Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-14120
ADVANTA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1462070
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF ORGANIZATION) IDENTIFICATION NO.)
WELSH & MCKEAN ROADS, P. O. BOX 844,
SPRING HOUSE, PENNSYLVANIA 19477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
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))
CLASS A RIGHT
CLASS B RIGHT
(TITLE OF EACH CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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.)
$89,443,466 as of March 18, 1999 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 18, 1999 there were 10,467,548 shares of the Registrant's Class
A Common Stock, $.01 par value, outstanding and 16,351,480 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 Registrant's 1999 Part III, Items 10-13
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A not later than 120 days following the end of
the Registrant's last fiscal year, and referred to herein as
the "Proxy Statement".
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. and its subsidiaries (the "Company," the "Registrant" or
"Advanta") provide consumers and small businesses with innovative products and
services via direct and indirect, cost effective delivery systems. In 1998, the
Company's business consisted primarily of originating and servicing mortgages,
business credit cards, small-ticket equipment leases, 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 1998 managed assets totaled $12.4 billion and an additional $8.3
billion in assets were serviced for third parties.
On February 20, 1998, Advanta Corp. and certain of its subsidiaries
contributed substantially all of the assets of its consumer credit card business
to a newly formed Rhode Island limited liability company, Fleet Credit Card, LLC
(the "LLC") controlled by Fleet Financial Group, Inc. ("Fleet"). Subsequently,
Fleet Credit Card Services, LP ("Fleet LP"), a limited partnership became the
successor in interest to the LLC (references herein to the "LLC" include Fleet
LP as the successor in interest to the LLC). In the transaction (the "Fleet
Transaction"), completed under the terms of a Contribution Agreement between
Advanta Corp. and Fleet dated as of October 28, 1997, as amended February 20,
1998 (the "Contribution Agreement"), each of Advanta Corp. and certain of its
subsidiaries and Fleet and certain of its subsidiaries contributed substantially
all of the assets of their respective consumer credit card businesses, subject
to liabilities, to the LLC. Advanta Corp. acquired a minority interest in the
LLC of 4.99% at the date of the closing of the Fleet Transaction.
Following the Fleet Transaction, the Company continues to operate its
mortgage, business credit card, leasing services and insurance businesses,
including its depository institutions, Advanta National Bank ("ANB") and Advanta
Bank Corp. ("ABC"). In addition, the Company retained certain non-material
assets of its consumer credit card business which are not required in the
operation of such business and certain liabilities related to its consumer
credit card business, including, among others, all reserves relating to its
credit insurance business and any liability or obligation relating to certain
consumer credit card accounts generated in specific programs which comprise a
very small portion of the Company's consumer credit card receivables. Subsequent
to the consummation of the Fleet Transaction, certain interim services were to
be provided by each of the Company and Fleet to the other in accordance with the
terms of the Contribution Agreement.
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 Welsh & McKean
Roads, P.O. Box 844, Spring House, Pennsylvania 19477-0844. The Company's
telephone number at its principal executive office is (215) 657-4000. References
to Advanta or the Company in this Report include its consolidated subsidiaries
unless the context otherwise requires.
ADVANTA MORTGAGE
Advanta Mortgage, a business unit of Advanta, capitalizes on numerous niche
opportunities in the home equity industry by offering a broad range of services
to consumers, brokers and other originators of home equity loans throughout the
country. Advanta Mortgage originates, purchases, securitizes, and services non-
conforming credit first and second lien home equity loans, and home equity lines
of credit, directly through subsidiaries of Advanta, including ANB, ABC and
Advanta Mortgage Corp. USA ("AMCUSA").
Loan production is generated through multiple distribution channels. Home
equity loans and home equity lines of credit are originated directly from
consumers using targeted direct mail and direct response television and radio
techniques, and through a branch office system ("Advanta Finance") consisting of
57 branches throughout the country. First and second home equity loans are also
originated through a broker network,
1
3
correspondent relationships and purchases from other financial institutions. In
1998, loans originated and purchased by Advanta Mortgage amounted to $5.3
billion compared to $3.7 billion in 1997.
In addition to servicing and managing the loans it originates, Advanta
Mortgage contracts with third parties to service their home equity loans on a
subservicing basis. Advanta Mortgage's portfolio of third party loans serviced
for a fee totaled $8.3 billion at year-end 1998, compared to $9.2 billion at
year-end 1997. The Company bears no risk of credit loss on this portfolio.
Subserviced loans are not included in the Company's managed portfolio of
receivables.
During 1998, Advanta Mortgage funded the loans it originated and purchased
primarily through securitizations. In a securitization, Advanta Mortgage
typically sells receivables to a trust for cash while retaining an interest in
the loans securitized. The cash purchase 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 and a portion of the
interest collected on the underlying loans while Advanta Mortgage retains the
servicing and an interest-only strip. Accordingly, Advanta Mortgage
securitizations typically result in the removal of the related mortgage loans
from the Company's balance sheet for financial and regulatory accounting
purposes. The retained interest-only strip represents the remaining interest
collected from the borrowers on the underlying loans after the payment of
pass-through interest to the certificate holders and the payment of a servicing
fee to AMCUSA in its role as servicer and is partially offset by the estimated
fair value of the Company's recourse obligation for anticipated charge-offs.
During 1998, $4.9 billion of Advanta Mortgage loans were securitized and sold
compared to $3.4 billion in 1997. "Advanta Mortgage loans" include home equity
and auto loans and exclude loans which were never owned by the Company, but
which the Company services for a fee ("contract servicing" or "subservicing").
The cash flows from the interest-only strips are received over the life of
the loans. However, in accordance with generally accepted accounting principles
("GAAP"), Advanta Mortgage recognizes a gain at the time of the sale equal to
the excess of the fair value of the assets obtained, principally cash, over the
allocated cost of the assets sold and transaction costs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 1 and 3 to the Consolidated Financial Statements. Cash flows from the
interest-only strip are first used to accelerate principal payments to investors
to build up over-collateralization in the trust to a certain level, after which
amounts are remitted to the Company. Other basic sources of income to Advanta
Mortgage are net interest income on loans outstanding and loan servicing income,
including subservicing of loans which are never owned by the Company.
On October 27, 1998, Advanta announced that beginning in the fourth quarter
of 1998, it would report income for Advanta Mortgage that is essentially equal
to that of a portfolio lender. Since gain on sale accounting is required under
generally accepted accounting principles for securitizations structured as
sales, the Company has begun to accomplish this change by increasing its use of
on-balance sheet funding. Over time, the Company expects to decrease its
reliance on securitizations structured as sales and increase its use of deposits
at ANB and ABC and secured borrowings, including borrowings from other financial
institutions, to fund its mortgage loans.
Advanta Mortgage's managed portfolio of receivables includes owned loans
and the loans it services in which it retains an interest. At December 31, 1998,
Advanta Mortgage's owned loans receivables totaled $838 million while total
managed receivables were $8.3 billion. In contrast to the subserviced loans
described above, the performance of the managed portfolio, including loans
securitized by the Company, can materially impact the Company's ongoing income.
See Note 1 to Consolidated Financial Statements. At December 31, 1998, the total
serviced portfolio, including the "subserviced" portfolio, was $16.6 billion
compared to $14.5 billion at December 31, 1997.
Approximately 92% of the managed mortgage loan portfolio is secured by
first lien position loans and the balance is secured by second lien position
loans. Approximately 65% of the managed portfolio is comprised of fixed rate
loans. The remainder represents intermediate rate loans which bear interest at a
fixed rate for a period of two to three years and an adjustable rate thereafter
and adjustable rate loans. The following table shows the geographic distribution
by state for the top five states of total managed and non-performing Advanta
Mortgage loans at December 31, 1998.
2
4
PERCENT
PERCENT OF NON-
ADVANTA PERCENT OF OF NON- PERFORMING
MORTGAGE TOTAL PORTFOLIO PERFORMING TO TOTAL
($ IN MILLIONS) LOANS NONPERFORMING BY STATE BY STATE LOANS
- -------------------------------------------------------------------------------------------------------
California $1,049.1 $ 39.1 12.7% 10.4% 0.5%
Michigan 774.2 28.1 9.3 7.5 0.3
Pennsylvania 442.9 20.5 5.3 5.5 0.2
Florida 430.9 25.3 5.2 6.8 0.3
Ohio 422.2 20.7 5.1 5.5 0.3
Other 5,165.9 241.8 62.4 64.3 2.9
- -------------------------------------------------------------------------------------------------------
TOTAL $8,285.2 $375.5 100.0% 100.0% 4.5%
- -------------------------------------------------------------------------------------------------------
Geographic concentration carries a risk of increased delinquency and/or
loss if a specific area suffers an economic downturn. Advanta Mortgage monitors
economic conditions in those regions through market and trend analyses. A Credit
Policy Committee meets throughout the year to update lending policies based on
the results of analyses, which may include abandoning lending activities in
economically unstable areas of the country. The Company believes that the
concentrations of nonperforming loans reflected in the preceding table are not
necessarily reflective of general economic conditions in each region, but rather
reflect the credit risk inherent in the different grades of loans originated in
each area. The interest rate charged and the maximum loan-to-value ratio
permitted with respect to each grade of loans are adjusted to compensate for the
credit risk inherent in the loan grade.
Advanta Mortgage also engages in the indirect financing of automobile
purchases by consumers in the near-prime market to borrowers who have
experienced credit problems, are attempting to re-establish credit, may not yet
have sufficient credit history or do not wish to deal with traditional sources
of financing.
In 1998, approximately 57% of the Company's total revenues, net of credit
losses and excluding the gain on the transfer of the consumer credit card
business pursuant to the Fleet Transaction, were derived from Advanta Mortgage.
ADVANTA BUSINESS SERVICES
Advanta Business Services, a business unit of Advanta ("ABS" or "business
loans and leases"), offers flexible lease financing programs on small-ticket
equipment and MasterCard(R)* business credit cards to small businesses.
MasterCard licenses banks and other financial institutions, such as Advanta Bank
Corp., to issue business credit cards using its trademark and to utilize its
interchange network. ABS is one of the nation's leading providers of these
products to small businesses.
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 ABS's
headquarters using extensive direct marketing operations. These operations
include a staff of telephone sales representatives who are assigned to specific
industries, and are backed by the Company's direct mail marketing program.
Additional business is also generated from direct contact with customers through
these same channels.
The primary markets of the leasing business include office machinery,
security systems and computers. ABS also has expanded its presence into
additional market segments. Additionally, ABS has expanded its National Accounts
program which seeks referral business from larger distributors and
manufacturers. Managed lease receivables at December 31, 1998 totaled
approximately $670 million, an increase of approximately $70 million from year
end 1997.
The managed portfolio of the business credit card operation grew from
approximately $663 million at December 31, 1997 to $815 million as of December
31, 1998. Direct marketing techniques, primarily direct
- ---------------
* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.
3
5
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 the 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, ABC (see
"Depository Institutions").
In 1998, approximately 20% of the Company's total revenues, net of credit
losses and excluding the gain on the transfer of the consumer credit card
business pursuant to the Fleet Transaction, were derived from Advanta Business
Services.
ADVANTA INSURANCE COMPANIES
Advanta's insurance subsidiaries ("Advanta Insurance") make available,
through unaffiliated insurance carriers, specialty credit related insurance
products and services to Advanta's existing customer base. The focus of these
products is on the customers' ability to repay their debt in the event of
certain circumstances. These products include a combined credit life, disability
and unemployment program, an accidental death program and equipment insurance.
Enrollment in these programs is achieved through Advanta's direct mail or
telemarketing distribution channels. In consideration, the lending subsidiary of
Advanta that extends the loan to Advanta's customers receives, as an expense
reimbursement, a percentage of insurance premiums collected by the unaffiliated
insurance carriers.
In certain circumstances, Advanta Insurance reinsures all or a portion of
certain risks associated with these products or services. Advanta Insurance's
reinsurance agreements provide for a proportional quota share of 100% of these
risks from the insurance carriers. In consideration for assumption of these
risks, Advanta Insurance receives 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.
Through a strategic alliance formed in 1996 with Progressive Casualty
Insurance Company ("Progressive"), Advanta Insurance is providing its direct
marketing expertise to market Progressive's automobile insurance policies
nationwide. As part of the alliance, Advanta Insurance and Progressive entered
into a quota share reinsurance agreement that provides that Advanta's insurance
subsidiary assumes 50% of all risks and expenses on automobile policies written
by Progressive under the insurance programs being marketed. Generally,
automobile policies underwritten by Progressive provide for automobile liability
protection up to $500,000 and automobile physical damage protection up to
$100,000 as defined under specific policy and customer requirements.
Pursuant to a strategic alliance formed in 1998 with UNUM Corporation,
Advanta Insurance is developing and test marketing certain critical illness
insurance products for the Company's leasing and business card customers.
In addition, prior to the closing of the Fleet Transaction on February 20,
1998, ANB (and its predecessors by merger) made available to Advanta's consumer
credit card customers in certain states the option to purchase debt cancellation
products called Credit Protection Plus(R) and Credit Protector(R). ANB (and its
predecessors by merger) had purchased from Advanta Insurance insurance
protection against certain "excess losses" incurred from providing these
services. Following the Fleet Transaction, Advanta Insurance continues to make
its insurance products available to the customers of Advanta Mortgage and ABS.
In connection with the Fleet Transaction, all of ANB's credit card customer
relationships underlying the insurance risks reinsured by Advanta Insurance were
transferred to Fleet or its subsidiaries. Following the closing of the Fleet
Transaction on February 20, 1998, Advanta Insurance no longer reinsures these
insurance risks and will not recognize any reinsurance revenues as provided
under the reinsurance agreements. Advanta Insurance is, however, obligated to
reimburse the unaffiliated insurance carriers for losses and loss adjustment
expenses paid and maintain loss and loss expense reserves on losses incurred on
risks assumed on or prior to February 20, 1998. ANB continues to be responsible
for customers who request activation of their debt cancellation agreements for
events covered under these agreements occurring on or prior to February 20,
1998.
4
6
ANB is responsible for all reserves for expenses related to these activations.
Advanta Insurance terminated its excess of loss insurance policy with ANB as a
result of the Fleet Transaction.
ADVANTA PARTNERS
Advanta Partners LP ("Advanta Partners") is a private 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.
DEPOSITORY INSTITUTIONS
Advanta owns two depository institutions, ANB and ABC. ANB is a national
banking association organized under the laws of the United States of America.
The headquarters and sole branch of ANB are currently located in Wilmington,
Delaware. ABC is an industrial loan corporation organized under the laws of the
State of Utah. ABC's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). Its principal offices are located in Salt Lake City, Utah.
In 1982, the Company acquired Colonial National Bank USA, the name of which
was changed to Advanta National Bank USA ("AUS") in May 1996. In 1995, the
Company chartered Advanta National Bank ("Old ANB") to complement the credit
card activities of AUS. Old ANB was a limited purpose national bank known as a
"credit card bank" and its lending activities were limited to consumer credit
card lending. Effective June 30, 1997, Old ANB was merged into AUS and AUS was
renamed Advanta National Bank (previously defined herein as ANB). As a national
bank, ANB 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 and to generate funds economically in the form of deposits
insured by the FDIC. The Company currently conducts a large portion of Advanta
Mortgage's business and, prior to February 20, 1998, it conducted a large
portion of its consumer credit card business through ANB (and its predecessors
by merger). The Company also offers a range of insured deposit products through
ANB.
In January 1992, ABC opened for business and began accepting deposits.
Currently, ABC's principal activities consist of small ticket equipment lease
financing, issuance of the "Advanta Business Card" credit card marketed by ABS
and originating and servicing home equity loans. At December 31, 1998, ABC had
deposits of $206.2 million and total assets of $269.0 million. The Company
anticipates that ABC's managed receivables base will continue to grow in 1999.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured deposit products through ANB and ABC.
Bank deposit products offered through ANB include demand deposits, money market
savings accounts, statement savings accounts, retail certificates of deposit and
large denomination certificates of deposit (certificates of $99,000 or more).
Deposit products offered through ABC include retail certificates of deposit and
large denomination certificates of deposit (certificates of $99,000 or more).
Consumer deposit business is generated from repeat sales to existing depositors
and from new depositors attracted by newspaper and other media advertising and
direct mail solicitations. The Company also offers uninsured investment products
of Advanta Corp. through both direct and underwritten sales of debt securities.
ADVANTA PERSONAL PAYMENT SERVICES
Prior to the closing of the Fleet Transaction on February 20, 1998, the
Company offered consumer credit cards through Advanta Personal Payment Services,
a business unit of Advanta ("APPS" or "consumer credit cards"). The Company,
which had been in the consumer credit card business since 1983, issued gold
(i.e.,
5
7
premium) and standard MasterCard(R)* and VISA(R)* credit cards nationwide. APPS
had built a substantial cardholder base which, as of December 31, 1997, totaled
5.9 million accounts and $11.2 billion in managed receivables.
APPS generated 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. A credit card
securitization involves the transfer of the receivables generated by a pool of
credit card accounts to a securitization trust. Certificates issued by the trust
and sold to investors represent undivided ownership interests in receivables
transferred to the trust. Accordingly, the credit card securitizations resulted
in removal of the related credit card receivables from the Company's balance
sheet for financial and regulatory accounting purposes. For tax purposes, the
investor certificates were characterized as a collateralized debt financing of
the Company. Credit card income also included fees paid by credit card customers
for product enhancements they selected, and revenues paid to ANB (and its
predecessors by merger) by third parties for the right to market their products
to the APPS consumer credit card customers.
Since 1988, APPS, through ANB (and its predecessors by merger), had been
active in the consumer credit card securitization market. Through 1997 and up to
the closing of the Fleet Transaction, the Company recognized 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 to
the Consolidated Financial Statements.
On February 20, 1998, in connection with the Fleet Transaction, the assets
and liabilities relating to ANB's consumer credit card securitizations and
servicing capabilities and obligations were transferred to the LLC and Fleet and
its subsidiaries assumed ANB's obligations as seller and servicer with respect
to each of the credit card securitization trusts.
In 1998 approximately 20% of the Company's total revenues, net of credit
losses and excluding the gain on the transfer of the consumer credit card
business pursuant to the Fleet Transaction, were derived from APPS. In 1997,
approximately 59% of the Company's total revenues net of credit losses were
derived from APPS.
