credit card and lease
securitizations were issued with embedded or purchased interest rate caps. These
rate caps, however, were not needed to satisfy asset/liability management
strategies. In order to achieve its desired interest rate sensitivity structure
and further reduce the effective pass-through rate of the securitization, the
Company has synthetically altered the interest rate structure on certain
off-balance sheet credit card and lease securitizations by writing interest rate
caps to offset the embedded and purchased rate caps attached to them.
The premiums received or paid for writing or purchasing such cap contracts
are included in other assets and are amortized to noninterest revenues over the
life of the contract. Any obligations which may arise under these contracts are
recorded in noninterest revenues on an accrual basis. As of December 31, 1995,
unamortized premiums for caps written and purchased amounted to $4.3 million and
$1.2 million, respectively. The weighted average maturity for caps written and
purchased was 2.9 years and 2.8 years, respectively. As of December 31, 1994,
unamortized premiums for caps written and purchased amounted to $5.8 million and
$3.3 million, respectively. The weighted average maturity for caps written and
purchased was 3.8 years and 3.6 years, respectively.
When the Company periodically securitizes and sells credit card
receivables, the receivables sold to the securitization trust may carry rates
which are indexed to the prime rate, whereas the securitization certificates
issued from the trust may be priced at a spread over LIBOR. The Company is
exposed to interest rate risk to the extent that these two rate indices react
differently to changes in market interest rates. The Company may choose to hedge
its excess servicing revenues from the risk of spread compression between the
prime rate and LIBOR by entering into corridor transactions which effectively
fix a prime/LIBOR spread. In addition, variable rate receivables sold to a
variable pass-through rate securitization trust may contain introductory fixed
rates which expose the Company to interest rate risk during the receivables'
introductory period. The Company may choose to hedge the risk of interest rate
spread compression by entering into collar transactions which effectively lock
in a minimum interest rate spread in a changing interest rate environment.
58
Advanta Corp. and Subsidiaries
Premiums paid or received for entering into corridor and collar
transactions are included in other assets or other liabilities and are amortized
to noninterest revenues over the life of the contract. Any obligations which may
arise under these contracts are recorded to noninterest revenues on an accrual
basis. As of December 31, 1995 and 1994, unamortized premiums received for
corridor and collar transactions amounted to $66 thousand and $0, respectively.
As of December 31, 1995 and 1994, the weighted average maturity of corridor and
collar transactions was 8 months and 1.7 years, respectively.
Forward contracts are commitments to either purchase or sell a
financial instrument at a future date for a specified price and may be settled
in cash or through delivery of the underlying financial instrument. The Company
regularly securitizes and sells fixed rate mortgage loan receivables. The
Company may choose to hedge the changes in the market value of its fixed rate
loans and commitments designated for anticipated securitizations by selling U.S.
Treasury securities for forward settlement. The maximum and average terms of
hedges of anticipated mortgage loan sales is four and two months, respectively.
Gains and losses from forward sales are deferred and included in the measurement
of the dollar basis of the loans sold. Realized losses of $1.8 million, and $32
thousand were deferred as of December 31, 1995 and 1994, respectively.
In addition, the Company periodically issues fixed pass-through rate
credit card securitizations and fixed rate bank notes. The Company is exposed to
interest rate risk to the extent that rates rise before the issuance of the
anticipated fixed rate obligations. The Company may choose to hedge the interest
costs associated with anticipated obligations by selling securities for forward
settlement. Gains or losses resulting from these hedges are deferred and
amortized to interest expense over the life of the underlying obligation. The
maximum and average terms of these types of anticipatory hedges is two months.
As of December 31, 1995, unamortized losses on hedges of anticipated fixed
interest rate obligations amounted to $2.2 million and the remaining weighted
average amortization period was 4.3 years.
The Company also has foreign currency risk to the extent that its net
investment in the joint venture with The Royal Bank of Scotland is not funded
with local currency. The Company may choose to hedge its foreign exchange risk
by selling foreign currency for forward settlement. The maximum and average
terms of hedges of foreign currency exposure is thirty days. Losses from foreign
currency forward contracts are included in stockholders' equity and amounted to
$4 thousand as of December 31, 1995.
The following table discloses the Company's interest rate swaps by
major category, notional value, weighted average interest rates, and annual
maturities for the periods presented.
Balances maturing in:
Balance at -------------------------------------------------------------------------------
December 31, 1995 1996 1997 1998 1999 2000 2001 2002
- - ----------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable:
Notional Value $664,000 (A) $400,000 (A) $ 0 $ 0 $ 0 $65,528 $198,472 $ 0
Weighted Average Pay Rate 6.32% 6.57% 0.00% 0.00% 0.00% 5.72% 6.02% 0.00%
Weighted Average Receive Rate 5.57% 5.38% 0.00% 0.00% 0.00% 5.86% 5.84% 0.00%
Receive Fixed/Pay Variable:
Notional Value $203,835 $ 26,000 $106,835 $16,000 $5,000 $ 0 $ 0 $50,000
Weighted Average Receive Rate 6.75% 5.02% 7.00% 7.05% 7.95% 0.00% 0.00% 6.90%
Weighted Average Pay Rate 5.95% 5.94% 5.94% 5.94% 5.94% 0.00% 0.00% 5.97%
Total Notional Value $867,835 $426,000 $106,835 $16,000 $5,000 $65,528 $198,472 $50,000
Total Weighted Average
Rates on Swaps:
Receive Rate 5.84% 5.36% 7.00% 7.05% 7.95% 5.86% 5.84% 6.90%
Pay Rate 6.23% 6.53% 5.94% 5.94% 5.94% 5.72% 6.02% 5.97%
==================================================================================================================================
(A) Pay fixed swaps amounting to $250 million with a weighted average fixed
rate of 7.16% were scheduled to mature on January 17, 1996.
59
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, 1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------------------
Philadelphia, PA
January 22, 1996
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 prepared 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: (1) 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 LLP, 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
60
Advanta Corp. and Subsidiaries
Supplemental Schedules
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands) December 31, 1995
- - --------------------------------------------------------------------
Maturity:
3 months or less $254,623
Over 3 months through 6 months 98,448
Over 6 months through 12 months 156,112
Over 12 months 431,444
- - --------------------------------------------------------------------
Total $940,627
====================================================================
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market(SM) under the symbols ADVNB (non-
voting common stock) and ADVNA (voting common stock).
Following are the high, low and closing sale prices and cash dividends
declared for the last two years as they apply to each class of stock:
Cash
Dividends
Quarter Ended: High Low Close Declared
- - --------------------------------------------------------
March 1994 $33.25 $26.00 $29.25 $ .06
June 1994 37.50 28.75 32.25 .06
September 1994 34.75 26.50 29.25 .06
December 1994 30.50 23.25 25.25 .08
March 1995 32.25 24.50 31.25 .08
June 1995 38.75 30.75 37.75 .08
September 1995 42.50 36.00 42.50 .08
December 1995 45.00 35.13 36.38 .108
- - --------------------------------------------------------
Class A:
- - --------------------------------------------------------
March 1994 $36.00 $26.50 $31.50 $ .05
June 1994 41.75 30.50 35.63 .05
September 1994 37.50 28.25 30.13 .05
December 1994 33.50 24.25 26.25 .067
March 1995 34.75 25.50 33.50 .067
June 1995 42.50 33.00 41.69 .067
September 1995 46.25 39.50 45.00 .067
December 1995 48.88 37.50 38.25 .09
========================================================
At December 31, 1995, the Company had approximately 930 and 700
holders of record of Class B and Class A common stock, respectively.