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
indirectly owns ANB, 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 ANB, 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. Under CEBA, ANB is subject to
certain restrictions, such as limiting its activities to those in which it was
engaged prior to March 5, 1987 and, prior to September 30, 1996, limiting its
growth rate to not more than 7% per annum. In September 1996, the growth cap of
7% was eliminated under CEBA by amendment of the BHCA, creating substantial new
flexibility for the Company with respect to asset liability management at ANB.
Continuing CEBA restrictions also prohibit ANB 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. Because the Company is not a bank holding
company, it is not subject to examination by the Federal Reserve Board (other
than for purposes of assuring continued compliance with the CEBA restrictions
referenced in
- ---------------
* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.; VISA(R) is a federally registered servicemark of VISA,
U.S.A., Inc.
6
8
this section). Should the Company or ANB 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 a
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 ANB 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.
Under CEBA, ABC is not considered a "bank" for purposes of the BHCA.
Accordingly, the Company's ownership of it does not impact the Company's exempt
status under the BHCA.
ADVANTA NATIONAL BANK
ANB is subject to regulation and periodic examination primarily by the
Office of the Comptroller of the Currency (the "OCC"). Such regulation relates
to the maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices. As a national bank, ANB is subject to provisions of
federal law which restrict its ability to extend credit to its affiliates or pay
dividends to its parent company. See "Dividends and Transfers of Funds."
ANB is subject to capital adequacy guidelines issued by the Federal
Financial Institutions Examination Council ("FFIEC"). These guidelines make
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations and consider off-balance sheet exposures in
determining capital adequacy. Under the rules and regulations of the FFIEC, at
least half of the total capital is to be comprised of common equity, retained
earnings and a limited amount of non-cumulative perpetual preferred stock ("Tier
I 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 II capital"). The FFIEC
has also adopted minimum leverage ratios (Tier I capital divided by total
average assets) for national banks. Recognizing that the risk-based capital
standards address only credit risk (and not interest rate, liquidity,
operational or other risks), many national banks are expected to maintain
capital in excess of the minimum standards.
In addition, pursuant to certain provisions of the FDIC Improvement Act of
1991 ("FDICIA") and regulations promulgated thereunder with respect to prompt
corrective action, FDIC-insured institutions such as ANB 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 (combined Tier I and Tier II capital) to
risk-weighted assets of not less than 10%, Tier I capital to risk-weighted
assets of not less than 6%, and a Tier I leverage ratio of not less than 5%.
As of December 31, 1998 and December 31, 1997, ANB's total capital ratio
(combined Tier I and Tier II capital) was 12.12% and 16.39%, respectively. In
each case, ANB met the capital requirements of FDICIA, and was categorized as
well-capitalized under the regulatory framework for prompt corrective action.
ADVANTA BANK CORP.
Advanta Bank Corp. ("ABC"), a Utah-chartered industrial loan corporation
("ILC"), is a depository institution subject to regulatory oversight and
examination by both the FDIC and the Utah Department of Financial Institutions.
Under its banking charter, ABC is permitted to make consumer and commercial
loans and to accept all FDIC insured deposits with the exception of demand
deposits (i.e., checking accounts).
7
9
ABC is subject to the same regulatory and supervisory processes as commercial
banks; however, as an industrial loan corporation ABC's activities and powers
are not as restricted as those of commercial banks.
ABC is subject to provisions of federal law which restrict and control its
ability to extend credit and provide or receive services between affiliates. See
"Dividends and Transfers of Funds." ABC is subject to the same FFIEC capital
adequacy guidelines as ANB. See "Advanta National Bank." In addition, the FDIC
has regulatory authority to prohibit ABC from engaging in any unsafe or unsound
practice in conducting its business. Although ABC is not subject to specific
limitations on its ability to pay dividends, it is possible, depending upon the
financial condition of ABC and other factors, that the FDIC could claim that a
dividend payment might under some circumstances be an unsafe or unsound
practice. In such event, ABC would be limited in its ability to pay dividends to
its parent company.
As of December 31, 1998 and December 31, 1997, ABC's combined total capital
ratio (combined Tier I and Tier II capital) was 14.13% and 18.02%, respectively.
In each case, ABC met the capital requirements of FDICIA, and was categorized as
well-capitalized under the regulatory framework for prompt corrective action.
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, the Real Estate Settlement
Practices Act and the Fair Credit Reporting Act. Provisions of these statutes
and related regulations require, among other things, 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, and certain of its
direct and indirect 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 ANB can supply
funds through dividends to the Company and its affiliates. The prior approval of
the OCC is required if the total of all dividends declared by ANB in any
calendar year exceeds that institution's net profits (as defined) for that year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus accounts. In addition, ANB is not permitted to pay
a dividend in an amount greater than its undivided profits then on hand after
deducting its losses and bad debts. The OCC also has authority under the
Financial Institutions Supervisory Act to prohibit a national bank from engaging
in any unsafe or unsound practice in conducting its business. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the OCC could claim that a dividend payment might under some
circumstances be an unsafe or unsound practice.
Although ABC is not subject to specific limitations on its ability to pay
dividends, it is possible, depending upon the financial condition of ABC and
other factors, that the FDIC could claim that a dividend payment might under
some circumstances be an unsafe or unsound practice. In such event, ABC would be
limited in its ability to pay dividends to its parent company.
ANB and ABC 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. They also require generally that the depository
institution's transactions with its affiliates be on terms no less favorable to
the bank than comparable transactions with unrelated third parties. 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. Such loans and extensions of
credit are also subject to various collateral
8
10
requirements. In addition, in order for the Company to maintain its
grandfathered exemption under CEBA, ANB is not permitted to make any loans to
the Company or any of its subsidiaries.
REGULATION OF INSURANCE
The Company's insurance subsidiaries are subject to the laws and
regulations of, and supervision by, the states in which they are domiciled or
have obtained authority to transact insurance business. These states have
adopted laws and regulations which govern all insurance policy underwriting,
rating, licensing, marketing, administration and financial operations of an
insurance company, including dividend payments and financial solvency. In
addition, the insurance subsidiaries have registered as an Arizona Holding
Company which requires an annual registration and the approval of certain
transactions between all affiliated entities.
The maximum dividend that any of 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 for any given twelve-month period, its net income (if a
life insurance company) or, net investment income (if a property and casualty
insurance company). In 1998, Advanta Insurance declared and paid dividends in
the amount of $38.7 million to Advanta Corp. of which $35.0 million was
classified as an extraordinary dividend. Advanta Insurance applied for and
received approval from the Arizona Department of Insurance before the payment of
the $35.0 million extraordinary dividend to Advanta Corp.
The State of Arizona has adopted minimum risk-based capital standards as
developed by the National Association of Insurance Commissioners. Risk-based
capital is the quantification of an insurer's investment, underwriting, reserve
and business risks in relation to its total adjusted capital and surplus. The
ratio of an insurer's total adjusted capital and surplus, 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.
The Company's insurance subsidiaries meet all risk-based capital standards and
require no intervention by any party.
The Company's insurance subsidiaries reinsure risks pursuant to
underwriting insurance practices and rates, which 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.
Various legislative proposals have been or will be introduced in Congress,
including, among others, proposals that would permit affiliations between banks
and commercial or securities firms and statutory changes to the Real Estate
Settlement Procedures Act, the Truth in Lending Act and the Competitive Equality
Banking Act of 1987. It is impossible to determine whether any of these
proposals will become law and, if so, what impact they will have on the Company.
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 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
9
11
adequate yield on its loans will not be impacted by the nature of the
competition that now exists or may develop.
In seeking investment funds from the public, the Company faces competition
from banks, savings institutions, money market funds, credit unions and a wide
variety of private and public entities that sell debt securities, some of which
are publicly traded. Many of the Company's 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
the investment (including any commissions which must be paid or interest
forfeited on funds withdrawn), customer service, service charges, if any, and
the taxability of interest.
EMPLOYEES
As of December 31, 1998, the Company had 2,568 employees, down from 4,498
employees at the end of 1997. On February 20, 1998, 2,204 employees of the
Company became employed by the LLC in connection with the Fleet Transaction. 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 earnings per share, anticipated returns on equity, anticipated
growth in loans outstanding and business credit card accounts, anticipated net
interest margins, anticipated operations costs and employment growth,
anticipated prepayment rates of outstanding loans, anticipated marketing expense
or anticipated delinquencies and charge-offs. The cautionary statements provided
below are being made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995 (the "Securities Litigation Reform Act") and with
the intention of obtaining the benefits of the "safe harbor" provisions of the
Securities Litigation Reform Act for any such forward-looking information.
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:
- Increased credit losses and collection costs associated with a worsening
of general economic conditions, declining real estate values, rising
delinquency levels, increases in the number of customers seeking
protection under the bankruptcy laws, resulting in accounts being charged
off as uncollectible, and the effects of fraud by third parties or
customers.
- Intense and increasing competition from numerous providers of financial
services who may employ various competitive strategies. The Company faces
competition from national, regional and local originators of
non-conforming mortgages, business credit cards and business equipment
leases, some of which have greater resources than the Company.
- The effects of increased competition and changes in economic conditions
including interest rate fluctuations resulting in higher than anticipated
prepayments of outstanding loans.
- The effects of interest rate fluctuations on the Company's net interest
margin and the value of its assets and liabilities; the continued legal
or commercial availability of techniques (including interest rate swaps
and similar financial instruments, loan repricing, hedging and other
techniques) used by the Company to manage the risk of such fluctuations
and the continuing operational viability of those techniques and the
accounting and regulatory treatment of such instruments.
- Difficulties or delays in the securitization of 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 economic, legal,
regulatory, accounting and tax environments and adverse changes in the
performance of the securitized assets.
10
12
- The amount, type and cost of secured financing available to the Company
to fund its owned loans, and any changes to that financing including any
impact from changes in the current economic, legal, regulatory,
accounting and tax environments, adverse changes in the performance of
the owned portfolio, any impact from changes in the Company's debt
ratings and the activities of parties with which the Company has
agreements or understandings, including any activities affecting any
investment.
- 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, prepayment of loan balances and general economic conditions and
other factors beyond the control of the Company.
- The impact of "seasoning" (the average age of a lender's portfolio) on
the Company's level of delinquencies and losses which may require a
higher allowance for loan losses for on-balance sheet assets and may
adversely impact mortgage and business loan and lease securitization
income. The addition of account originations or balances and the
attrition of such accounts or balances could significantly impact the
seasoning of the overall portfolio.
- The amount of 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); the effects of changes within
the Company's organization or in its compensation and benefit plans; 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 including any impact from changes in the
Company's debt ratings; and 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 that 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.
- The impact of the Company's costs to comply with requirements of the Year
2000 Issue described herein as well as the effects of the compliance or
lack thereof by the Company's customers, suppliers and partners.
ITEM 2. PROPERTIES.
At December 31, 1998, the Company owned two buildings totaling 198,000 square
feet in the Pennsylvania suburbs of Philadelphia. The Company leased an
additional 148,714 square feet in three buildings in the Pennsylvania suburbs of
Philadelphia, including the Company's principal executive offices located in
Spring House, Pennsylvania. In the adjoining states of New Jersey, Delaware and
New York the Company owned one building with 56,196 square feet and leased an
additional 62,352 square feet in three buildings. The Company also leased
258,650 square feet of office space in four buildings located in California and
Utah. In
11
13
summary, at December 31, 1998 the Company occupied 723,912 square feet of leased
and owned space in 13 buildings located in six states. In addition, the Company
leased office space which averaged approximately 1,100 square feet per branch
for each of its 57 Advanta Finance branches.
In connection with the Fleet Transaction, the Company contributed to the
LLC three owned buildings totaling 218,278 square feet and leases on four
buildings totaling 129,387 square feet in the Pennsylvania suburbs of
Philadelphia. In addition, the Company contributed to the LLC one owned building
totaling 121,000 square feet in Delaware and a lease on one building totaling
155,655 square feet in Colorado.
ITEM 3. LEGAL PROCEEDINGS.
On June 30, 1997, purported shareholders of the Company who are represented by a
group of law firms filed a putative class action complaint against the Company
and several of its current and former officers and directors in the United
States District Court for the Eastern District of Pennsylvania. A second,
similar complaint was filed in the same court a few days later by a different
group of law firms. Both complaints allege that the Company made
misrepresentations in certain of its public filings and statements in violation
of the Securities Exchange Act of 1934. The complaints seek damages of an
unspecified amount. On July 10, 1998, the complaints, which had previously been
consolidated, were dismissed by the Court for failing to state a claim. The
plaintiffs determined not to attempt to amend their complaints. Rather, they
have appealed the District Court's decision to the United States Court of
Appeals for the Third Circuit. The appeal has been fully briefed and is awaiting
decision. The Company believes that the District Court's ruling will be affirmed
and that the allegations in the complaints are without merit. In the opinion of
management, the ultimate resolution of these complaints is not expected to have
a material adverse effect on the financial position or future operating results
of the Company.
Between August 25, 1997 and September 10, 1998, the Company and certain of
its subsidiaries were named as defendants in lawsuits by certain consumer credit
cardholders claiming to represent consumer credit cardholders in a specific
program. The class action complaints alleged that consumer credit cardholder
accounts in a specific program were improperly repriced to a higher percentage
rate of interest. The complaints asserted various violations of federal and
state law with regard to such repricings, and each sought damages of an
unspecified amount. On June 3, 1998, the Judicial Panel on multidistrict
litigation ordered that all of the federal court actions be consolidated into
one proceeding for pretrial purposes in the United States District Court for the
Eastern District of Pennsylvania. On November 5, 1998, the Company and counsel
for plaintiffs in two of the actions pending in the Superior Court of the State
of Delaware and in the consolidated litigation in the United States District
Court for the Eastern District of Pennsylvania entered into a Settlement
Agreement and Stipulation in the Delaware State Court to settle the claims
relating to the specific program referred to above. Pursuant to the Settlement
Agreement and Stipulation, which was approved by the Court on December 30, 1998,
the Company paid $7.25 million to the plaintiffs. With the exception of the
claims of persons who opted out of the settlement and certain class members who
are debtors in bankruptcy cases, all the claims in the other lawsuits related to
the specific program referred to above have been released.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit
against Advanta Corp. and certain of its subsidiaries in Delaware Chancery
Court. Fleet's allegations, which the Company denies, center around Fleet's
assertions that the Company has failed to complete certain post-closing
adjustments to the value of the assets and liabilities the Company contributed
to the LLC in connection with the Fleet Transaction. Fleet seeks damages of
approximately $141 million. The Company has filed an answer to the complaint
denying the material allegations of the complaint, but acknowledging that the
Company contributed $1.8 million in excess liabilities in the post-closing
adjustment process, after taking into account the liabilities the Company has
already assumed. The Company also has filed a countersuit against Fleet for
approximately $101 million in damages the Company believes have been caused by
certain actions of Fleet following closing of the Fleet Transaction. Management
expects that the ultimate resolution of this litigation will not have a material
adverse effect on the financial position or future operating results of the
Company.
12
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers of the Company listed below was elected by
the applicable Board of Directors, to serve at the pleasure of the Board in the
capacities indicated.
NAME AGE OFFICE DATE ELECTED
- --------------------------------------------------------------------------------------------
Dennis Alter 56 Chairman of the Board and Chief 1972
Executive Officer
William A. Rosoff 55 Vice Chairman and Director 1996
Olaf Olafsson 36 President and Director 1998 and 1997
Philip M. Browne 39 Senior Vice President and Chief 1998
Financial Officer
Charles H. Podowski 52 President and Chief Executive 1998, 1997 and 1995
Officer, Advanta Business Cards
and President and Director,
Advanta Insurance Companies
George O. Deehan 56 Chief Executive Officer, Advanta 1998
Leasing Services
Mr. Alter became Executive Vice President and a Director of the Company's
predecessor organization in 1967. He was elected President and Chief Executive
Officer in 1972, and Chairman of the Board of Directors in August 1985. Mr.
Alter has remained as Chairman of the Board since August 1985. In February 1986,
he relinquished the title of President, and in August 1995 he relinquished the
title of Chief Executive Officer. In October 1997, Mr. Alter reassumed the title
of Chief Executive Officer.
Mr. Rosoff 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 LLP, the Company's outside
counsel, where he advised the Company for over 20 years. While at Wolf, Block,
Schorr and Solis-Cohen LLP he served as Chairman of its Executive Committee and,
immediately before joining the Company, as a member of its Executive Committee
and Chairman of its Tax Department. Mr. Rosoff is a Trustee of Atlantic Realty
Trust, a publicly held real estate investment trust.
Mr. Olafsson joined the Company in September 1996 as Vice Chairman of
Advanta Information Services, Inc. ("AIS") and was elected as a Director of AIS
in October 1996. In December 1997, Mr. Olafsson became a Director of the Company
and in March 1998 he was elected as President of the Company. Prior to joining
the Company, he was president and chief executive officer of Sony Interactive
Entertainment, Inc., a business unit of Sony Corporation, which he founded in
1991.
Mr. Browne joined the Company in June 1998 as Senior Vice President and
Chief Financial Officer. Prior to joining the Company, he was an Audit and
Business Advisory Partner with Arthur Andersen LLP where, for over sixteen
years, he audited public and private companies and provided business advisory
and consulting services to financial services companies. Mr. Browne had served
as the Arthur Andersen engagement partner for the Company since 1994.
Mr. Podowski was elected President of the Advanta Insurance Companies in
April 1995, Chief Executive Officer and President of Advanta Business Services
in September 1997 and President and Chief Executive Officer of Advanta Business
Cards in December 1998. 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 insurance subsidiaries in Asia, Australia and New Zealand. Prior to joining
CIGNA, Mr. Podowski worked for The Chase Manhattan Bank, N.A.
Mr. Deehan was elected President and Chief Executive Officer of Advanta
Leasing Services in December 1998. Prior to joining the Company, from 1992 to
1998, Mr. Deehan served AT&T Capital in
13
15
various capacities, including serving as President of Information Technology
Services for AT&T Capital, President and Chief Operating Officer of NCR Credit
Corporation, and Senior Vice President of Marketing and Sales of AT&T Capital,
Canada. Prior to joining AT&T Capital, Mr. Deehan held numerous positions with
financial services companies.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market System of The Nasdaq
Stock Market, Inc. under the symbols ADVNB (Class B non-voting common stock) and
ADVNA (Class A voting common stock).