61
Advanta Corp. and Subsidiaries
Quarterly Data
(Unaudited)
(In thousands, except per share data) 1995
- - --------------------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
- - --------------------------------------------------------------------------------------------------------------
Interest income $ 74,487 $ 56,482 $ 48,557 $ 59,406
Interest expense 50,829 41,522 35,571 38,110
-----------------------------------------------------
Net interest income 23,658 14,960 12,986 21,296
Provision for credit losses 25,215 10,603 8,583 8,925
-----------------------------------------------------
Net interest income after provision for credit losses (1,557) 4,357 4,403 12,371
Noninterest revenues 161,721 136,221 130,849 114,223
Operating expenses 102,377 86,296 83,871 78,141
-----------------------------------------------------
Income before income taxes 57,787 54,282 51,381 48,453
- - --------------------------------------------------------------------------------------------------------------
Net income $ 37,580 $ 34,914 $ 33,400 $ 30,783
==============================================================================================================
Earnings per common share $ 0.85 $ 0.81 $ 0.80 $ 0.74
==============================================================================================================
Weighted average common shares outstanding 44,349 43,133 41,772 41,438
==============================================================================================================
(In thousands, except per share data) 1994
- - --------------------------------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
- - --------------------------------------------------------------------------------------------------------------
Interest income $ 45,765 $ 39,350 $ 39,345 $ 40,679
Interest expense 29,804 22,619 21,580 20,755
-----------------------------------------------------
Net interest income 15,961 16,731 17,765 19,924
Provision for credit losses 6,185 5,750 15,434 6,829
-----------------------------------------------------
Net interest income after provision for credit losses 9,776 10,981 2,331 13,095
Noninterest revenues:
Gain on sale of credit cards 0 0 18,352 0
Other noninterest revenues 111,320 97,202 89,154 79,780
-----------------------------------------------------
Total noninterest revenues 111,320 97,202 107,506 79,780
Operatng expenses 77,721 66,030 69,224 53,809
-----------------------------------------------------
Income before income taxes 43,375 42,153 40,613 39,066
- - --------------------------------------------------------------------------------------------------------------
Net income $ 28,615 $ 26,767 $ 25,757 $ 24,924
==============================================================================================================
Earnings per common share $ 0.70 $ 0.65 $ 0.63 $ 0.61
==============================================================================================================
Weighted average common shares outstanding 40,802 41,192 41,173 40,941
==============================================================================================================
62
Advanta Corp. and Subsidiaries
Supplemental Schedules
ALLOCATION OF RESERVE FOR CREDIT LOSSES
($ in thousands) December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- -------------- -------------- --------------- -------------
Amount % Amount % Amount % Amount % Amount %
- - ------------------------------------------------------------------------------------------------------------------------------
Credit cards $36,889 69% $27,486 66% $25,859 83% $35,743 89% $31,193 86%
Mortgage loans 3,360 6 5,164 12 2,706 9 2,926 7 2,447 7
Leases 977 2 1,076 3 1,826 6 1,442 4 1,119 3
Other 12,268 23 7,891 19 836 2 117 - 1,596 4
- - -----------------------------------------------------------------------------------------------------------------------------
Total $53,494 100% $41,617 100% $31,227 100% $40,228 100% $36,355 100%
=============================================================================================================================
COMPOSITION OF GROSS RECEIVABLES
($ in thousands) December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
- - ------------------------------------------------------------------------------------------------------------------------------
Credit cards $2,338,280 85% $1,730,176 88% $1,131,367 89% $737,485 74% $1,048,325 82%
Mortgage loans 321,711 12 142,874 7 91,340 7 212,273 21 186,820 15
Leases 93,660 3 86,157 5 51,008 4 46,712 5 36,510 3
Other loans 9,276 - 5,237 - 3,590 - 1,774 - 1,765 -
- - -----------------------------------------------------------------------------------------------------------------------------
Total $2,762,927 100% $1,964,444 100% $1,277,305 100% $998,244 100% $1,273,420 100%
=============================================================================================================================
YIELD AND MATURITY OF SELECTED INVESTMENTS AVAILABLE FOR SALE AT
DECEMBER 31, 1995
($ 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 $401,621 5.05% $ 3,777 5.90% $ 0 0.00% $ 0 0.00%
State and municipal securities(A) 21,041 5.57 2,169 6.50 1,081 8.07 0 0.00
Other (B) 1,898 3.75 16,567 5.95 9,707 6.30 18,206 6.37
- - -------------------------------------------------------------------------------------------------------------------------------
Total $424,560 5.07% $22,513 5.99% $10,788 6.48% $18,206 6.37%
===============================================================================================================================
(A) Yield computed on a taxable equivalent basis using a statutory
rate of 35%.