Following are the high, low and closing sale prices and cash dividends
declared for the last two years as they apply to each class of stock:
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
CLASS B:
March 1997 $53.63 $25.50 $25.88 $.1320
June 1997 36.25 18.88 35.69 .1320
September 1997 36.50 24.75 27.25 .1320
December 1997 37.63 23.38 25.38 .1320
March 1998 $31.25 $19.69 $21.00 $.0756
June 1998 24.25 17.50 19.88 .0756
September 1998 20.56 8.25 10.50 .0756
December 1998 12.00 5.25 11.06 .0756
CLASS A:
March 1997 $54.75 $26.63 $26.88 $.1100
June 1997 37.25 20.00 36.75 .1100
September 1997 37.50 26.19 29.13 .1100
December 1997 38.75 24.25 26.25 .1100
March 1998 $32.75 $21.00 $22.50 $.0630
June 1998 26.25 19.25 21.94 .0630
September 1998 22.75 9.38 12.88 .0630
December 1998 14.88 7.13 13.25 .0630
At December 31, 1998, the Company had approximately 775 and 338 holders of
record of Class B and Class A common stock, respectively. Since its initial
public offering, the Company has paid regular and uninterrupted dividends.
Although the Company currently anticipates that comparable cash dividends
will continue to be paid in the future, the payment of future dividends by the
Company will be at the discretion of the Board of Directors and will depend on
numerous factors including the Company's cash flow, financial condition, capital
requirements and such other factors as the Board of Directors deems relevant.
14
16
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Noninterest revenues(1) $ 421,642 $ 827,481 $ 765,750 $ 532,380 $ 369,988
Interest revenues 241,090 435,274 354,927 249,566 172,607
Interest expense 184,275 324,558 269,700 166,032 94,758
Gain on transfer of consumer credit card business 541,288 0 0 0 0
Provision for credit losses 67,193 210,826 96,862 53,326 34,198
Operating expenses 388,644 630,841 523,174 350,685 266,784
Other charges(2) 125,072 0 0 0 0
Income before income taxes 438,836 96,530 264,761 211,903 165,207
Net income 447,880 71,625 175,657 136,677 106,063
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net Income
Basic
Combined(3) $ 16.65 $ 1.52 $ 4.15 $ 3.38 $ 2.72
Class A 16.62 1.45 4.08 3.34 2.70
Class B 16.68 1.57 4.19 3.42 2.75
Diluted
Combined(3) 15.71 1.50 3.89 3.20 2.58
Class A 15.69 1.43 3.86 3.18 2.56
Class B 15.73 1.54 3.91 3.22 2.60
Cash dividends declared
Class A .252 .440 .380 .290 .217
Class B .303 .528 .456 .348 .260
Book value -- combined 21.26 19.01 18.06 14.35 11.12
Closing stock price
Class A 13.25 26.25 42.75 38.25 26.25
Class B 11.06 25.38 40.88 36.38 25.25
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION -- YEAR END
Investments and money market instruments(4) $ 1,654,929 $ 2,092,292 $ 1,653,384 $ 1,089,317 $ 671,661
Gross receivables
Owned 1,159,791 3,398,090 2,656,641 2,762,927 1,964,444
Securitized 8,628,291 14,460,114 13,632,552 9,452,428 6,190,793
---------------------------------------------------------
Managed 9,788,082 17,858,204 16,289,193 12,215,355 8,155,237
Total serviced receivables(5) 18,066,410 27,039,669 19,981,285 12,838,272 8,155,237
Total assets
Owned 3,795,750 6,686,132 5,583,959 4,524,259 3,113,048
Managed 12,424,041 21,146,246 19,216,511 13,976,687 9,303,841
Deposits 1,749,790 3,017,611 1,860,058 1,906,601 1,159,358
Long-term debt 652,758 1,438,358 1,393,095 587,877 666,033
Stockholders' equity 560,304 926,950 852,036 672,964 441,690
Capital securities(6) 100,000 100,000 100,000 0 0
Stockholders' equity, long-term debt and capital
securities 1,313,062 2,465,308 2,345,131 1,260,841 1,107,723
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Return on average assets 11.95% 1.09% 3.16% 4.06% 4.47%
Return on average common equity 82.76 8.47 25.31 26.15 26.97
Return on average total equity(7) 64.81 8.12 22.07 24.75 26.97
Equity/managed assets(7) 5.33 4.86 4.95 4.81 4.75
Equity/owned assets(7) 17.40 15.36 17.05 14.87 14.19
Dividend payout 1.62 33.34 10.75 9.97 9.24
15
17
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
As a percentage of managed receivables:
Total loans 30 days or more delinquent(8) 7.7 6.0 5.4 3.3 2.7
Net charge-offs(8) 2.5 5.3 3.2 2.2 2.3
Operating expenses 3.7 3.4 2.9 2.9 3.7
- ---------------------------------------------------------------------------------------------------------------------------
(1) Excludes gains on sales of credit card relationships in 1996 and 1994.
(2) Other charges represents the following: severance and outplacement costs
associated with workforce reduction, option exercise and other employee
costs associated with the Fleet Transaction/Tender Offer; expense associated
with exited business/product; and asset impairment.
(3) Combined represents a weighted average of Class A and Class B (see Note 1 to
Consolidated Financial Statements).
(4) Includes restricted interest-bearing deposits and subordinated trust assets.
(5) Represents total managed plus Advanta Mortgage contract servicing.
(6) Represents Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures of the Company.
(7) In 1998, 1997 and 1996, return on average total equity, equity/managed
assets and equity/owned assets include capital securities as equity. The
ratios without capital securities for 1998 were 74.75%, 4.52%, and 14.76%,
respectively, for 1997 were 8.33%, 4.38% and 13.86%, respectively, and for
1996 were 22.31%, 4.43%, and 15.26%.
(8) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to consumer credit card bankruptcies.
(see "Management's Discussion and Analysis -- Asset Quality").
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW
For the year ended December 31, 1998, the Company reported net income of
$447.9 million or $15.71 per combined common share, assuming dilution, compared
to $71.6 million or $1.50 per combined diluted common share for 1997 (see Note 1
to Consolidated Financial Statements).
The earnings reported for 1998 reflect the $541.3 million gain on the Fleet
Transaction (see Notes 1 and 2 to Consolidated Financial Statements), a $62.3
million pretax charge for severance and outplacement costs associated with
workforce reduction, option exercises and other employee costs associated with
the Fleet Transaction/Tender Offer (See Note 2 to Consolidated Financial
Statements), a $54.1 million pretax charge for expenses associated with exited
businesses and products, $41.8 million of equity securities losses and an $8.7
million pretax charge for facility impairments. For the year ended December 31,
1998, net income for Advanta Mortgage and Advanta Business Services was $25.1
million and $10.3 million, respectively. In addition, included in the net income
for 1998 is $10.2 million contributed by the consumer credit card unit prior to
the Fleet Transaction. Net income for 1997 for Advanta Mortgage, Advanta
Business Services and the consumer credit card unit was $33.3 million, $14.7
million and $22.9 million, respectively.
During 1998, net income for Advanta Mortgage reflects a $51.0 million
pretax charge to adjust the retained interest-only strips ("IO Strips") to fair
value reflecting increases in prepayment speeds experienced during the year. The
Company announced that beginning in the fourth quarter of 1998, it will report
income for its mortgage business that is essentially equal to that of a
portfolio lender, rather than the front-ended income typically reported through
gain on sale accounting. Since gain on sale accounting is required under
generally accepted accounting principles for securitizations structured as
sales, the Company has begun to accomplish this change by increasing its use of
on-balance sheet funding over time and decreasing its degree of reliance on
securitizations structured as sales.
16
18
For the year ended December 31, 1997, the Company reported net income of
$71.6 million or $1.50 per combined common share, assuming dilution, compared to
$175.7 million or $3.89 per combined diluted common share for the full year of
1996.
The earnings reported for 1997 reflect an increase in provision for credit
losses of $114.0 million over 1996. This increase resulted from a higher level
of charge-offs and delinquencies primarily in the consumer credit card
portfolio. In addition, 1996 earnings reflected a $33.8 million gain on the sale
of credit card relationships.
ADVANTA MORTGAGE
Net income for Advanta Mortgage was $25.1 million for the year ended
December 31, 1998 as compared to $33.3 million and $25.0 million for 1997 and
1996, respectively. During 1998, net income for Advanta Mortgage reflects a
$51.0 million pretax charge recorded to adjust its IO Strip to fair value
reflecting increases in prepayment speeds experienced during the year. The
decrease in net income was partially a reflection of the Company's decision to
report income for Advanta Mortgage that is essentially equal to that of a
portfolio lender, rather than the front-ended income typically reported through
gain on sale accounting. In the fourth quarter of 1998, Advanta Mortgage
recognized gains of $32.9 million from the securitization and sale of
approximately $1.1 billion of loans. These gains were substantially equal to the
amortization of its IO Strip and Contractual Mortgage Servicing Rights ("CMSR").
GAIN ON SALE OF RECEIVABLES
Advanta Mortgage securitized loans with an aggregate principal balance of
$4.0 billion for the year ended December 31, 1998. In addition, Advanta Mortgage
sold $274 million in whole loans and increased its portfolio of loans held in
off-balance sheet Commercial Paper conduit facilities by approximately $564.0
million. Total Advanta Mortgage sales/securitization volume increased 43.3% over
the year ended December 31, 1997. The increase in sales/securitization volume
resulted primarily from the increase in mortgages originated during the year.
Advanta Mortgage originated $5.3 billion in new loans during the year, an
increase of 44.9% over 1997.
In 1998, Advanta Mortgage recognized gains of $118.7 million, or
approximately 2.5% on loans sold and securitized, as compared to $72.0 million,
or approximately 2.1% recognized in 1997. The increase in gain as a percentage
of loans sold is primarily due to the mix of loans sold during the year. The
gain realized varies for each of Advanta Mortgage's products and origination
channels. Typically, the gain realized from loans directly originated is higher
than the gain from indirect origination channels. Due to the significant drop in
interest rates during 1998, the hedge contracts used to manage interest rate
risk between origination and sale of the loans generated losses of approximately
$44 million. These losses were generally offset by the higher than normal gains
that occur from the sale of loans in a decreasing rate environment.
In 1997, Advanta Mortgage recognized gains of $72.0 million, resulting from
the securitization and sale of $3.4 billion of receivables, as compared to $77.5
million, from the securitization of $1.4 billion receivables in 1996. The 1997
amount is net of a $42.4 million pretax charge to adjust the IO Strip to fair
value.
The FASB is currently addressing several implementation issues relating to
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
One of these issues relates to an exception SFAS No. 125 currently makes for
FDIC-insured institutions. The FDIC, upon reclamation of assets from an
FDIC-insured institution, would not be required by law to pay interest between
the date of reclamation and the date of payment, which could indicate that they
would not meet the isolation from creditors criterion established in SFAS No.
125. In January 1998, the FASB staff announced that it would study the issue and
said that, in the interim, FDIC-insured institutions need not conclude that the
FDIC receivership powers preclude sale accounting. The FDIC Board recently
issued a proposed "Statement of Policy Regarding the Treatment of
Securitizations and Loan Participations Following the Appointment of the FDIC as
Conservator or Receiver." Under this proposed policy, the FDIC has determined
that subject to certain conditions, it will not seek to reclaim, recover, or re-
characterize as property of the institution or the receivership estate, the
financial assets or undivided interest in
17
19
a loan transferred by the institution to a special purpose entity in connection
with a securitization. As receiver of a failed institution, the FDIC has the
authority to repudiate contracts and reclaim assets transferred. Comments on the
proposed policy are due in March 1999. The timing and ultimate resolution of
this matter is still uncertain at this time.
PORTFOLIO LENDER ANALYSIS
Beginning in the fourth quarter of 1998, the Company began to report income
for Advanta Mortgage that is essentially equal to that of a portfolio lender,
rather than the front-ended income typically reported through gain on sale
accounting. Since gain on sale accounting is required under generally accepted
accounting principles for securitizations structured as sales, the Company is
accomplishing this by increasing its use of on-balance sheet funding over time
and decreasing its degree of reliance on securitizations structured as sales. In
this regard, the Company began to analyze and evaluate Advanta Mortgage's
financial results from a portfolio lender's perspective as well as under
generally accepted accounting principles. The following table presents the
Company's reported results adjusted to approximate the results of a portfolio
lender for the year ended December 31, 1998.
PRO FORMA
PRO FORMA PORTFOLIO
AS REPORTED ADJUSTMENTS LENDER
- -------------------------------------------------------------------------------------------------
REVENUES:
Gain on sale of receivables $ 148,641 $(118,638) $ 30,003
Interest income 241,090 593,601 834,691
Servicing revenues 143,829 (44,747) 99,082
Gain on transfer of consumer credit card business 541,288 -- 541,288
Other revenues, net 129,172 -- 129,172
- -------------------------------------------------------------------------------------------------
Total revenues 1,204,020 430,216 1,634,236
- -------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 388,644 8,302 396,946
Interest expense 184,275 389,386 573,661
Provision for credit losses 67,193 46,074 113,267
Costs associated with Fleet Transaction/Tender Offer
and exited business/products 125,072 -- 125,072
- -------------------------------------------------------------------------------------------------
Total expenses 765,184 443,762 1,208,946
- -------------------------------------------------------------------------------------------------
Income before income taxes $ 438,836 $ (13,546) $ 425,290
- -------------------------------------------------------------------------------------------------
With respect to the portfolio lender results, individual line items are
stated as if the securitized mortgages were still owned by the Company and
remained on the balance sheet. The pro forma adjustment to gain on sale of
receivables represents the reclassification of net gains recognized on the sale
of Advanta Mortgage loans for the year ended December 31, 1998. The pro forma
adjustment to provision for credit losses represents the amount by which the
provision would have increased had the securitized Advanta Mortgage loans
remained on the balance sheet and the provision for credit losses on the
securitized Advanta Mortgage loans been equal to actual reported charge-offs.
The actual provision for credit losses of a portfolio lender could differ from
the recorded charge-offs depending upon the age and composition of the portfolio
and the timing of charge-offs. The proforma presentation results in a reduction
of approximately $13.5 million in pretax income reflecting the estimated net
impact the new funding strategy would have had if it had been in place since
January 1, 1998.
LOAN ORIGINATIONS
Advanta Mortgage loan production is generated through multiple distribution
channels. Home equity loans and lines of credit are originated directly from
consumers using targeted direct mail and direct response television and radio
techniques, and through a branch office system("Advanta Finance") of 57 branches
throughout the country (collectively "Direct" originations). First and second
mortgage loans are also
18
20
originated through a broker network ("Broker") and correspondent relationships,
and purchased from other financial institutions ("Conduit" and "Corporate
Finance"). Auto finance contracts are purchased from correspondent originators
on a flow basis or in bulk purchases. "Advanta Mortgage loans" include home
equity and auto loans and exclude loans which were never owned by the Company,
but which the Company services for a fee ("contract servicing" or
"subservicing"). Originations for Advanta Mortgage were as follows ($ in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
Direct $1,655,399 $ 865,001 $ 419,745
Broker 475,427 266,002 286,809
Conduit 1,752,968 1,238,339 650,258
Corporate Finance 1,325,447 1,103,083 39,804
Auto 104,350 194,807 103,736
- -----------------------------------------------------------------------------------------------
$5,313,591 $3,667,232 $1,500,352
- -----------------------------------------------------------------------------------------------
Total 1998 originations for Advanta Mortgage increased 44.9% over 1997.
Direct mortgage originations for 1998 increased 91.4% over originations for 1997
and indirect mortgage originations for 1998 increased 30.5% from the prior year.
The increase in direct originations reflects the Company's focus on capitalizing
on its direct marketing experience and centralized telemarketing and processing
capabilities. In conjunction with the change in the Company's funding strategy,
management is projecting managed receivables growth to be approximately 20% to
30% in 1999. The decrease in auto originations was attributable to the Company's
decision to originate auto volume in a controlled manner, while pricing
appropriately for risk.
Total 1997 originations for Advanta Mortgage increased 144.4% over the
twelve months ended December 31, 1996. This increase resulted from the
implementation of the Company's strategy to build market share in the
nonconforming home equity market.
SERVICING REVENUES
Servicing revenues increased to $100.2 million for the year ended December
31, 1998 as compared to $61.8 million for the year ended December 31, 1997. The
increase in servicing revenues was the result of the $2.6 billion increase in
Advanta Mortgage's averaged securitized receivables. The Company's contract
servicing portfolio was $8.3 billion at December 31, 1998 versus $9.2 billion at
December 31, 1997. The decrease in contract servicing receivables resulted from
the withdrawal of business by certain customers who have begun servicing their
own portfolios, and from higher prepayments in contract servicing portfolios.
Servicing revenues in 1997 increased 167% over $23.1 million for 1996. This
increase resulted from the growth in the contract servicing portfolio from $3.7
billion at December 31, 1996 to $9.2 billion at December 31, 1997.
ADVANTA BUSINESS SERVICES
Advanta Business Services offers flexible lease financing programs on
small-ticket equipment and business credit cards. Net income for Advanta
Business Services was $10.3 million for the year ended December 31, 1998 as
compared to $14.7 million and $19.8 million for 1997 and 1996, respectively. The
decrease in net income resulted from increases in costs to originate, service
and manage the Company's leasing products, and from a change in the mix of lease
receivables originated by the Company. In 1998, the Company originated a higher
proportion of direct finance leases and a lower proportion of operating leases
as compared to lease originations for 1997.
GAIN ON SALE OF RECEIVABLES
Advanta Business Services recognized $30.0 million in securitization income
in 1998, as compared to $31.5 million and $30.6 million for the years ended
December 31, 1997 and 1996, respectively. These amounts include approximately
$11.7 million, $19.2 million and $21.9 million in gains from the securitization
of $299.2
19
21
million, $275.6 million and $258.6 of leases in 1998, 1997 and 1996,
respectively. The remainder represents gains on the sale of new business card
receivables, which are sold to the securitization trust on a continuous basis to
replenish the investors' interest in trust receivables, which have been repaid
by the cardholders.