(B) Equity investments and other securities without a stated maturity
are excluded from this table.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
63
23
Advanta Corp. and Subsidiaries
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 by reference, as is the text in Part I of
this Report under the caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive
Compensation," "Compensation Committee Report on Executive Compensation" and
"Election of Directors -- Committees, Meetings and Compensation of the Board of
Directors, -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions and -- Other Matters" are hereby incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The text of the Proxy Statement under the captions "Security Ownership
of Certain Benefical Owners" and "Security Ownership of Management" are hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the Proxy Statement under the captions "Election of
Directors -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions and -- Other Matters" are hereby incorporated herein by
reference.
64
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, 1995 and 1994.
2. Consolidated Income Statements for each of the three years in the
period ended December 31, 1995.
3. Consolidated Statements of Changes in Stockholders' Equity for each
of the three years in the period ended December 31, 1995.
4. Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1995.
5. Notes to Consolidated Financial Statements.
(a) (2) Schedules
1. Schedule I -- Condensed Financial Information of Registrant.
2. Schedule II -- Valuation and Qualifying Accounts.
3. 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 (incorporated by
reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File No. 33-53475),
filed June 10, 1994) , as amended by the Certificate of
Designations, Preferences, Rights and Limitations of the
Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995
(Stock Appreciation Income Linked Securities (SAILS)) (incorporated
by reference to Exhibit 4.3 to the Registrant's Current Report on
Form 8-K dated August 15, 1995, filed the same date).
3-b By-laws of the Registrant, as amended (filed herewith).
4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon
Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including
Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of Class B
Common Stock Certificate (incorporated by reference to Exhibit 1 of
the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to
Registrant's Form 8-A, respectively, both dated April 22, 1992).
65
4-c Trust Indenture dated as of November 15, 1993 between the Registrant
and The Chase Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-3 (No. 33-50883), filed November 2,
1993).
4-d Specimen of 6 3/4% Convertible Class B Preferred Stock, Series 1995
(Stock Appreciation Income Linked Securities (SAILS)) Certificate
(incorporated by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K dated August 15, 1995, filed the same
date).
4-e Deposit Agreement, dated as of August 15, 1995, among Advanta Corp.
and Mellon Securities Trust Company and the Holders from Time to
Time of the Depositary Receipts Described Therein in Respect of the
6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS)) (with form of
Depositary Receipt as an exhibit thereto) (incorporated by reference
to Exhibit 4.10 to the Company's Current Report on Form 8-K dated
August 15, 1995, filed the same date).
4-f Senior Trust Indenture, dated as of October 23, 1995, between the
Registrant and Mellon Bank, N.A., as Trustee (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-62601), filed September 13, 1995).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by
reference to Exhibit 10-b to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1989). +
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10-b to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
filed March 20, 1995).+
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 Advanta Management Incentive Plan (incorporated by reference to
Exhibit 10-n to the Registrant's Registration Statement on Form S-2
(File No. 33-39343), filed March 8, 1991). +
10-e* Application for membership in VISA(R) U.S.A. Inc. and Membership
Agreement executed by Colonial National Bank USA on March 25, 1983.
10-f* Application for membership in MasterCard(R) 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.
66
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 (File 33-58660), filed February 23,
1993).