BUSINESS CARD AND LEASE ORIGINATIONS
Advanta Business Services issues non-cancelable leases and business credit
cards to small businesses. Leases are issued for "small ticket" equipment such
as computers, copiers, fax machines, telephone systems and other office
equipment. Lease originations are primarily generated through third party
referrals from manufacturers or distributors of equipment as well as through
independent brokers and direct mail marketing. The Advanta Business Card is a
MasterCard(R) which has generally been issued to small businesses which have
been in operation for at least two years. Business card accounts are generated
through targeted direct marketing techniques, primarily direct mail to
prospective customers. Originations for Advanta Business Services were as
follows ($ in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Leases $ 335,030 $ 322,302 $337,264
Business card 1,386,347 1,073,886 518,504
- ----------------------------------------------------------------------------------------------
$1,721,377 $1,396,188 $855,768
- ----------------------------------------------------------------------------------------------
For the year ended December 31, 1998, total originations for business cards
and leases increased 23.3% when compared to 1997. For 1997, business card and
lease originations increased 63.2% over 1996 levels. The increases in business
card receivables resulted from programs designed to increase market penetration
and encourage existing customers to increase the use of the business cards.
ADVANTA CORP.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments decreased $194.2 million for
the year ended December 31, 1998 as compared to 1997. During the same period,
interest expense decreased $140.3 million. The decreases in interest income and
interest expense were mainly attributable to the decrease in interest bearing
assets and liabilities owned by the Company subsequent to the Fleet Transaction
and Tender Offer. Also impacting interest income on receivables during 1998 were
consumer credit card securitization transactions prior to the Fleet Transaction
as well as the mix of receivables. Both periods reflect suppressed margins as a
result of carrying higher cash, cash equivalent and investment balances as a
percent of owned assets for liquidity purposes.
Interest income of $435.3 million for 1997 increased $80.3 million as
compared to 1996. During the same period, interest expense increased $54.9
million. The increase in interest income was principally the result of an
increase in the average yield on interest earning assets to 8.15% for 1997 as
compared to 7.83% for 1996, which primarily resulted from the repricing of the
consumer credit card portfolio. The increase in the owned net interest margin
was negatively impacted by the mix of interest earning assets reflecting the
conservative position in cash and cash equivalents on the balance sheet. The
increase in interest expense reflects both higher average balances of interest
bearing liabilities and an increase in the average rate paid on those
liabilities.
Advanta Mortgage, business card, lease and consumer credit card receivable
securitization activity shifts revenues from interest income to non-interest
revenues. This activity reduces the level of higher-yielding receivables on the
balance sheet while proportionately increasing the balance sheet levels of new
lower-yielding receivables and short-term, high quality investments earning
money market rates.
The owned average cost of funds decreased to 6.26% in 1998 from 6.31% in
1997. The owned average cost of funds was 6.12% in 1996. The Company has
utilized derivatives to manage interest rate risk (see discussion under
"Derivatives Activities").
20
22
The following table provides an analysis of owned interest income and
expense data, average balance sheet data, net interest spread (the difference
between the yield on interest-earning assets and the average rate paid on
interest-bearing liabilities), and net interest margin (the difference between
the yield on interest-earning assets and the average rate paid to fund
interest-earning assets) for 1996 through 1998. Average owned loan and lease
receivables and the related interest revenues include certain loan fees.
INTEREST RATE ANALYSIS
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- -------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -------------------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET
- ------------------------
Interest-earning assets:
Receivables:
Advanta Mortgage
loans $ 778,257 $ 77,312 9.93% $ 586,228 $ 58,704 10.01% $ 242,946 $ 25,812 10.62%
Leases and business
cards 283,857 28,068 9.89 333,080 36,776 11.04 200,052 21,009 10.50
Consumer credit
cards(1) 384,697 23,457 6.10 1,728,039 179,732 10.40 2,594,997 220,547 8.50
Other loans 15,724 1,858 11.82 31,810 2,639 8.30 12,270 1,045 8.52
---------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total receivables(2) 1,462,535 130,695 8.94 2,679,157 277,851 10.37 3,050,265 268,413 8.80
Federal funds sold 203,485 10,933 5.37 345,404 18,659 5.40 166,454 8,853 5.32
Restricted interest-
bearing deposits 474,958 30,248 6.37 893,773 55,116 6.17 524,505 34,154 6.51
Trading investments 172,084 10,374 6.03 -- -- 0.00 -- -- 0.00
Tax-free securities(2) 4,992 407 8.15 3,926 307 7.82 8,052 502 6.23
Taxable investments 673,239 37,850 5.62 1,213,897 66,663 5.49 704,641 36,808 5.22
---------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total interest-earning
assets(3) $2,991,293 $220,507 7.37% $ 5,136,157 $418,596 8.15% $ 4,453,917 $348,730 7.83%
========== ======== ====== =========== ======== ====== =========== ======== ======
Interest-bearing
liabilities:
Deposits
Savings $ 202,943 $ 10,916 5.38% $ 402,893 $ 22,850 5.67% $ 302,125 $ 15,728 5.21%
Time deposits under
$100,000 909,132 54,941 6.04 1,018,163 63,473 6.23 582,887 34,430 5.91
Time deposits of
$100,000 or more 329,001 20,078 6.10 1,035,366 63,841 6.17 999,613 60,721 6.07
---------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total deposits 1,441,076 85,935 5.96 2,456,422 150,164 6.11 1,884,625 110,879 5.88
Debt 1,337,508 87,204 6.52 2,452,166 156,524 6.38 2,092,913 132,641 6.34
Other borrowings 102,372 7,067 6.90 232,820 17,870 7.68 427,650 26,180 6.12
---------- -------- ------ ----------- -------- ------ ----------- -------- ------
Total interest-bearing
liabilities 2,880,956 180,206 6.26 5,141,408 324,558 6.31 4,405,188 269,700 6.12
Net noninterest-bearing
liabilities 110,337 (5,251) 48,729
---------- ----------- -----------
Sources to fund
interest-earning
assets $2,991,293 $180,206 6.02% $ 5,136,157 $324,558 6.32% $ 4,453,917 $269,700 6.06%
========== ======== ====== =========== ======== ====== =========== ======== ======
Net interest spread 1.11% 1.84% 1.71%
====== ====== ======
Net interest margin(4) 1.35% 1.83% 1.77%
====== ====== ======
OFF-BALANCE SHEET:
- ------------------------
Average balance on
securitized:
Advanta Mortgage loans $5,958,762 $ 3,332,012 $ 1,890,101
Leases & business
cards 1,069,534 729,976 403,745
Consumer credit
cards(1) 1,461,412 9,628,905 9,574,549
---------- ----------- -----------
Total average
securitized
receivables $8,489,708 $13,690,893 $11,868,395
========== =========== ===========
Total average managed
receivables $9,952,243 $16,370,050 $14,918,660
- -------------------------------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Interest and average rate for tax-free securities, loans, and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and nonaccrual loans and leases.
(4) Managed net interest margin for 1998 was 2.73%, representing a combination
of owned interest-earning assets/owned interest-bearing liabilities and
securitized Advanta Mortgage assets/liabilities.
21
23
INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
1998 VS. 1997 1997 VS. 1996
($ IN THOUSANDS) ---------------------------------- -------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------------
Interest income from:
Loan and lease receivables:
Advanta Mortgage loans $ 19,080 $ (472) $ 18,608 $ 34,455 $(1,563) $ 32,892
Leases and business cards (5,104) (3,604) (8,708) 14,635 1,132 15,767
Consumer credit cards(1) (102,016) (54,259) (156,275) (83,534) 42,719 (40,815)
Other loans (1,642) 861 (781) 1,622 (28) 1,594
Federal funds sold (7,632) (94) (7,726) 9,671 135 9,806
Restricted interest-bearing
deposits (26,603) 1,735 (24,868) 22,835 (1,873) 20,962
Trading investments 10,374 -- 10,374 -- -- --
Tax-free securities 86 14 100 (301) 106 (195)
Taxable investments (30,378) 1,565 (28,813) 27,860 1,995 29,855
--------- -------- --------- -------- ------- --------
Total interest income(2) (143,835) (54,254) (198,089) 27,243 42,623 69,866
--------- -------- --------- -------- ------- --------
Interest expense on:
Deposits:
Savings (10,814) (1,120) (11,934) 5,631 1,491 7,122
Time deposits under $100,000 (6,666) (1,866) (8,532) 27,080 1,963 29,043
Time deposits of $100,000 or
more (43,074) (689) (43,763) 2,136 984 3,120
Debt (72,675) 3,355 (69,320) 23,039 844 23,883
Other borrowings (9,150) (1,653) (10,803) (13,884) 5,574 (8,310)
--------- -------- --------- -------- ------- --------
Total interest expense (143,389) (963) (144,352) 45,278 9,580 54,858
--------- -------- --------- -------- ------- --------
Net interest income $ (446) $(53,291) $ (53,737) $(18,035) $33,043 $ 15,008
- --------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Includes income from assets held and available for sale.
GAIN ON TRANSFER OF CONSUMER CREDIT CARD BUSINESS
The gain of approximately $541.3 million recognized by the Company in 1998
represents the excess of liabilities transferred to the LLC over the net basis
of the assets transferred and the Company's retained minority membership
interest in the LLC, which at the closing date of the Fleet Transaction was a
4.99% ownership interest in the LLC valued at $20 million. See Note 2 to the
Consolidated Financial Statements.
22
24
OTHER REVENUES
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Equity securities (losses) gains $(41,750) $(11,426) $ 6,522
Business card interchange income 20,741 11,617 4,396
Consumer credit card interchange income 11,881 85,208 102,804
Consumer credit card overlimit fees 16,233 46,447 16,465
Mortgage other revenues 22,945 4,535 1,645
Leasing and business card other revenues 18,769 15,865 24,039
Insurance revenues, net 14,408 37,816 38,175
Other 1,149 18,021 3,276
- ---------------------------------------------------------------------------------------------
Total other revenues, net $ 64,376 $208,083 $197,322
- ---------------------------------------------------------------------------------------------
Other revenues include equity securities losses of $42.5 million recognized
in 1998 reflecting changes in the fair value of Advanta Partners LP investments.
Most of the loss relates to investments not publicly traded for which Advanta
Partners LP decided to expedite a disposal plan.
In 1998, Mortgage other revenues includes an $11.2 million gain on the sale
of an investment in affordable housing partnerships, and $6 million from the
favorable settlement of certain prior year claims.
Insurance revenues, net, and "Other" other revenues were $14.4 million and
$1.1 million, respectively, in 1998, decreasing $23.4 million and $16.9 million,
respectively, from 1997. The decline is attributable to the transfer of the
consumer credit card portfolio in connection with the Fleet Transaction.
Other revenues of $208.1 million in 1997 increased $10.8 million or 5.5%
from $197.3 million in 1996, primarily due to increases in consumer credit card
overlimit and cash advance fees as a result of the Company's risk based pricing
strategy on consumer credit cards. These increases were partially offset by
decreases in consumer credit card interchange income as a result of lower
transaction volume and equity securities losses reflecting a decrease in the
carrying value of Advanta Partners LP investments.
23
25
OPERATING EXPENSES
($ IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits $185,566 $247,287 $182,666
Other operating expenses:
Marketing 53,109 53,039 31,975
Equipment expense 23,381 37,712 22,752
Amortization of credit card deferred origination costs,
net 22,271 69,344 88,517
External processing 21,908 43,256 42,814
Occupancy expense 16,001 23,097 14,827
Credit and collection expense 15,715 20,017 13,784
Professional/consulting fees 14,767 38,600 40,247
Telephone expense 12,428 21,262 16,116
Postage 8,949 29,039 25,700
Minority interest in income of consolidated subsidiary 8,880 8,880 222
Credit card fraud losses 3,194 22,287 23,611
Other 2,475 17,021 19,943
- ---------------------------------------------------------------------------------------------
Total other operating expenses $203,078 $383,554 $340,508
- ---------------------------------------------------------------------------------------------
Total operating expenses $388,644 $630,841 $523,174
- ---------------------------------------------------------------------------------------------
At year end:
Number of accounts Managed (000's) 565 6,342 5,984
Number of employees 2,568 4,498 3,541
For the year:
Operating expenses as a percentage of average managed
receivables(1) 3.7% 3.4% 2.9%
- ---------------------------------------------------------------------------------------------
(1) Excludes amortization of credit card deferred origination costs, net.
Operating expenses for 1998 include the operating expenses associated with
the consumer credit card business prior to the Fleet Transaction. Salaries and
employee benefits decreased $61.7 million for the year ended December 31, 1998
as compared to 1997. This reduction reflects the decrease in the number of
employees as a result of the Fleet Transaction as well as workforce reductions
and exit and disposition plans associated with business and product offerings
not directly associated with the Company's mortgage and business services units.
Total other operating expenses of $203.1 million for 1998 were lower by
$180.5 million or 47.1% than the $383.6 million in 1997, principally resulting
from decreases in operating expenses following the Fleet Transaction. Other
operating expenses for 1998 included an increase in marketing expense for
Advanta Mortgage associated with the increase in direct mortgage originations.
The ratio of operating expenses as a percentage of average managed
receivables increased during 1998 due to: lost economies of scale resulting from
the downsizing pursuant to the Fleet Transaction; the Company's plan to expand
certain aspects of its infrastructure to better position the Company for the
future; and the Company's decision to slow receivables growth in the fourth
quarter.
Total operating expenses increased by $107.6 million or 21% to $630.8
million in 1997 from $523.2 million in 1996. Part of the increase in total
operating expenses resulted from a $65 million or 35% increase in salaries and
employee benefits. Other factors affecting the increase in operating expenses in
1997 were a $21.1 million or 65.9% increase in marketing expenses related to new
business advertising for Advanta Mortgage and Advanta Business Services as well
as account retention initiatives for the consumer credit card portfolio.
Included in other operating expenses in 1997, was a $19.2 million decrease in
the amortization of credit card deferred origination costs due to a decrease in
originations experienced in 1996. Other operating expenses
24
26
including equipment and occupancy expenses reflected increases consistent with
the increases in serviced customer accounts.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $67.2 million in 1998 decreased $143.6
million or 68% from $210.8 million in 1997. The decrease was due to the
contribution of the consumer credit card business in connection with the Fleet
Transaction. This decrease was partially offset by an increase in the allowance
for Advanta Mortgage loan losses resulting from the Company's decision to
increase the level of loans that will remain on the balance sheet in connection
with its change in funding strategy.
The provision for credit losses of $210.8 million in 1997 increased $114.0
million or 117.7% from $96.9 million in 1996. The increase was due to higher
charge-offs on owned receivables, which increased 114.3% from $70.6 million in
1996 to $151.2 million in 1997 and higher levels of delinquencies, which
continued to increase throughout 1997.
A description of the credit performance of the loan portfolio is set forth
under the section entitled "Credit Risk Management."
CREDIT RISK MANAGEMENT
Management regularly reviews the loan and lease portfolio in order to
evaluate the adequacy of the allowance for credit losses. The evaluation
includes such factors as the inherent credit quality of the loan and lease
portfolio, past experience (including frequency of defaults and loss severity),
current economic conditions and changes in the composition of the loan and lease
portfolio. The allowance for credit losses is maintained for on-balance sheet
receivables. The on-balance sheet allowance is intended to cover all credit
losses inherent in the owned loan portfolio. With regard to securitized assets,
anticipated losses and related recourse liabilities are reflected in the
calculations of Gain on Sale of Receivables, Consumer Credit Card Securitization
Income, Retained Interest Only Strip, Amounts due from Consumer Credit Card
Securitizations and Other Assets. See Notes 1 and 3 to Consolidated Financial
Statements. Recourse liabilities are intended to cover all probable credit
losses over the life of the securitized receivables. Management evaluates both
its on-balance sheet and recourse requirements and, as appropriate, effects
changes to these accounts.
The allowance for credit losses on a consolidated basis was $33.4 million,
or 2.9% of owned receivables, at December 31, 1998, compared to $137.8 million,
or 4.1% of owned receivables, at December 31, 1997. The decrease in coverage is
a result of an increase in the relative percent of secured receivables in the
total loan portfolio. The decline in allowance for credit losses is
predominately attributable to the transfer of the consumer credit card allowance
in conjunction with the Fleet Transaction. The allowance for credit losses on a
consolidated basis was $89.2 million, or 3.4% of owned receivables, in 1996. The
increase in the allowance for credit losses from 1996 to 1997 reflects the
higher level of charge-offs and delinquencies in 1997 primarily in the consumer
credit card portfolio.
ASSET QUALITY
Impaired assets include both nonperforming assets (Advanta Mortgage loans
and credit cards and leases past due 90 days or more; real estate owned; and
bankrupt, decedent and fraudulent credit cards) and accruing loans past due 90
days or more on business cards and leases. The Company charges off expected
losses on all nonperforming mortgage loans at the earlier of foreclosure or when
they have become 12 months delinquent, regardless of anticipated collectibility.
Lease receivables are written off no later than when they have become 120 days
delinquent. All other loans are generally charged off upon the earlier of
approximately 6 months delinquency or after an investigative period for bankrupt
and fraudulent accounts. The carrying value for real estate owned is based on
fair value, net of costs of disposition and is reflected in other assets.
25
27
Gross interest income that would have been recorded in 1998 for owned
nonperforming assets, had interest been accrued throughout the year in
accordance with the assets' original terms, was approximately $3.0 million. The
amount of interest on nonperforming assets included in income for 1998 was $1.8
million.
In the third quarter of 1996, the Company adopted a new charge-off
methodology related to bankrupt consumer credit card accounts, providing for up
to a 90-day (rather than up to a 30-day) investigative period following
notification of the bankruptcy petition prior to charge-off. This methodology is
consistent with others in the credit card industry. The 1998, 1997 and 1996
credit statistics set forth in the following tables reflect this change in
methodology.
Managed impaired assets at December 31, 1998 decreased to $410.6 million
from the $532.0 million at December 31, 1997. The levels of managed loans 30
days or more delinquent also decreased to $753.5 million from the $1.1 billion
at December 31, 1997. These decreases resulted from the transfer of the consumer
credit card portfolio in the Fleet Transaction, partially offset by seasoning in
the Advanta Mortgage and Advanta Business Services portfolios.
The consolidated managed charge-off rate for the year ended December 31,
1998 was 2.5%, down from 5.3% for 1997 and 3.2% for 1996. The following
represents the annual results by product:
AVERAGE
MANAGED
RECEIVABLES
FOR THE YEAR ENDED YEAR ENDED
-------------------- 12/31/98
1998 1997 1996 (IN MILLIONS)
- -------------------------------------------------------------------------------------------------
Mortgage only 0.56% 0.53% 0.70% $6,509
Auto 9.30 7.25 0.13 228
Business Card 5.88 3.73 2.65 744
Leases 2.66 2.71 2.15 609
- -------------------------------------------------------------------------------------------------
On the total owned portfolio, the charge-off rate was 3.7% in 1998 compared
to 5.6% for 1997. The charge-off rate on the owned consumer credit card
portfolio decreased to 7.4% from 7.9% in 1997. The charge-off rate on owned
Advanta Mortgage loans increased from 1.0% in 1997 to 1.5% in 1998. The 1998
charge-off rate on leases and business cards was 4.8% compared to 2.5% in 1997
and 1.5% in 1996.
Past due loans represent accruing loans that are past due 90 days or more
as to collection of principal and interest. Loans are put on nonaccrual status
when they become 90 days past due.
During 1994, the Company implemented a new policy for the charge-off of
mortgage loans. Under this policy, when a nonperforming mortgage loan becomes
twelve months delinquent, the Company writes down the loan to its net realizable
value, regardless of anticipated collectibility. Consequently, in 1994, all
mortgage loans that had been twelve or more months delinquent, as well as any
mortgages that became twelve months delinquent during the year were written down
(through a recorded charge-off) to their net realizable value.
26
28
The following tables provide a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
DECEMBER 31,
----------------------------------------------------------
($ IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED -- MANAGED(1)
Nonperforming assets $410,584 $ 328,835 $191,668 $ 82,171 $ 61,587
Accruing loans past due 90 days or more 30 203,117 228,845 84,892 40,837
Impaired assets 410,614 531,952 420,513 167,063 102,424
Total loans 30 days or more delinquent 753,521 1,068,183 886,717 404,072 220,390
As a percentage of gross receivables:
Nonperforming assets 4.2% 1.8% 1.2% .7% .8%
Accruing loans past due 90 days or more .0 1.1 1.4 .7 .5
Impaired assets 4.2 3.0 2.6 1.4 1.3
Total loans 30 days or more delinquent:
New methodology(2) 7.7 6.0 5.4
Prior methodology 5.2(3) 3.3 2.7
Net charge-offs:
Amount $247,287 $ 860,098 $479,992 $212,865 $139,676
As a percentage of average gross
receivables:
New methodology(2) 2.5% 5.3% 3.2%
Prior methodology 3.5(3) 2.2% 2.3%
- ---------------------------------------------------------------------------------------------------------
ADVANTA MORTGAGE LOANS -- MANAGED(4)(5)
Nonperforming assets $375,520 $ 200,600 $ 93,101 $ 56,743 $ 44,678
Total loans 30 days or more delinquent 656,789 391,929 194,412 106,223 65,966
As a percentage of gross receivables:
Nonperforming assets 4.5% 3.8% 3.4% 3.2% 3.3%
Total loans 30 days or more delinquent 7.9 7.4 7.1 5.9 4.9
Net charge-offs -- Mortgage Loans:
Amount 36,142 19,953 14,970 13,836 20,709
As a percentage of average gross
receivables 0.6% .5% 0.7% 0.9% 1.7%
Net charge-offs -- Auto Loans:
Amount $ 21,238 $ 10,212 $ 11 N/A N/A
As a percentage of average gross
receivables 9.3% 7.3% .1%
- ---------------------------------------------------------------------------------------------------------
LEASES AND BUSINESS CARDS -- MANAGED(6)
Nonperforming assets $ 34,826 $ 26,782 $ 9,503 $ 4,912 $ 2,682
Impaired assets 34,833 26,817 9,503 4,912 2,682
Total loans 30 days or more delinquent 96,054 81,675 59,880 35,274 20,972
As a percentage of gross receivables:
Nonperforming assets 2.4% 2.1% 1.2% 1.3% 1.0%
Impaired assets 2.4 2.1 1.2 1.3 1.0
Total loans 30 days or more delinquent 6.5 6.5 7.3 9.3 7.9
Net charge-offs -- Leases:
Amount 16,220 15,074 9,567 5,846 $ 3,747
As a percentage of average gross
receivables 2.7% 2.7% 2.2% 1.9% 1.9%
Net charge-offs -- Business Cards:
Amount $ 43,732 $ 18,928 $ 4,210 N/A N/A
As a percentage of average gross
receivables 5.9% 3.7% 2.6%
- ---------------------------------------------------------------------------------------------------------
CONSUMER CREDIT CARDS -- MANAGED
Nonperforming assets N/A $ 101,298 $ 89,064 $ 20,516 $ 14,227
Accruing loans past due 90 days or more N/A 203,069 228,822 84,878 40,721
Impaired assets N/A 304,367 317,886 105,394 54,948
Total loans 30 days or more delinquent N/A 594,403 632,083 262,299 133,121
As a percentage of gross receivables:
Nonperforming assets N/A .9% .7% .2% .2%
Accruing loans past due 90 days or more N/A 1.8 1.8 .8 .6
Impaired assets N/A 2.7 2.5 1.1 .8
Total loans 30 days or more delinquent:
New methodology(2) N/A 5.3 5.0
Prior methodology 4.6(3) 2.6 2.0
Net charge-offs:
Amount $129,955 $ 795,928 $451,239 $193,160 $115,218
As a percentage of average gross
receivables:
New methodology(2) 7.0% 7.0% 3.7%
Prior methodology 4.1(3) 2.5% 2.5%
- ---------------------------------------------------------------------------------------------------------
27
29
(1) Includes consumer credit cards through February 20, 1998.
(2) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to consumer credit card bankruptcies
(see Asset Quality).
(3) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
(4) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
(5) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(6) Includes leases for all years presented and business cards beginning in
1996.
28
30
The following tables provide a summary of allowances, impaired assets,
delinquencies and charge-offs for the past five years:
DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED -- OWNED(1)
Allowance for credit losses $33,437 $137,773 $ 89,184 $53,494 $41,617
Nonperforming assets 49,568 51,149 29,822 21,856 31,949
Accruing loans past due 90 days or more 30 49,458 40,597 17,399 11,354
Impaired assets 49,598 100,607 70,419 39,255 43,303
Total loans 30 days or more delinquent 73,755 201,891 145,613 76,859 67,904
As a percentage of gross receivables:
Allowance for credit losses 2.9% 4.1% 3.4% 1.9% 2.1%
Nonperforming assets 4.3 1.5 1.1 .8 1.6
Accruing loans past due 90 days or more .0 1.5 1.5 .6 .6
Impaired assets 4.3 3.0 2.7 1.4 2.2
Total loans 30 days or more delinquent:
New methodology(2) 6.4 5.9 5.5
Prior methodology 5.3(3) 2.8 3.5
Net charge-offs:
Amount $53,107 $151,222 $ 70,576 $42,549 $35,293
As a percentage of average gross receivables:
New methodology(2) 3.7% 5.6% 2.3%
Prior methodology 2.5(3) 2.3% 2.6%
- --------------------------------------------------------------------------------------------------------
ADVANTA MORTGAGE LOANS -- OWNED(4)(5)
Allowance for credit losses $20,092 $ 5,822 $ 8,785 $ 3,360 $ 5,164
Nonperforming assets 38,734 23,234 13,005 18,676 27,379
Total loans 30 days or more delinquent 56,131 42,916 28,546 20,348 23,958
As a percentage of gross receivables:
Allowance for credit losses 2.4% 1.2% 2.3% 1.0% 3.6%
Nonperforming assets 4.6 4.9 3.5 5.8 19.2
Total loans 30 days or more delinquent 6.7 9.0 7.6 6.3 16.8
Net charge-offs -- Mortgage:
Amount $ 3,658 $ 2,310 $ 3,049 $ 5,962 $11,689
As a percentage of average gross receivables .5% .4% 1.3% 3.2% 9.7%
Net charge-offs -- Auto:
Amount $ 7,648 $ 3,524 $ 10 N/A N/A
As a percentage of average gross receivables 16.1% 5.8% .1%
- --------------------------------------------------------------------------------------------------------
LEASES AND BUSINESS CARDS -- OWNED(6)
Allowance for credit losses $ 9,611 $ 9,798 $ 4,241 $ 1,577 $ 1,076
Nonperforming assets 10,596 6,705 2,927 714 1,068
Impaired assets 10,603 6,740 2,927 714 1,068
Total loans 30 days or more delinquent 16,946 17,799 9,462 4,350 8,459
As a percentage of gross receivables:
Allowance for credit losses 3.2% 3.3% 2.0% 1.7% 1.3%
Nonperforming assets 3.5 2.2 1.4 0.8 1.2
Impaired assets 3.5 2.3 1.4 0.8 1.2
Total loans 30 days or more delinquent 5.6 6.0 4.4 4.6 9.8
Net charge-offs -- Leases:
Amount $ 3,491 $ 2,170 $ 833 $ 1,139 $ 914
As a percentage of average gross receivables 2.5% 1.5% .7% 1.4% 1.5%
Net charge-offs -- Business Cards:
Amount $10,033 $ 6,198 $ 2,169 N/A N/A
As a percentage of average gross receivables 6.9% 3.3% 2.5%
- --------------------------------------------------------------------------------------------------------
CONSUMER CREDIT CARDS -- OWNED
Allowance for credit losses N/A $118,420 $ 76,084 $36,289 $27,486
Nonperforming assets N/A 21,055 13,890 2,466 3,502
Accruing loans past due 90 days or more N/A 49,410 40,574 17,385 11,238
Impaired assets N/A 70,465 54,464 19,851 14,740
Total loans 30 days or more delinquent N/A 141,000 107,263 50,651 35,156
As a percentage of gross receivables:
Allowance for credit losses N/A 4.6% 3.7% 1.6% 1.6%
Nonperforming assets N/A .8 .7 .1 .2
Accruing loans past due 90 days or more N/A 1.9 2.0 .7 .6
Impaired assets N/A 2.7 2.7 .8 .9
29
31
DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Total loans 30 days or more delinquent:
New methodology(2) N/A 5.5 5.2
Prior methodology 5.0(3) 2.2 2.0
Net charge-offs:
Amount $28,278 $137,017 $ 64,521 $35,425 $22,688
As a percentage of average gross receivables:
New methodology(2) 7.4% 7.9% 2.5%
Prior methodology 2.7(3) 2.2% 1.9%
- --------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to consumer credit card bankruptcies
(see Asset Quality).
(3) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
(4) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
(5) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(6) Includes leases for all years presented and business cards beginning in
1996.
COSTS AND EXPENSES ASSOCIATED WITH FLEET TRANSACTION/TENDER OFFER
Pursuant to the Tender Offer, the Company purchased 7,882,750 shares of its
Class A Common Stock and 12,482,850 of its Class B Common Stock at $40 per share
net, and 1,078,930 of its SAILS Depositary Shares at $32.80 per share, net.
Contingent on the Fleet Transaction, the Company accelerated vesting of 43.15%
of outstanding options that were not vested at the time of the closing of the
Fleet Transaction. In connection with the Tender Offer, present and former
directors and employees who held exercisable options to purchase Class A and
Class B Common Stock tendered such options in lieu of first exercising such
options and tendering the underlying stock. The Company used approximately $850
million (before taking into account the exercise price of options) to repurchase
the shares in the Tender Offer. In addition, the Company also amended the terms
of options granted to employees who became employees of the LLC or whose
employment with the Company was otherwise terminated in connection with the
Fleet Transaction (the "Affected Employees") to extend the post-employment
exercise period. Although there was a charge to earnings associated with this
amendment, there was no net impact to capital in connection with this amendment.
The Company also canceled options issued to certain members of the Board of
Directors and replaced the canceled options with stock appreciation rights.
In March 1997, the Compensation Committee of the Board of Directors
approved the Advanta Senior Management Change of Control Severance Plan (the
"Management Severance Plan") which provides benefits to senior management
employees in the event of a change of control (as defined) of the Company if,
within one year of the date of a change of control, there has been either an
actual or constructive termination of the senior management employee. In
February 1998, pursuant to the Company's agreement with Fleet, the Compensation
Committee approved an amendment to the Management Severance Plan that allows the
Office of the Chairman, in its sole discretion, to extend the level of benefits
that would otherwise be allowed in the event of a change of control to Affected
Employees. The Board of Directors also authorized the Chairman of the Board, in
his sole discretion, to pay bonuses to certain key employees in recognition of
their efforts on behalf of the Company in the strategic alternatives process. In
accordance with the Company's agreement with Fleet, the LLC agreed to assume the
Company's Management Severance Plan and 50% of the bonus payments with respect
to those Affected Employees who became employees of the LLC in connection with
the Fleet Transaction. In May 1997, the Board of Directors adopted the Office of
the Chairman Supplemental Compensation Program which entitled the members of the
Office of the Chairman to receive benefits in the event of a change of control
(as defined) or other similar transaction. In October 1997, the Company
announced that the Chief Executive Officer ("CEO") of the Company and the CEO of
the consumer credit card business unit were leaving the Company in connection
with the Fleet Transaction. These benefits were all
30
32
contingent upon the consummation of the Fleet Transaction and were recognized
upon the closing of the transaction.
In connection with the Company's evaluation of strategic alternatives and
the Fleet Transaction, the Company adopted special retention programs. Under
these programs, certain employees are entitled to receive special payments based
on their targeted bonuses and contingent upon their continued employment with
the Company or a successor entity. The first payments under the special
retention programs were made in March 1998. Further, in March 1998, the Company
identified employees that would be terminated in connection with the Fleet
Transaction as part of the corporate restructuring to reduce corporate expenses.
During the first quarter of 1998, the corporate restructuring was approved by
the Board of Directors and affected employees were informed of the termination
benefits they would receive. Substantially all of these employees ceased
employment with the Company prior to April 30, 1998.
The Company recorded a $62.3 million pretax charge to earnings in
connection with the foregoing plans, plan amendments and workforce reduction
activities.
EXPENSE ASSOCIATED WITH EXITED BUSINESS/PRODUCTS
In connection with the Company's efforts to reduce expenses associated with
business and product offerings which are not directly associated with its
mortgage and business services units, management approved exit and disposition
plans during the first quarter of 1998 related to certain businesses and
products previously offered. The Company recorded charges in the quarter ended
March 31, 1998 related to costs to be incurred by the Company in executing these
plans, including contractual obligations to customers for which no future
revenue will be received, and contractual vendor obligations for services from
which no future benefit will be derived. The charges also include termination
benefits to employees associated with the businesses and products identified in
the exit plan. Related to the exit plan, certain assets were identified for
disposal and written down to estimated realizable value. In addition, the
Company recognized investment banking, professional and consulting fees that
were contingent upon completion of the Fleet Transaction as well as other
professional and consulting fees associated with the Company's corporate
restructuring. During the quarter ended March 31, 1998, the Company recorded a
$54.1 million pretax charge to earnings in connection with these exit plans.
ASSET IMPAIRMENT/DISPOSAL
In connection with the Company's plans to reduce corporate expenses,
certain assets were identified for disposal and the carrying cost thereof
(approximately $17 million) was written off or written down to estimated
realizable value. Approximately $8.3 million was classified as expense
associated with exited business/products. These assets consisted principally of
leasehold improvements and various other assets.
INCOME TAXES
In 1998, the Company recorded a consolidated income tax benefit of $9.0
million, as a result of the federal tax treatment of its contribution of assets
associated with the Fleet Transaction. The Company's consolidated income tax
expense was $24.9 million in 1997, or an effective tax rate of 26%. Tax expense
for 1996 was $89.1 million, or an effective rate of 34%. The decrease in the
effective tax rate from 1996 to 1997 resulted from a higher level of
insurance-related activities, and tax credits from affordable housing
investments in combination with a lower level of pretax income.
ASSET/LIABILITY MANAGEMENT
The Company's financial condition is managed with a focus on maintaining
high credit quality standards, disciplined management of market risks and
prudent levels of leverage and liquidity.
31
33
MARKET RISK SENSITIVITY
Market risk is the potential for loss or diminished financial performance
arising from adverse changes in market forces such as interest rates and market
prices. Market risk sensitivity is the degree to which a financial instrument,
or a company that owns financial instruments is exposed to market forces. The
Company regularly evaluates its market risk profile and attempts to minimize the
impact of market risks on net interest income and net income.
The Company's exposure to equity price risk is immaterial relative to
expected overall financial performance. The Company's financial performance can,
however, be affected by fluctuations in interest rates, changes in economic
conditions, shifts in customer behavior, and other factors. Changes in economic
conditions and shifts in customer behavior are difficult to predict, and the
financial performance of the Company generally cannot be insulated from such
forces.
Financial performance variability as a result of fluctuations in interest
rates is commonly called interest rate risk. Interest rate risk generally
results from mismatches in the timing of asset and liability repricing (gap
risk) and from differences between the repricing indices of assets and
liabilities (basis risk).
The Company attempts to analyze the impact of interest rate risk by
regularly evaluating the perceived risks inherent in its asset and liability
structure, including securitized instruments and off-balance sheet instruments.
Risk exposure levels vary continuously, as changes occur in the Company's
asset/liability mix, market interest rates, prepayment trends, and other factors
affecting the timing and magnitude of cash flows. Computer simulations are used
to generate expected financial performance in a variety of interest rate
environments. Those results are analyzed to determine if actions need to be
taken to mitigate the Company's interest rate risk.
In managing interest rate risk exposure, the Company periodically
securitizes receivables, sells and purchases assets, alters the mix and term
structure of its funding base, changes its investment portfolio and uses
derivative financial instruments. Derivative instruments, by Company policy, are
not used for speculative purposes (see discussion under "Derivative
Activities").
The Company has measured its interest rate risk using a rising rate
scenario and a declining rate scenario. Net interest income is estimated using a
third party software model that uses standard income modeling techniques (see
Note 18 to Consolidated Financial Statements). The Company estimates that its
net interest income over a twelve month period would approximately increase or
decrease by 5.0%, respectively, if interest rates were to rise or fall by 200
basis points. Both increasing and decreasing rate scenarios assume an
instantaneous shift in rates and measure the corresponding change in expected
net interest income over one year.
The above estimates of net interest income sensitivity alone do not provide
a comprehensive view of the Company's exposure to interest rate risk. The
quantitative risk information is limited by the parameters and assumptions
utilized in generating the results. Such analyses are useful only when viewed
within the context of the parameters and assumptions used. The above rate
scenarios in no way reflect management's expectation regarding the future
direction of interest rates, and they depict only two possibilities out of a
large set of possible scenarios.