10-h Agreement dated as of January 21, 1994 between the Registrant and
Alex W. Hart (incorporated by reference to Exhibit 10-h to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1993, filed March 29, 1994). +
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 Advanta Corp. Executive Deferral Plan (filed herewith).+
10-k Advanta Corp. Non-Employee Directors Deferral Plan (filed
herewith).+
10-l Advanta Management Incentive Plan With Stock Election II
(incorporated by reference to Exhibit 10-o to the Registrant's
Registration Statement on Form S-2 (File No. 33-39343), filed March
8, 1991). +
10-m 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-n 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 (File No. 33-58660), filed
February 23, 1993).+
10-o Life Insurance Benefit for Certain Key Executives and Directors
(filed herewith). +
10-p $510,000,000 Unsecured Revolving Credit Agreement dated as of May 4,
1995 among the Registrant, Advanta National Bank USA, and Mellon
Bank, N.A. as Agent and the several bank parties thereto
(incorporated by reference to Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarter year ended March 31,
1995, filed May 12, 1995).
10-q Advanta Management Incentive Plan With Stock Election IV, as amended
(incorporated by reference to Exhibit 10-t to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994,
filed March 20, 1995). +
10-r Agreement of Limited Partnership of Advanta Partners LP, dated as of
May 6, 1994 (incorporated by reference to Exhibit 10(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, filed August 11, 1994).
10-s Employment Agreement by and between Advanta Partners LP and Anthony
P. Brenner, made as of May 6, 1994 (incorporated by reference to
Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, filed August 11, 1994).
67
10-t Pooling and Servicing Agreement between Colonial National Bank USA
and Bankers Trust Company, as Trustee, dated December 1, 1993, as
amended May 23, 1994 (incorporated by reference to Exhibit 4.1 to
Colonial National's Registration Statement on Form S-3 (No.
33-79986), filed June 8, 1994)
10-u Agreement dated as of January 15, 1996 between the Registrant and
William A. Rosoff (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 (included on the signature page hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
* Incorporated by reference to the Exhibit with corresponding number
constituting part of the Registrant's Registration Statement on Form S-2 (No.
33-00071), filed on September 4, 1985.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the Registrant on October 18, 1995
regarding consolidated earnings of the Registrant and its subsidiaries
for the fiscal quarter ended September 30, 1995. Summary earnings and
balance sheet information as of that date were filed with such report.
2. A Report on Form 8-K was filed by the Registrant on January 23, 1996
regarding consolidated earnings for the Registrant and its
subsidiaries for the fiscal quarter and fiscal year ended December 31,
1995. Summary earnings and balance sheet information as of that date
were filed with such report.
68
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, 1996 By: /s/ Richard A. Greenawalt
--------------- ----------------------------------
Richard A. Greenawalt, President,
Chief Operating Officer and Director
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
constitute and appoint Dennis Alter, Richard Greenawalt, Alex W. Hart, John J.
Calamari, David D. Wesselink and Gene S. Schneyer, or any of them (with full
power to each of them to act alone), his or her true and lawful attorney-
in-fact and agent, with full power of substitution, for him or her and on his
or her behalf to sign, execute and file an Annual Report on Form 10-K under the
Securities Exchange Act of 1934, as amended, for the fiscal year ended December
31, 1995 relating to the Advanta Corp. and any or all amendments thereto, with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 1996.
Name Title
- - --------- -----
/s/ Dennis Alter Chairman of the Board
- - -------------------------------------------
Dennis Alter
/s/ Alex W. Hart Chief Executive Officer
- - ------------------------------------------- and Director
Alex W. Hart
/s/ Richard A. Greenawalt President, Chief Operating
- - ------------------------------------------- Officer and Director
Richard A. Greenawalt
/s/ William A. Rosoff Vice Chairman and Director
- - -------------------------------------------
William A. Rosoff
/s/ David D. Wesselink Senior Vice President and
- - ------------------------------------------- Chief Financial Officer
David D. Wesselink
69
Name Title
- - --------- -----
/s/ John J. Calamari Vice President, Finance and
- - ------------------------------------------- Chief Accounting Officer
John J. Calamari
/s/ Arthur P. Bellis Director
- - -------------------------------------------
Arthur P. Bellis
/s/ Max Botel Director
- - -------------------------------------------
Max Botel
/s/ Richard J. Braemer Director
- - -------------------------------------------
Richard J. Braemer
/s/ Anthony P. Brenner Director
- - -------------------------------------------
Anthony P. Brenner
/s/ William C. Dunkelberg Director
- - -------------------------------------------
William C. Dunkelberg
/s/ Robert C. Hall Director
- - -------------------------------------------
Robert C. Hall
/s/ Warren Kantor Director
- - -------------------------------------------
Warren Kantor
/s/ James E. Ksansnak Director
- - -------------------------------------------
James E. Ksansnak
/s/ Ronald J. Naples Director
- - -------------------------------------------
Ronald J. Naples
/s/ Phillip A. Turberg Director
- - -------------------------------------------
Phillip A. Turberg
70
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 22, 1996. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
schedules listed in Item 14(a)(2) 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 statements.
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.
Arthur Andersen LLP
Philadelphia, PA
January 22, 1996
71
ADVANTA Corp. & Subsidiaries
December 31, 1995
Schedule I - Condensed Financial Information of Registrant
Parent Company Only
CONDENSED BALANCE SHEETS
(Dollars in thousands)
December 31,
----------------------------
1995 1994
----------- -----------
ASSETS
Cash $ 81,337 $ 28,821
Investments available for sale 107,451 199,771
Other assets, principally investments in and
advances to wholly owned subsidiaries 1,371,524 1,066,860
----------- -----------
Total assets $1,560,312 $1,295,452
=========== ===========
LIABILITIES
Accrued expenses and other liabilities $ 5,563 $ 8,628
Subordinated debt and other borrowings 881,785 845,134
----------- -----------
Total liabilities 887,348 853,762
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 415 404
Other stockholders' equity 671,539 440,276
----------- -----------
Total stockholders' equity 672,964 441,690
----------- -----------
Total liabilities and stockholders' equity $1,560,312 $1,295,452
=========== ===========
72
Schedule I (cont'd)
Parent Company Only
CONDENSED STATEMENTS INCOME
(Dollars in thousands)
Year Ended December 31,
--------------------------------------
1995 1994 1993
-------- -------- ---------
Income:
Interest $ 53,745 $ 23,983 $ 8,545
Other 27,130 15,724 4,163
-------- -------- --------
Total Income 80,875 39,707 12,708
-------- -------- --------
Expenses:
General and administrative 59,129 42,948 57,051
Interest 69,105 34,787 21,544
-------- -------- --------
Total Expenses 128,234 77,735 78,595
-------- -------- --------
Loss before income taxes,
equity in subsidiaries,
and extraordinary item (47,359) (38,028) (65,887)
Benefit for income taxes 20,469 16,419 25,147
-------- -------- --------
Loss before equity in
subsidiaries and
extraordinary item (26,890) (21,609) (40,740)
Equity in net profit of
subsidiaries 163,567 127,672 118,660
-------- -------- --------
Net income before
extraordinary item 136,677 106,063 77,920
Extraordinary item, net 0 0 (1,273)
-------- -------- --------
Net income $136,677 $106,063 $ 76,647
======== ======== ========
73
Schedule I (Cont'd)
Parent Company Only
Statements of Cash Flows
Year Ended December 31,
-------------------------------------
1995 1994 1993
---------- ------------- ----------
OPERATING ACTIVITIES
Net Income $ 136,677 $ 106,063 $ 76,647
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 964 414 335
Change in other assets (254,766) (130,495) (101,210)
Change in accrued liabilities 8,387 7,865 1,955
Loss on repurchase of senior
subordinated debentures 0 0 1,928
- - ------------------------------------------------------------------------------------------------
Net cash used by operating activities (108,738) (16,153) (20,345)
INVESTING ACTIVITIES
Net change in premises & equipment (1,901) (2,810) (454)
Purchase of investments available for sale (637,917) (1,161,420) (291,548)
Proceeds from sales of investments available
for sale 340,177 295,196 186,051
Proceeds from maturing investments available
for sale 373,410 797,233 31,715
Dividends received from subsidiaries 7,600 39,000 61,986
Change in interest-bearing deposits 0 0 24,350
- - ------------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities 81,369 (32,801) 12,100
FINANCING ACTIVITIES
Change in lines of credit (50,000) 50,000 0
Proceeds from issuance of subordinated/senior debt 147,200 39,398 85,380
Payments on redemption of subordinated/senior debt (172,626) (58,618) (103,480)