In addition to interest rate risk, the Company has other financial
instruments, namely capitalized servicing rights and interest-only strips, that
are subject to prepayment risk. Prepayments are principal payments received in
excess of scheduled principal payments. Prepayments generally result from entire
loan payoffs due largely to refinancing a loan or selling a home. Actual or
anticipated prepayment rates are expressed in terms of a constant prepayment
rate ("CPR"), which represents the annual percentage of beginning loan balances
that prepay. To a degree, prepayment rates are related to market interest rates
and changes in those interest rates. The relationship between them, however, is
not precisely determinable. Accordingly, the Company believes it is more
relevant to disclose the fair value sensitivity of these instruments based on
changes in prepayment rate assumptions rather than based on changes in interest
rates.
32
34
The Company's capitalized servicing rights and interest only strips are
derived from both fixed and variable rate loans, the majority of which are
fixed. Fixed and variable rate loans are currently prepaying at different rates
and are expected to continue this behavior in the future. The Company has
estimated the impact on the fair value of these assets assuming a change in
prepayments of 2.9% CPR for fixed rate loans and 3.8% CPR for variable rate
loans. The Company has estimated that these changes in prepayment assumptions
could result in a $32 million change in the combined fair value of these assets.
These estimates do not factor in the impact of changes in the interest rate
environment associated with the changes in the prepayment rates. Changes in
interest rates generally affect the level of loan originations. Prepayment
assumptions are not the only assumptions in the fair value calculation for these
assets, but they are the most influential. Other key assumptions are not
directly impacted by market forces as defined earlier. The above prepayment
scenarios do not reflect management's expectation regarding the future direction
of prepayments, and they depict only two possibilities out of a large set of
possible scenarios.
The Company currently has securities in a trading portfolio for liquidity
purposes (see Liquidity and Capital Resources). The Company estimates that the
value of these securities would not materially change assuming a 10% change in
market-based investment yields.
DERIVATIVES ACTIVITIES
The Company uses derivative financial instruments for the purpose of
managing its exposure to interest rate risk. 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.
As part of this approval process, a market risk analysis is completed to
determine the potential impact on the Company from severe negative (i.e.,
stressed) movements in market rates. By policy, derivatives transactions may
only be used to manage the Company's exposure to interest rate risk 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. Internal counterparty 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 counterparty, credit exposure amounts are calculated in a stressed
environment and represent the maximum aggregate credit exposure from derivatives
and other capital market transactions the Company is willing to accept from an
individually approved counterparty. 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 that is independent of the trading
function, which measures, monitors, and reports on credit, market, and liquidity
risk exposures from capital markets, hedging and
33
35
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. The Company
will adopt SFAS No. 133 effective January 1, 2000. The Company anticipates that
the adoption of SFAS No. 133 will not have a material effect on the results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, for both
long-term and short-term needs, through active management of both assets and
liabilities. During 1998, the Company, through its subsidiaries, securitized or
sold approximately $4.9 billion of Advanta Mortgage loans and $.4 billion of
business card and 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 mortgage
loan and business card and lease receivable growth. Cash and equivalents exceed
amounts normally held to protect against the uncertain liquidity environment
during 1998. At December 31, 1998, the Company had approximately $.3 billion of
federal funds sold, $.5 billion of loan and lease receivables held for sale, $.5
billion of trading investments, and $.5 billion of investments available for
sale which could be sold to generate additional liquidity.
The Company's funding strategy for 1999 relies heavily on cash, cash
equivalents and investments as well as deposit gathering activity at both
Advanta National Bank ("ANB", the successor by merger of Advanta National Bank
USA ("AUS") formerly Colonial National Bank USA and Advanta National Bank, a
credit card bank chartered in 1995 ("Old ANB")) and Advanta Bank Corp. ("ABC",
formerly Advanta Financial Corp., and together with ANB, the "Banks").
As a result of the Fleet Transaction, approximately $1.3 billion in cash,
cash equivalents and investments which had previously been held by the Company
in connection with its consumer credit card business was no longer required in
such business and became available for general corporate purposes. The Company
used approximately $850 million of such amount (before taking into account the
exercise price of options) to purchase 7,882,750 shares of its Class A Common
Stock, 12,482,850 of its Class B Common Stock, and 1,078,930 of its SAILS
Depositary Shares through the Tender Offer which was completed on February 20,
1998.
After paying down approximately $263 million in long-term debt, the Company
closed 1998 with unrestricted cash, cash equivalents and marketable securities
of approximately $458 million at the parent company level and $761 million at
the Company's two banks. Equity, including capital securities, was approximately
$660 million at December 31, 1998. Beginning in the fourth quarter of 1998, the
Company commenced efforts to increase the use of on-balance sheet funding over
time and decrease its degree of reliance on securitizations structured as sales.
This will include greater use of deposit funding through the
34
36
Company's two banks and the use of other funding sources, which are accounted
for as debt. During 1999, the Company intends to utilize a portion of its high
liquidity to fund on-balance sheet portfolio growth.
As of December 31, 1998, ANB's total deposits were $1.5 billion after a
significant portion of its deposits were contributed to the LLC in the first
quarter of this year in connection with the Fleet Transaction. At December 31,
1998, ABC, a Utah state-chartered, FDIC-insured industrial loan corporation, had
total deposits of $206.2 million. Total deposits increased approximately $777.0
million and $37.8 million for ANB and ABC, respectively, from March 31, 1998.
This deposit growth reflects the Company's strategy to increase funding at the
Banks as the reliance on securitization diminishes.
During May of 1998, ANB offered to repurchase its outstanding Bank Notes
that were not assumed by the LLC in connection with the Fleet Transaction. ANB
repurchased $93.4 million of Bank Notes; $7.4 million of Bank Notes that were
not tendered remained outstanding.
At December 31, 1998, ANB held $501.6 million of AAA rated classes of
Advanta Mortgage Loan Trust 1998-2 and Advanta Mortgage Loan Trust 1998-4
securities as trading investments. These investments are consistent with ANB's
liquidity management objectives and its high levels of liquidity. By holding
these securities, ANB receives an attractive yield and maintains flexibility for
future funding requirements.
During the third quarter of 1998, the Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's Class A and Class B
common stock and the formation of an Employee Stock Ownership Plan ("ESOP"). At
December 31, 1998, the Company had repurchased approximately 1.1 million shares
of Class A common stock and approximately 446,000 shares of Class B common
stock. Of this total, 1 million Class A shares were purchased for the ESOP.
Funding diversification has been an essential component of the Company's
liquidity and capital management. The Company and the Banks have utilized both
retail and institutional on-balance sheet funding sources issuing a variety of
debt and deposit products. The Company and the Banks also have utilized a
secured revolving credit facility and off-balance sheet securitization funding
(described below).
On August 21, 1998, AMCUSA and its subsidiaries and ANB increased their
secured revolving credit facility to $750 million from $500 million, and the
committed portion was increased from $250 million to $375 million. In December
1998, these same entities entered into a new $250 million commercial paper
conduit facility. In the first quarter of 1999, the previously engaged $500
million commercial paper facility secured in December 1997, was reduced to $304
million, and will expire in the second quarter of 1999. During 1998, Advanta
Bank Corp. entered into a new commercial paper facility secured by business
credit card receivables for $200 million. Also, deposit sources proved readily
expandable in 1998 as demonstrated in the growth noted above. In addition,
notwithstanding the Company's current liquidity, efforts continue to develop new
sources of funding, both through previously untapped customer segments and
through development of new financing structures.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the past five
years.
COMPOSITION OF DEPOSIT BASE
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
Demand deposits $ 4.3 0% $ 41.6 1% $ 28.3 1% $ 91.7 5% $ 64.5 5%
Money market savings 181.5 10 506.8 17 329.7 18 277.5 14 301.7 26
Time deposits of $100,000 or
less 1,445.8 83 2,163.0 72 978.6 53 965.5 51 691.0 60
Time deposits of more than
$100,000 118.2 7 306.2 10 523.5 28 571.9 30 102.2 9
- ----------------------------------------------------------------------------------------------------------------
Total deposits $1,749.8 100% $3,017.6 100% $1,860.1 100% $1,906.6 100% $1,159.4 100%
- ----------------------------------------------------------------------------------------------------------------
35
37
COMPOSITION OF DEBT AND OTHER BORROWINGS
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
Subordinated notes and
certificates $ 1.5 0% $ 55.5 2% $ 71.1 3% $ 76.2 4% $ 282.1 20%
Senior notes and
certificates 145.6 14 151.0 7 208.3 8 200.6 11 0 0
Short-term bank notes 0 0 242.0 11 309.3 13 25.0 1 85.0 6
Medium-term bank notes 7.3 1 669.5 29 835.6 34 322.7 18 0 0
5 1/8% notes, due 1996 0 0 0 0 0 0 150.0 8 149.9 11
Medium-term notes 866.5 81 1,099.5 48 880.8 36 504.7 28 359.7 25
Value notes 9.3 1 30.7 1 0 0 0 0 0 0
Term fed funds 0 0 0 0 10.0 0 443.0 25 309.0 22
Securities sold under
agreements to repurchase 0 0 0 0 0 0 0 0 86.5 6
Lines of credit and term
funding arrangements 18.5 2 3.9 0 40.0 0 0 0 50.0 4
Other borrowings 17.8 1 48.9 2 107.0 6 81.8 5 80.9 6
- ----------------------------------------------------------------------------------------------------------------
Total debt and other
borrowings $1,066.5 100% $2,301.0 100% $2,462.1 100% $1,804.0 100% $1,403.1 100%
- ----------------------------------------------------------------------------------------------------------------
At December 31, 1998, ANB's and ABC's combined total capital ratios
(combined Tier I and Tier II capital) were 12.12% and 14.13%, respectively. At
December 31, 1997, ANB's and ABC's combined total capital ratios (combined Tier
I and Tier II capital) were 16.39% and 18.02%, respectively. In each case, ANB
and ABC met the requirements of their respective regulatory agencies, and each
were categorized as well-capitalized under the regulatory framework for prompt
corrective action.
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, 1998 and
1997, the insurance subsidiaries were in compliance with such rules and
regulations.
CAPITAL EXPENDITURES
The Company spent $45.4 million for capital expenditures in 1998, primarily
for the construction of buildings in Pennsylvania for the mortgage division,
leasehold improvements, additional space in existing buildings, office and voice
communication equipment and furniture and fixtures. This compared to $79.2
million for capital expenditures in 1997 and $84.2 million in 1996. In 1999, the
Company anticipates capital expenditures to be lower than the level incurred in
1998.
YEAR 2000 READINESS DISCLOSURE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results on or after the
year 2000. The "Year 2000 Issue" affects computer and information technology
("IT") systems, as well as non-IT systems which include embedded technology such
as micro-processors and micro-controllers (or micro-chips) that have date
sensitive programs that may not properly recognize the Year 2000 or beyond. If
the systems and products used by the Company are not properly equipped to
identify and recognize the Year 2000, the Company's IT systems and non-IT
systems could fail or create erroneous results. This could cause the Company to
experience a temporary inability to process transactions, originate loans or
leases, service the loans of third parties and engage in other normal business
activities. Under these circumstances, the Year 2000 Issue could have a material
adverse effect on the Company's products, services, operations and financial
results.
36
38
In connection with the Year 2000 Issue, the Company has organized a
separate Year 2000 Project Office (the "Project Office") managed by a team led
by a senior information technology manager to assess whether the computer
systems and applications used by the Company are Year 2000 compliant and to
implement appropriate responses in the event any of such systems and
applications are not compliant. The Project Office has developed standards for
its work based on the work of leading authorities in the field. The Project
Office reports to the Company's Year 2000 Steering Committee which consists of
the Company's Chief Information Officer, head of each of the Company's business
units, the General Counsel and other key members of corporate senior management.
In addition, the Company's Internal Audit Department has assigned a senior
information technology auditor to monitor all Year 2000 Issues and developments
for the Audit Committee of the Company's Board of Directors. The Company has
also engaged independent consultants to assist in the verification and
validation processes to assure the reliability of the Company's risk and cost
estimates.
The Company is proceeding to implement a Year 2000 compliance program in
accordance with applicable guidelines and regulations of the Federal Financial
Institutions Examination Council ("FFIEC") as adopted by the Office of the
Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC"). The Company's compliance program consists of the following
phases:
AWARENESS Define the scope of the Year 2000 problem.
Establish a Year 2000 project team. Develop an
overall strategy to address the Year 2000
problem. Identify all IT and non-IT systems that
may be affected by the Year 2000 Issue.
ASSESSMENT Assess the size and complexity of the Year 2000
Issue. Evaluate whether IT and non-IT systems are
Year 2000 compliant. Identify and prioritize
"mission-critical" systems.
RENOVATION Remediate or replace systems that are not Year 2000
compliant.
VALIDATION Test of systems to validate that they are Year 2000
compliant.
CONTINGENCY PLANNING Develop options in the event that any or all of the
IT and non-IT systems fail or cannot be made Year
2000 compliant.
IMPLEMENTATION Certify that systems are Year 2000 compliant.
Implement contingency plans for any non-compliant
system.
The Company has completed the Awareness and Assessment phases, and has
substantially completed the Renovation, Validation and Contingency Planning
phases of its Year 2000 compliance program with respect to both internal mission
critical IT and non-IT systems. Each of the Company's business units has
completed the evaluation of its systems, applications and vendor lists,
including identifying and prioritizing "mission-critical" systems, and is
implementing project plans to modify existing computer programs, convert to new
programs or replace systems to the extent necessary to address the Year 2000
Issue. On an ongoing basis, the Company is also providing customer awareness
training for customer-centered employees that will equip them to respond to
customer inquiries about the Company's Year 2000 readiness. The Company has
substantially completed testing of its internal mission-critical systems and the
development of contingency plans as of the end of 1998. The Company is in the
process of completing the Renovation, Validation and Implementation of systems
which are provided by third parties, and expects this to be substantially
complete by March 31,1999. In addition, all non-mission critical applications
are being addressed, and the Company expects the Renovation and Implementation
phases to be substantially complete by June 30, 1999.
The Company has identified its significant business relationships,
including without limitation vendors, customers and asset management and funding
counterparties, to assess the potential impact on the Company's operations if
those third parties and/or their products or systems fail to become Year 2000
compliant in a timely manner. The Company has mailed questionnaires to third
parties with which it maintains a significant business relationship to help
identify which of those third parties and/or their products or systems will not
be Year 2000 compliant. In addition, the Company regularly reviews Internet
websites to monitor and assess the level of Year 2000 compliance of vendors,
suppliers and other third parties. Evaluation of questionnaire
37
39
responses, risk assessments, action steps and contingency plans related to
significant third party relationships are expected to be complete within the
time frames established by the FFIEC guidelines as adopted by the OCC and FDIC.
Non-compliant products are being evaluated for remediation, replacement or
retirement. To date, the Company is not aware of any material third party
business relationship, product or system with a Year 2000 problem that
management believes would have a material adverse effect on the Company.
However, there can be no assurance that the systems and products used by outside
service providers or other third parties upon which the Company's systems rely
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company's Year 2000 compliance program also includes the development of
contingency plans for each of the Company's business units in the event that
remediation or replacement plans are not successfully implemented. The
contingency plans are designed to protect its business and operations from
business interruptions related to the Year 2000 Issue and, by way of example,
may include back-up procedures or the identification of alternative suppliers,
where practical. Each of the Company's business units has developed, and is
validating, its contingency plans. Many of the functions performed by the
products and systems used by the Company, which operate automatically, can be
performed manually. Consequently, in the event these products or systems
experience isolated failures as a result of the Year 2000 problem, the
disruption caused by such isolated failures should not have a material adverse
effect on the Company. There can be no assurances, however, that any of the
Company's contingency plans will be sufficient to anticipate or address all of
the problems or issues that may arise.
The Company has established a two-year budget for 1998 and 1999 of
approximately $20.9 million, including capital expenditures, to address the Year
2000 Issue. This budget includes approximately $5.3 million to cover the costs
associated with diverted personnel. Of the total budget, the Company has
allocated approximately $9.5 million for contingencies. Based on current
information, the Company believes that the budget will be sufficient to cover
its expenditures associated with the Year 2000 Issue. As of December 31, 1998,
exclusive of costs associated with diverted personnel, the Company has spent
approximately $3.1 million in operating expenses and approximately $900,000 in
capital expenditures. Funding for the project is being provided out of operating
revenues. The Company notes that GAAP generally requires that the costs of
becoming Year 2000 compliant, including without limitation modifying computer
software or converting to new programs, be charged to expense as they are
incurred. Therefore, except for the cost of replacement systems or other items
that have a future use, the Company will expense the cost of the Year 2000
project as incurred. The Company has deferred development on selected business
systems due to Year 2000 priorities. These deferrals are not expected to have a
material effect on the financial condition and results of operations of the
Company.
The Company believes that the Year 2000 Issue will not pose significant
operational problems for it and will not have a material adverse effect on its
future financial condition, liquidity or results of operations during 1999 and
in future periods. The projected costs and expenditures and project completion
dates are based on management's best estimates, are subject to the performance
of third parties over which the Company has no control and may be updated from
time to time as additional information becomes available.
38
40
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
DECEMBER 31,
------------------------
1998 1997
- --------------------------------------------------------------------------------------
ASSETS
Cash $ 90,597 $ 57,953
Federal funds sold 267,400 156,500
Restricted interest-bearing deposits 80,028 543,239
Trading investments 501,563 --
Investments available for sale 521,410 1,222,272
Subordinated trust assets 284,528 170,281
Loan and lease receivables, net:
Held for sale 527,644 1,452,560
Other 611,289 1,923,986
- --------------------------------------------------------------------------------------
Total loan and lease receivables, net 1,138,933 3,376,546
Retained interest-only strip 247,381 191,868
Premises and equipment (at cost, less accumulated
depreciation of $38,377 in 1998 and $83,746 in 1997) 84,396 152,215
Other assets 579,514 815,258
- --------------------------------------------------------------------------------------
TOTAL ASSETS $3,795,750 $6,686,132
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 4,324 $ 41,595
Interest-bearing 1,745,466 2,976,016
- --------------------------------------------------------------------------------------
Total deposits 1,749,790 3,017,611
Long-term debt 1,030,147 2,248,172
Other borrowings 36,301 52,774
Other liabilities 319,208 340,625
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,135,446 5,659,182
- --------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
debentures of the Company 100,000 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding -- 1,010 shares in 1998
and 1997 1,010 1,010
Class B preferred stock, $.01 par value:
Authorized -- 1,000,000 shares; Issued -- 14,211 shares in
1998 and 25,000 in 1997 0 0
Class A voting common stock, $.01 par value;
Authorized -- 214,500,000 shares; Issued -- 10,375,489
shares in 1998 and 18,193,885 shares in 1997 104 182
Class B non-voting common stock, $.01 par value;
Authorized -- 230,000,000 shares; Issued -- 16,294,825
shares in 1998 and 26,564,546 shares in 1997 163 266
39
41
($ IN THOUSANDS)
DECEMBER 31,
------------------------
1998 1997
- --------------------------------------------------------------------------------------
Additional paid-in capital 229,304 379,543
Deferred compensation (17,214) (25,353)
Unearned ESOP shares (12,550) --
Accumulated other comprehensive income (91) 50
Retained earnings 382,092 585,659
Less: Treasury stock at cost, 55,000 Class A and 972,768
Class B common shares in 1998 and 418,286 Class B
common shares in 1997 (22,514) (14,407)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 560,304 926,950
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,795,750 $6,686,132
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
40
42
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
REVENUES:
Gain on sale of receivables $ 148,641 $ 117,474 $ 106,156
Interest income 241,090 435,274 354,927
Servicing revenues 143,829 249,293 204,206
Consumer credit card securitization income 64,796 252,631 258,066
Gain on transfer of consumer credit card business 541,288 -- --
Gain on sale of consumer credit cards -- -- 33,820
Other revenues, net 64,376 208,083 197,322
- -----------------------------------------------------------------------------------------------
Total revenues 1,204,020 1,262,755 1,154,497
- -----------------------------------------------------------------------------------------------
EXPENSES:
Salaries and employee benefits 185,566 247,287 182,666
Other operating expenses 203,078 383,554 340,508
Interest expense 184,275 324,558 269,700
Provision for credit losses 67,193 210,826 96,862
Severance and outplacement costs
associated with workforce reduction, option exercise
and other employee costs associated with Fleet
Transaction/Tender Offer 62,257 -- --
Expense associated with exited business/product 54,115 -- --
Asset impairment 8,700 -- --
- -----------------------------------------------------------------------------------------------
Total expenses 765,184 1,166,225 889,736
- -----------------------------------------------------------------------------------------------
Income before income taxes 438,836 96,530 264,761
Income taxes (benefit) (9,044) 24,905 89,104
- -----------------------------------------------------------------------------------------------
Net income $ 447,880 $ 71,625 $ 175,657
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Basic earnings per share
- -----------------------------------------------------------------------------------------------
Class A $ 16.62 $ 1.45 $ 4.08
Class B 16.68 1.57 4.19
Combined 16.65 1.52 4.15
- -----------------------------------------------------------------------------------------------
Diluted earnings per share
- -----------------------------------------------------------------------------------------------
Class A $ 15.69 $ 1.43 $ 3.86
Class B 15.73 1.54 3.91
Combined 15.71 1.50 3.89
- -----------------------------------------------------------------------------------------------
Basic weighted average shares outstanding
- -----------------------------------------------------------------------------------------------
Class A 11,174 18,172 17,621
Class B 15,500 24,635 23,174
Combined 26,674 42,807 40,795
- -----------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding
- -----------------------------------------------------------------------------------------------
Class A 11,182 18,235 18,031
Class B 17,313 25,266 27,042
Combined 28,495 43,501 45,073
See Notes to Consolidated Financial Statements
41
43
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
-------------------------------------------------------------------------------------
DEFERRED
CLASS A CLASS B CLASS A CLASS B ADDITIONAL COMPENSATION
COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON PAID-IN & UNEARNED
INCOME STOCK STOCK STOCK STOCK CAPITAL ESOP SHARES
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1995 $1,010 $0 $175 $ 240 $ 301,931 $(21,637)
Net Income $175,657
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of tax benefit
(expense) of $319 (593)
Change in unrealized
appreciation(depreciation) of
investments, net of tax benefit
(expense) of $182 (338)
--------
Comprehensive Income $174,726
========
Preferred and common cash
dividends declared
Exercise of stock options 4 7 7,503
Issuance of stock:
Benefit plans 9 36,000 (33,815)
Amortization of deferred
compensation 11,960
Termination/tax benefit -- benefit
plans 5,045 2,263
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1996 $1,010 $0 $179 $ 256 $ 350,479 $(41,229)
Net Income $ 71,625
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of ($289) 536
Change in unrealized
appreciation(depreciation) of
investments, net of tax benefit
(expense) of ($251) 466
--------
Comprehensive Income $ 72,627
========
Preferred and common cash
dividends declared
Exercise of stock options 3 6 8,468
Issuance of stock:
Dividend reinvestment 857
Benefit plans 4 14,524 (11,159)
Amortization of deferred
compensation 11,343
Termination/tax benefit -- benefit
plans 5,215 15,692
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $1,010 $0 $182 $ 266 $ 379,543 $(25,353)
Net Income $447,880
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of $109 (202)
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($33) 61
--------
Comprehensive Income $447,739
========
Tender offer (79) (113) (160,861)
Preferred and common cash
dividends declared
Exercise of stock options 1 2 3,102
Issuance of stock:
Dividend reinvestment 89
Benefit plans 13 22,647 (20,605)
Amortization of deferred
compensation 8,193
Termination/tax benefit -- benefit
plans (5) (15,214) 20,551
Stock buyback
ESOP stock purchase (12,569)
ESOP shares committed to be
released (2) 19
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $1,010 $0 $104 $ 163 $ 229,304 $(29,764)
- -------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
INCOME EARNINGS STOCK EQUITY
- ---------------------------------- ----------------------------------------------------
Balance at Dec. 31, 1995 $ (21) $ 391,266 $ 0 $ 672,964
Net Income 175,657 175,657
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of tax benefit
(expense) of $319 (593) (593)
Change in unrealized
appreciation(depreciation) of
investments, net of tax benefit
(expense) of $182 (338) (338)
Comprehensive Income
Preferred and common cash
dividends declared (24,588) (24,588)
Exercise of stock options 7,514
Issuance of stock:
Benefit plans 2,228 4,422
Amortization of deferred
compensation 11,960
Termination/tax benefit -- benefit
plans (2,270) 5,038
- ------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1996 $(952) $ 542,335 $ (42) $ 852,036
Net Income 71,625 71,625
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of ($289) 536 536
Change in unrealized
appreciation(depreciation) of
investments, net of tax benefit
(expense) of ($251) 466 466
Comprehensive Income
Preferred and common cash
dividends declared (28,301) (28,301)
Exercise of stock options 8,477
Issuance of stock:
Dividend reinvestment 857
Benefit plans 1,297 4,666
Amortization of deferred
compensation 11,343
Termination/tax benefit -- benefit
plans (15,662) 5,245
- ---------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $ 50 $ 585,659 $(14,407) $ 926,950
Net Income 447,880 447,880
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of $109 (202) (202)
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($33) 61 61
Comprehensive Income
Tender offer (640,553) (801,606)
Preferred and common cash
dividends declared (10,894) (10,894)
Exercise of stock options 3,105
Issuance of stock:
Dividend reinvestment 89
Benefit plans 2,055
Amortization of deferred
compensation 8,193
Termination/tax benefit -- benefit
plans (3,558) 1,774
Stock buyback (4,549) (4,549)
ESOP stock purchase (12,569)
ESOP shares committed to be
released 17
- -------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $ (91) $ 382,092 $(22,514) $ 560,304
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
42
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 447,880 $ 71,625 $ 175,657
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on transfer of consumer credit card business (541,288) -- --
Noncash expense associated with Fleet Transaction/Tender
Offer and other exited business/products 25,539 -- --
Equity securities losses/(gains) 41,750 11,426 (6,522)
Depreciation and amortization 21,480 35,280 19,335
Provision for credit losses 67,193 210,826 96,862
Proceeds from sale of trading investments 293,413 -- --
Change in subordinated trust assets (114,247) (95,237) (41,863)
Origination of loans held for sale (5,837,505) (4,355,174) (5,849,111)
Principal collected on loans held for sale 67,519 75,050 67,388
Proceeds from sales/securitizations of loans held for
sale 5,757,960 4,303,710 5,385,055
Change in other assets (126,763) 50,871 (289,632)
Change in other liabilities 15,039 47,717 147,276
Change in retained interest-only strip (55,513) (53,603) (46,146)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 62,457 302,491 (341,701)
INVESTING ACTIVITIES
Change in federal funds sold and interest-bearing
deposits (25,675) 4,541 (303,435)
Purchase of investments available for sale (44,610,758) (46,510,251) (30,770,841)
Proceeds from sale of investments available for sale 1,707,418 1,736,050 1,121,679
Proceeds from maturing investments available for sale 43,591,658 44,263,776 29,388,538
Purchase of lease portfolios/Advanta Mortgage loans (38,190) (141,687) (288,753)
Principal collected on Advanta Mortgage loans 53,826 14,881 5,785
Advanta Mortgage loans made to customers (362,000) (47,217) (121,060)
Excess of cash collections over income recognized on
direct financing leases 92,229 31,967 65,653
Equipment purchased for direct financing leases (71,546) (39,356) (273,180)
Change in business card receivables, excluding sales 23,969 (92,956) 77,261
Change in consumer credit card receivables, excluding
sales/transfers (121,845) (571,215) 981,621
Net change in other loans (5,995) (20,143) (11,553)
Purchases of premises and equipment, net (41,795) (79,003) (83,593)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 191,296 (1,450,613) (211,878)
FINANCING ACTIVITIES
Change in demand and savings deposits 70,415 190,493 (11,277)
Proceeds from sales of time deposits 1,762,747 1,934,081 1,481,557
Payments for maturing time deposits (500,447) (967,021) (1,516,823)
Change in repurchase agreements and term federal funds 38,195 (10,000) (433,000)
Proceeds from issuance of subordinated/senior debt 401,583 24,787 41,076
Payments on redemption of subordinated/senior debt (936,215) (97,609) (38,541)
Proceeds from issuance of medium-term notes -- 511,217 720,545
Payments on maturity of medium term notes (233,035) (261,835) (494,400)
Change in notes payable -- (269,612) 837,210
Stock tender offer (801,606) -- --
Stock buyback (4,549) -- --
ESOP stock purchase (12,569) -- --
ESOP debt repayment 17 -- --
Proceeds from issuance of capital securities -- -- 100,000
Proceeds from issuance of stock 5,249 14,000 11,974
Cash dividends paid (10,894) (28,301) (24,581)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (221,109) 1,040,200 673,740
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 32,644 (107,922) 120,161
Cash at beginning of year 57,953 165,875 45,714
- ----------------------------------------------------------------------------------------------------------
Cash at end of year $ 90,597 $ 57,953 $ 165,875
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Advanta Corp. (the "Company"), a Delaware corporation, is a financial services
company that provides consumers and small businesses a variety of products
including mortgages, equipment leases, business credit cards, insurance and
deposit products. The Company services approximately 600,000 customers and
manages receivables of approximately $9.8 billion. The Company also provides a
full range of loan purchasing, contract servicing and securitization services to
the mortgage industry. The Company operates through wholly-owned subsidiaries.
Advanta Mortgage ("AMC") originates mortgage loans secured by first or junior
liens. Advanta Business Services Corp. ("ABS") provides small ticket equipment
leases and markets credit cards to businesses. The Company's insurance
subsidiaries make available, through unaffiliated insurance carriers, specialty
credit-related insurance products and services to the Company's existing
customer base. Managed receivables for AMC and ABS totaled approximately $8.3
billion and $1.5 billion, respectively, at December 31, 1998. AMC's mortgage
loans are originated by the Company's indirect wholly-owned subsidiary Advanta
National Bank ("ANB") and other channels. ABS leases and business cards are
originated by the Company's wholly-owned subsidiary Advanta Bank Corp ("ABC").
Prior to February 20, 1998, the Company issued consumer credit cards primarily
through ANB. On February 20, 1998 the Company completed a transaction (the
"Fleet Transaction") with Fleet Financial Group, Inc. ("Fleet") to contribute
substantially all of it's consumer credit card receivables, subject to
liabilities, to Fleet Credit Card LLC (the "LLC"), a limited liability company
controlled by Fleet (see Note 2). Subsequent to February 20, 1998, Fleet Credit
Card Services LP became the successor in interest to the LLC. References to the
LLC include its successor in interest Fleet Credit Card Services LP.
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.
BASIS OF PRESENTATION
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Estimates are used when accounting for gain on sale of receivables and the
retained interest-only strips, contractual mortgage servicing rights, the fair
value of certain financial instruments, the allowance for credit losses, and
income taxes, among others. Actual results could differ from those estimates.
The Company has reformatted its consolidated financial statements and,
accordingly, certain prior period amounts have been reclassified to conform with
this presentation.
SECURITIZATION ACTIVITIES
The Company, through its subsidiaries, sells mortgage loans, business loans and
leases through securitizations, typically with servicing retained. Prior to the
Fleet Transaction, the Company also securitized consumer credit card receivables
through its subsidiaries.
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"), effective January 1, 1997. The transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received
44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in exchange. SFAS 125 requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be initially
measured at fair value, if practicable. It also requires that servicing assets
and other retained interests in the transferred assets be measured by allocating
the previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer. The adoption of SFAS 125 did not have a material effect on the
Company's financial statements.
The Company allocates the previous carrying amount of the receivables
securitized between the assets sold and the retained interests, including the
servicing relationship, interests in the receivables, and an interest-only strip
net of any recourse obligation, based on their relative estimated fair values at
the date of sale. A gain is recognized at the time of the sale, equal to the
excess of the fair value of the assets obtained (principally cash) over the
allocated cost of the assets sold and transaction costs. The retained
interest-only strip represents the fair value of the remaining interest to be
collected from the borrowers on the underlying loans after the payment of
pass-through interest to the certificate holders and the payment of a servicing
fee to the Company in its role as servicer reduced by the estimated fair value
of the Company's recourse obligation for anticipated charge-offs.
During the "revolving period" of each credit card securitization trust,
securitization income is recorded representing gains on the sale of new
receivables to the trusts on a continuous basis to replenish the investors'
interest in trust receivables that have been repaid by the credit cardholders.
RETAINED INTEREST-ONLY STRIP
SFAS 125 requires that any retained interest-only strips be measured in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The Company accounts for the retained interest-only strips from
mortgage securitizations as trading securities. These assets are recorded at
estimated fair value and the resulting unrealized gain or loss from the
valuation of the receivable is included in the results of operations for the
period. The Company accounts for the retained interest-only strips related to
leasing and business card securitizations as available for sale securities. At
December 31, 1998 and 1997, unrealized gains and losses on the retained
interest-only strips related to leasing and business card securitizations were
not material.
The Company estimates the fair value of retained interest-only strips based
on a discounted cash flow analysis. The cash flows are estimated as the excess
of the weighted average yield on each pool of the receivables sold over the sum
of the pass-through interest rate plus the servicing fee, a trustee fee, credit
enhancement costs and an estimate of future credit losses over the life of the
receivables. Cash flows are discounted from the date the cash is expected to
become available to the Company (the "cash-out" method). These cash flows are
projected over the life of the loans and leases using prepayment, default, and
interest rate assumptions that management believes would be used by market
participants for similar financial instruments subject to prepayment, credit and
interest rate risk. The cash flows are discounted using an interest rate that
management believes a purchaser unrelated to the seller of such a financial
instrument would demand. See Note 23 for discussion of assumptions used in the
estimate of fair value at December 31, 1998 and 1997. As all estimates used 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. Interest income is recognized over the life of the
retained interest-only strip using the discount rate used for the initial
valuation.
CONTRACTUAL MORTGAGE SERVICING RIGHTS
The Company allocates cost to the right to service mortgage loans at the
time of sale or securitization of receivables, based on the fair value of the
servicing rights. Management has estimated the fair value of contractual
mortgage servicing rights based on a discounted cash flow analysis. The cash
flows are estimated as the excess of the benefits of servicing, principally
revenues from contractually specified servicing fees, late charges, and other
ancillary sources, over adequate compensation. SFAS 125 defines adequate
compensation
45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as the amount of benefits of servicing that would fairly compensate a substitute
servicer should one be required, which includes the profit that would be
demanded in the marketplace. Contractual mortgage servicing rights are amortized
in proportion to, and over the period of, estimated net future servicing fee
income.
Servicing assets associated with lease, business card and consumer credit
card securitization transactions are not material as the benefits of servicing
are not expected to be more or less than adequate compensation to the Company
for performing the servicing.
The Company periodically evaluates the potential impairment of contractual
mortgage servicing rights. The Company stratifies these rights based on two of
the predominant risk characteristics of the underlying loans, the year of
origination and the type of loan (i.e., fixed or adjustable rate loan).
Impairment is recognized through a valuation allowance for each individual
stratum. The amount of impairment recognized is the amount by which the
contractual mortgage servicing rights for a stratum exceed their estimated fair
value. See Note 23 for discussion of assumptions used in the estimate of fair
value at December 31, 1998 and 1997.
SUBORDINATED TRUST ASSETS
These amounts represent other retained interests in Advanta Mortgage's
securitizations. Ownership of these interests is represented by subordinate
certificates issued by the securitization trust. These certificates serve as a
form of credit enhancement for the transactions, and excess losses on the
collateral would be absorbed by these amounts. The Company classifies and
measures these amounts in accordance with SFAS 115 as trading securities. At
December 31, 1998 and 1997, unrealized gains and losses on the subordinated
trust assets were not material.
LOAN AND LEASE RECEIVABLES HELD FOR SALE
Loan and lease receivables held for sale represent receivables currently on the
balance sheet that the Company intends to sell or securitize within the next six
months. These assets are reported at the lower of aggregate cost or fair market
value by loan type.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses for lending and leasing transactions is
established to reflect losses that have already occurred through provisions for
loan and lease losses. In estimating the allowance, 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.
The Company charges off against the allowance for credit losses confirmed
losses on all nonperforming Advanta Mortgage loans at the earlier of foreclosure
or when they have become twelve months delinquent. Lease receivables are
generally written off when 120 days contractually delinquent.
The Company's charge-off policy, as it relates to business and consumer
credit card accounts, is to charge-off a receivable, if not paid, at 180 and 186
days contractually delinquent, respectively. Accounts suspected of being
fraudulent are written off after a 90 day investigation period, unless the
investigation shows no evidence of fraud.
In the third quarter of 1996, the Company adopted a new charge-off
methodology related to bankrupt consumer credit card accounts, providing for up
to a 90-day investigative period following notification of the bankruptcy
petition, prior to charge-off. This methodology is consistent with others in the
credit card industry.