Change in repurchase agreements (52,975) 52,975 0
Increase in affiliate borrowings (35,444) (389,949) (156,915)
Redemption of senior subordinated debt 0 0 (36,404)
Proceeds from issuance of medium-term
notes 165,052 344,787 164,851
Cash dividends paid (15,501) (9,877) (7,298)
Issuance of stock 94,179 4,498 93,542
- - ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 79,885 33,214 39,676
- - ------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash 52,516 (15,740) 31,431
Cash at beginning of year 28,821 44,561 13,130
Cash at end of year $ 81,337 $ 28,821 $ 44,561
================================================================================================
74
Schedule II
Advanta Corp. & Subsidiaries
Valuation & Qualifying Accounts
(Dollars in thousands)
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
- - ----------------------------------------------------------------------------------------------------------
1995 Reserve for
losses on
securitized
credit cards 74,471 0 250,689 (1) 157,735 (5) 167,425
Reserve for
credit losses and
prepayments on
securitized HEL 19,767 0 24,933 (1) 14,094 (2) (5) 30,606
Reserve for
losses on
securitized
Leases 9,671 0 10,338 (1) 4,707 (5) 15,302
Reserve for
uncollectable
receivables &
unbillable fees 0 0 0 0 0
1994 Reserve for
losses on
securitized
credit cards 96,377 0 70,624 (1) 92,530 (5) 74,471
Reserve for
credit losses and
prepayments on
securitized HEL 40,513 0 15,441 (1) 36,187 (3) (5) 19,767
Reserve for
losses on
securitized
Leases 5,298 0 7,420 (1) 3,047 (5) 9,671
Reserve for
uncollectable
receivables &
unbillable fees 23 16 0 (1) 39 (5) 0
1993 Reserve for
losses on
securitized
credit cards 108,756 0 69,964 (1) 82,343 (5) 96,377
Reserve for
credit losses and
prepayments on
securitized HEL 17,861 0 34,436 (1) (4) 11,784 (5) 40,513
Reserve for
losses on
securitized
Leases 3,100 0 4,010 (1) 1,812 (5) 5,298
Reserve for
uncollectable
receivables &
unbillable fees 97 170 0 (1) 244 (5) 23
(1) Amounts netted against securitization income.
(2) Includes $1.0 million transferred from off-balance sheet reserves
to on-balance sheet reserves.
(3) Includes $12.8 million transferred from off-balance sheet to
on-balance sheet reserves.
(4) Includes $11.0 million transferred from on-balance sheet unallocated
reserves.
(5) Relates to net charge-offs.
75
EXHIBIT INDEX
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to
Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-3 (File No.
33-53475), filed June 10, 1994) , as amended by the
Certificate of Designations, Preferences, Rights and
Limitations of the Registrant's 6 3/4% Convertible
Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS))
(incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated August
15, 1995, filed the same date).
3-b By-laws of the Registrant, as amended (filed
herewith).
4-a* Trust Indenture dated April 22, 1981 between
Registrant and Mellon Bank, N.A., (formerly,
CoreStates Bank, N.A.), as Trustee, including Form of
Debenture.
4-b Specimen of Class A Common Stock Certificate and
specimen of Class B Common Stock Certificate
(incorporated by reference to Exhibit 1 of the
Registrant's Amendment No. 1 to Form 8 and Exhibit 1
to Registrant's Form 8-A, respectively, both dated
April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between
the Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference
to Exhibit 4 to the Registrant's Registration
Statement on Form S-3 (No. 33-50883), filed November
2, 1993).
4-d Specimen of 6 3/4% Convertible Class B Preferred
Stock, Series 1995 (Stock Appreciation Income Linked
Securities (SAILS)) Certificate (incorporated by
reference to Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated August 15, 1995, filed the
same date).
4-e Deposit Agreement, dated as of August 15, 1995, among
Advanta Corp. and Mellon Securities Trust Company and
the Holders from Time to Time of the Depositary
Receipts Described Therein in Respect of the 6 3/4%
Convertible Class B Preferred Stock, Series 1995
(Stock Appreciation Income Linked Securities (SAILS))
(with form of Depositary Receipt as an exhibit
thereto) (incorporated by reference to Exhibit 4.10
to the Company's Current Report on Form 8-K dated
August 15, 1995, filed the same date).
4-f Senior Trust Indenture, dated as of October 23, 1995,
between the Registrant and Mellon Bank, N.A., as
Trustee (incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-3
(File No. 33-62601), filed September 13, 1995).
9 Inapplicable.
76
10-a Registrant's Stock Option Plan, as amended
(incorporated by reference to Exhibit 10-b to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989). +
10-b Amended and Restated Advanta Corp. 1992 Stock Option
Plan (incorporated by reference to Exhibit 10-b to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994, filed March 20, 1995).+
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 Advanta Management Incentive Plan (incorporated by
reference to Exhibit 10-n to the Registrant's
Registration Statement on Form S-2 (File No.
33-39343), filed March 8, 1991). +
10-e* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National
Bank USA on March 25, 1983.
10-f* Application for membership in MasterCard(R)
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 (File 33-58660),
filed February 23, 1993).
10-h Agreement dated as of January 21, 1994 between the
Registrant and Alex W. Hart (incorporated by
reference to Exhibit 10-h to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1993, filed March 29, 1994). +
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 Advanta Corp. Executive Deferral Plan (filed
herewith).+
10-k Advanta Corp. Non-Employee Directors Deferral Plan
(filed herewith).+
10-l Advanta Management Incentive Plan With Stock Election
II (incorporated by reference to Exhibit 10-o to the
Registrant's Registration Statement on Form S-2 (File
No. 33-39343), filed March 8, 1991). +
77
10-m 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-n 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 (File
No. 33-58660), filed February 23, 1993).+
10-o Life Insurance Benefit for Certain Key Executives and
Directors (filed herewith). +
10-p $510,000,000 Unsecured Revolving Credit Agreement
dated as of May 4, 1995 among the Registrant, Advanta
National Bank USA, and Mellon Bank, N.A. as Agent and
the several bank parties thereto (incorporated by
reference to Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter year ended March
31, 1995, filed May 12, 1995).
10-q Advanta Management Incentive Plan With Stock Election
IV, as amended (incorporated by reference to Exhibit
10-t to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994, filed March 20,
1995). +
10-r Agreement of Limited Partnership of Advanta Partners
LP, dated as of May 6, 1994 (incorporated by
reference to Exhibit 10(a) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, filed August 11, 1994).
10-s Employment Agreement by and between Advanta Partners
LP and Anthony P. Brenner, made as of May 6, 1994
(incorporated by reference to Exhibit 10(b) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, filed August 11, 1994).
10-t Pooling and Servicing Agreement between Colonial
National Bank USA and Bankers Trust Company, as
Trustee, dated December 1, 1993, as amended May 23,
1994 (incorporated by reference to Exhibit 4.1 to
Colonial National's Registration Statement on Form
S-3 (No. 33-79986), filed June 8, 1994)
10-u Agreement dated as of January 15, 1996 between the
Registrant and William A. Rosoff (filed herewith). +
11 Inapplicable.
12 Inapplicable.
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
78
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of Independent Public Accountants (filed
herewith).
24 Powers of Attorney (included on the signature page
hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
* Incorporated by reference to the Exhibit with corresponding
number constituting part of the Registrant's Registration
Statement on Form S-2 (No. 33-00071), filed on September 4,
1985.
+ Management contract or compensatory plan or arrangement.