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ORIGINATION COSTS AND FEES
The Company accounts for origination costs following 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. 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 generally charges origination fees ("points") for mortgage
loans. Origination fees, net of direct origination costs, are deferred and
amortized over the contractual life of the loan as an adjustment to yield
(interest income). However, upon the sale or securitization of the loans, the
unamortized portion of such net fees is included in the computation of the gain
on sale.
The Company engages third parties to solicit and originate credit card
account relationships. The Company amortizes deferred credit card origination
costs on a straight-line basis over one year following the consensus reached at
the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board in EITF Issue 93-1. Costs incurred for
originations that were initiated prior to the EITF Issue 93-1 consensus were
amortized over a 60-month period.
INVESTMENTS
Trading investments are securities that are bought and held principally for the
purpose of selling them in the near term. Trading investments are reported at
fair value, with unrealized gains and losses included in earnings. Investments
available for sale include securities that 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 in
accordance with SFAS 115. Under SFAS 115, unrealized gains and losses on these
securities are reported in other comprehensive income, net of income taxes.
Investments of the Company's venture capital unit, Advanta Partner's LP,
are included in investments available for sale and carried at estimated fair
value following the specialized industry accounting principles of this unit.
Management makes such fair value determinations based on quoted market prices,
when available, and considering the investees' financial results, conditions and
prospects when market prices are not available. Following venture capital
accounting principles, the equity method of accounting for investments is not
applied.
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 the fair value of net assets acquired, is amortized on a
straight-line basis for periods of up to 25 years.
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 risk management strategy to reduce interest
rate risk and, where appropriate, to synthetically lower its cost of funds.
Derivatives are classified as hedges or synthetic alterations of specific
on-balance sheet items, off-balance sheet items or anticipated transactions. In
order for derivatives to qualify for hedge accounting treatment the following
conditions must be met: 1) the underlying item being hedged must expose the
Company to interest rate risk;
47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2) the derivative used serves to reduce the Company's sensitivity to interest
rate risk; and 3) the derivative used is designated and deemed effective in
hedging the Company's exposure to interest rate risk. In addition to meeting
these conditions, anticipatory hedges must demonstrate that the anticipated
transaction being hedged is probable to occur and the expected terms of the
transaction are identifiable.
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 are ultimately recognized in
income as part of those carrying amounts. 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.
For derivatives designated as hedges of assets where changes in fair value
are recognized currently in earnings, the related derivative is included in the
balance sheet at fair value, and changes in the fair value of the derivative are
also recognized currently in earnings.
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in operating results. During 1998, 1997 and 1996, all of the Company's
derivatives qualified as hedges or synthetic alterations.
INTEREST INCOME
The Company recognizes interest income using a method which approximates the
level yield method. The accrual of interest is discontinued when the related
receivable becomes 90 days past due. Interest income is subsequently recognized
only to the extent cash payments are received.
INSURANCE
Insurance premiums are earned ratably over the period of insurance coverage
provided. Reinsurance premiums, net of commissions, on credit life, disability
and unemployment policies on credit cards, are earned monthly based upon the
outstanding balance of the underlying receivables. 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.
STOCK-BASED COMPENSATION
The Company has elected to account for stock-based compensation following
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") as permitted by SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). The Company has adopted the disclosure-only
provisions of SFAS 123.
INCOME TAXES
The Company accounts for income taxes following the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 prescribes the liability method and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities and the provisions
of the enacted tax laws.
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JOINT VENTURE
In 1995, the Company formed a joint venture with The Royal Bank of Scotland, RBS
Advanta, to market, issue and service bankcards in the United Kingdom. As of
December 31, 1997, the Company owned 49% of the RBS Advanta joint venture, the
investment in which was accounted for under the equity method. During 1998, in
connection with the transaction described in Note 2, the Company contributed its
interest in the RBS Advanta joint venture to the LLC. Cumulative translation
adjustments included in accumulated other comprehensive income were $0 and $202
thousand at December 31, 1998 and 1997, respectively.
EARNINGS PER SHARE
Earnings per share are calculated following the provisions of SFAS No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation and
disclosure of Basic Earnings Per Share and Diluted Earnings Per Share. Basic
Earnings Per Share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Income available to common stockholders is computed by deducting
Class A and Class B preferred stock dividends from net income. Diluted Earnings
Per Share is computed by dividing income available to common stockholders,
increased by dividends on dilutive Class B preferred stock for the period,
divided by the sum of average common shares outstanding plus dilutive common
shares for the period. Potentially dilutive common shares include stock options,
restricted stock issued under incentive plans and Class B preferred stock. Since
the cash dividends declared on the Company's Class B Common Stock were higher
than the dividends declared on the Class A Common Stock, Basic and Dilutive
Earnings Per Share have been calculated using the "two-class" method. The
two-class method is an earnings allocation formula that determines earnings per
share for each class of common stock according to dividends declared and
participation rights in undistributed earnings. The Company has also presented
"Combined Earnings Per Share," which represents a weighted average of Class A
and Class B Earnings Per Share.
CASH FLOW REPORTING
For purposes of reporting cash flows, cash includes cash on hand and amounts due
from banks. Cash paid during 1998, 1997 and 1996 for interest was $218.3
million, $304.0 million and $241.1 million, respectively. Cash paid or (refunds
received) for taxes during these periods was $28.2 million, $(6.1) million and
$45.1 million, respectively. See Note 2 for discussion of noncash transfer of
assets and liabilities in the Fleet Transaction. Noncash transactions in 1998
also include the retention of $795 million of trust certificates at the time of
receivable securitization. These securities are classified as trading
investments.
RECENT ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" in March 1998. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998 and specifies that direct costs incurred
when developing computer software for internal use should be capitalized once
certain capitalization criteria are met. The Company will adopt this SOP during
the first quarter of 1999. The adoption of SOP 98-1 is not expected to have a
material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB")issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. The Company
will adopt SFAS No. 133 effective January 1, 2000.
49
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company anticipates that the adoption of SFAS No. 133 will not have a
material effect on the results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 also conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
Prior to the issuance of SFAS No. 134, the Company was required to account for
resulting mortgage-backed securities or other retained interests as trading
securities. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998. The Company will adopt SFAS No. 134 during the first
quarter of 1999. The adoption of SFAS No. 134 is not expected to have a material
effect on the Company's financial statements.
NOTE 2. DISPOSITION OF CONSUMER CREDIT CARD ASSETS
In accordance with the terms of the Contribution Agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between the Company and Fleet,
the Company and certain of its subsidiaries and Fleet and certain of its
subsidiaries each contributed certain assets and liabilities of their respective
consumer credit card businesses to the LLC in exchange for an ownership interest
in the LLC. As of the consummation of the Fleet Transaction on February 20,
1998, the Company's ownership interest in the LLC was 4.99%, which is accounted
for on the cost basis. The Company recognized a gain on the transfer of the
consumer credit card business representing the excess of liabilities transferred
to the LLC over the net basis of the assets transferred. The gain also included
the Company's ownership interest in the LLC. The gain on the transfer is not
subject to income tax and no tax provision has been recorded. The Contribution
Agreement provides for the parties to make a final determination of the
transferred assets and liabilities. As further described in Note 10, the
Contribution Agreement contains provisions with respect to dispute resolution in
the event the parties do not agree on the final determination of the transferred
assets and liabilities. It is possible the parties will not agree, and that the
dispute resolution process will result in an increase or decrease to the gain
recorded. The Company retained certain immaterial assets of its consumer credit
card business which are not required in the operation of such business and
certain liabilities related to its consumer credit card business. These retained
assets and liabilities include among others, all reserves relating to its credit
insurance business and any liability or obligation relating to certain consumer
credit card accounts generated in specific programs which comprised a very small
portion of the Company's consumer credit card receivables as of February 20,
1998. The assets and liabilities retained have been classified in other assets
and other liabilities.
The contribution was accounted for as: (i) the transfer of financial assets
(cash, loans, and other receivables) and an extinguishment of financial
liabilities (deposits, debt and other borrowings and other liabilities) under
SFAS 125; and (ii) the sale of non-financial assets and liabilities (principally
property and equipment, prepaid assets, deferred costs and certain contractual
obligations). The financial assets, non financial assets and liabilities of the
Company's consumer credit card business that were contributed were removed from
the balance sheet. The Company was legally released as primary obligor under all
of the financial liabilities contributed and, accordingly, they were removed
from the balance sheet.
Concurrently with the Fleet Transaction the Company purchased 7,882,750
shares of its Class A Common Stock, 12,482,850 of its Class B Common Stock, each
at $40 per share net, and 1,078,930 of its depositary shares each representing
one one-hundredth interest in a share of 6 3/4% Convertible Class B Preferred
Stock, Series 1995 (Stock Appreciated Income Linked Securities (SAILS)) at
$32.80 per share net, through an issuer tender offer (the "Tender Offer") which
was completed on February 20, 1998. The
50
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Office of the Comptroller of the Currency (the "OCC") approved the payment of a
special dividend/return of capital from ANB to Advanta Corp., its parent
company, to effect the purchase of the shares.
NOTE 3. SECURITIZATION ACTIVITIES
At December 31, 1998 and 1997, there were $7.4 billion and $4.8 billion,
respectively, of securitized Advanta Mortgage loan receivables outstanding which
are subject to certain recourse obligations. The Company had estimated
liabilities of $149.0 million and $120.0 million at year end 1998 and 1997,
respectively, related to these recourse obligations which are netted against the
retained interest-only strips. At December 31, 1998, the Company had amounts
receivable from Advanta Mortgage loan sales and securitizations, net of recourse
obligations, of $761.1 million, $309.8 million of which was subject to liens. At
December 31, 1997, the amounts receivable and amounts subject to lien were
$402.6 million and $146.8 million, respectively. These amounts are included in
restricted interest-bearing deposits, subordinated trust assets, retained
interest-only strip and other assets.
At December 31, 1998 and 1997, there were $1.2 billion and $965 million,
respectively, of securitized business cards and leases outstanding which are
subject to certain recourse obligations. There were liabilities of $41.3 million
and $34.0 million at year end 1998 and 1997, respectively, related to these
recourse obligations. These liabilities are netted against the retained
interest-only strips from business card and lease securitizations. The Company
had amounts receivable from business card and lease securitizations of $11.7
million at year-end 1998, all of which was subject to liens, and $6.3 million at
year-end 1997, none of which was subject to liens. These amounts are included in
restricted-interest bearing deposits and other assets. Total interest in
equipment residuals for lease assets sold was $49.3 million and $42.7 million at
December 31, 1998 and 1997, respectively, also subject to recourse obligations.
Interests in equipment residuals are included in loan and lease receivables.
At December 31, 1998, there were no securitized consumer credit cards
outstanding, due to the contribution of consumer credit card assets in
connection with the Fleet Transaction described in Note 2. There were
securitized consumer credit card receivables outstanding of $8.7 billion at
December 31, 1997. In each securitization transaction, consumer credit card
receivables were transferred to a trust that issued certificates representing
ownership interests in the trust primarily to institutional investors. The
Company retained a participation interest in the trusts, 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 consumer credit card trusts were $1.6 billion at December 31,
1997. The Company was subject to certain recourse obligations in connection with
these securitizations. At December 31, 1997, the Company had liabilities of
$338.3 million related to these recourse obligations. These liabilities are
netted against the amounts due from consumer credit card securitizations.
At December 31, 1997, there were amounts receivable from consumer credit
card securitizations, including related interest-bearing deposits, of $647.2
million, $438.8 million of which was subject to liens by the providers of the
credit enhancement facilities for the individual securitizations and inclusive
of amounts awaiting distributions to investors.
51
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents activity in subordinated trust assets related
to Advanta Mortgage loan securitizations:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
Beginning balance $170,281 $ 75,044
Initial collateral deposits 52,889 51,649
Subordinated trust assets acquired with excess cash flows 96,455 48,086
Interest earned 10,270 6,386
Less: Excess cash flows released to the Company (45,367) (10,884)
- --------------------------------------------------------------------------------------
Ending Balance $284,528 $170,281
- --------------------------------------------------------------------------------------
The following table presents activity in the retained interest-only (IO)
strip and contractual mortgage servicing rights ("CMSR") asset related to
Advanta Mortgage loan securitizations:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
Beginning balance IO Strip $191,868 $133,805
Beginning balance CMSR $ 24,546 $ 11,153
IO activity
Retained IO on sales, net 206,753 160,903
Interest income 21,674 17,656
Cash received and used to acquire subordinated trust
assets (96,455) (48,086)
Cash released to the Company (25,479) (30,039)
Fair value adjustments (50,980) (42,371)
CMSR activity
Servicing rights acquired 45,803 17,461
Amortization (12,977) (4,068)
Valuation allowance provision (8,275) 0
Ending Balance IO Strip $247,381 $191,868
Ending Balance CMSR $ 49,097 $ 24,546
- --------------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company had a valuation allowance on
contractual mortgage servicing rights of $8,275 and $0, respectively. During
1998, there were no direct write-downs or other reductions to the valuation
allowance.
52
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LOAN AND LEASE RECEIVABLES
Loan and lease receivables on the balance sheet, including those held for sale,
consisted of the following:
DECEMBER 31,
------------------------
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
Advanta Mortgage loans(A) $ 837,744 $ 478,433
Leases and business cards(B) 304,185 298,789
Consumer credit cards(C) 0 2,579,890
Other loans 17,862 40,978
- --------------------------------------------------------------------------------------
Gross loan and lease receivables 1,159,791 3,398,090
- --------------------------------------------------------------------------------------
Add: Deferred origination costs, net of deferred fees 12,579 116,229
Less: Allowance for credit losses:
Advanta Mortgage loans (20,092) (5,822)
Leases and business cards (9,611) (9,798)
Consumer credit cards 0 (118,420)
Other loans (3,734) (3,733)
- --------------------------------------------------------------------------------------
Total allowance (33,437) (137,773)
- --------------------------------------------------------------------------------------
Net loan and lease receivables $1,138,933 $3,376,546
- --------------------------------------------------------------------------------------
(A) Includes Advanta Mortgage loan receivables held for sale of $459.5 million
and $394.1 million in 1998 and 1997, respectively, and is net of unearned
income of $4.2 million and $3.1 million in 1998 and 1997, respectively.
(B) Includes leases and business cards held for sale of $68.1 million and $43.8
million in 1998 and 1997, respectively, and is net of unearned income of
$19.4 million and $20.7 million in 1998 and 1997, respectively. Also
includes residual interest for both years.
(C) Includes consumer credit card receivables held for sale of $1.0 billion in
1997.
Receivables sold and now serviced for others consist of the following:
DECEMBER 31,
-------------------------
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
Advanta Mortgage loans $7,447,502 $ 4,830,403
Business cards 664,712 522,688
Leases 516,077 442,312
Consumer credit cards 0 8,664,711
- ---------------------------------------------------------------------------------------
Total $8,628,291 $14,460,114
- ---------------------------------------------------------------------------------------
"Advanta Mortgage loans" include home equity and auto loans and exclude
loans which were never owned by the Company, but which the Company services for
a fee ("contract servicing" or "subservicing"). Contract servicing receivables
were $8.3 and $9.2 billion at December 31, 1998 and 1997, respectively.
53
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic concentration of managed (owned and serviced) receivables
was as follows:
DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
California $1,246,394 12.7% $ 2,545,282 14.3%
Michigan 816,971 8.4 797,043 4.5
Florida 541,501 5.5 1,037,763 5.8
Pennsylvania 517,369 5.3 789,526 4.4
New York 510,187 5.2 1,349,654 7.6
All other 6,155,660 62.9 11,338,936 63.4
- -----------------------------------------------------------------------------------------------
Total managed receivables $9,788,082 100.0% $17,858,204 100.0%
- -----------------------------------------------------------------------------------------------
In the normal course of business, the Company makes commitments to extend
credit to its credit card and home equity line of credit customers. Commitments
to extend credit are agreements to lend to a customer subject to certain
conditions established in the contract. The Company does not require collateral
to support credit card commitments. At December 31, 1998 and 1997, the Company
had $3.3 billion and $54.2 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, 1998 and 1997, outstanding managed
credit card and home-equity lines of credit receivables represented 35% and 22%,
respectively, of outstanding commitments on revolving customer relationships.
In June 1996, the Company, through its subsidiary ANB, sold certain
consumer credit card customer relationships and the related receivable balances
to a domestic bank. The receivables associated with these relationships
represented less than 2% of the Company's managed consumer credit card portfolio
as of June 30, 1996. The Company recorded a $33.8 million net gain related to
this transaction in 1996.
54
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. ALLOWANCE FOR CREDIT LOSSES
The following table displays five years of allowance history:
ALLOWANCE FOR CREDIT LOSSES YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Balance at January 1 $ 137,773 $ 89,184 $ 53,494 $ 41,617 $ 31,227
Provision for credit losses 67,193 210,826 96,862 53,326 34,198
Transfer from recourse reserves 0 0 3,000 1,100 11,485
Allowances on receivables
(sold)/purchased (118,420) (11,015) 6,404 0 0
Gross charge-offs:
Advanta Mortgage loans (14,313) (6,825) (3,473) (6,038) (11,731)
Leases and business cards (16,118) (9,583) (3,444) (1,413) (1,053)
Consumer credit cards (30,999) (155,528) (73,466) (41,779) (28,646)
Other loans -- (4) (13) (38) (44)
- ----------------------------------------------------------------------------------------------
Total gross charge-offs (61,430) (171,940) (80,396) (49,268) (41,474)
Recoveries:
Advanta Mortgage loans 3,007 991 414 76 42
Leases and business cards 2,594 1,215 442 274 139
Consumer credit cards 2,719 18,511 8,945 6,354 5,958
Other loans 1 1 19 15 42
- ----------------------------------------------------------------------------------------------
Total recoveries 8,321 20,718 9,820 6,719 6,181
- ----------------------------------------------------------------------------------------------
Net charge-offs (53,109) (151,222) (70,576) (42,549) (35,293)
Balance at December 31 $ 33,437 $ 137,773 $ 89,184 $ 53,494 $ 41,617
- ----------------------------------------------------------------------------------------------
NOTE 6. INVESTMENTS
Trading investments at December 31, 1998 consisted of AAA rated classes of
Advanta Mortgage Loan Trust 1998-2 and Advanta Mortgage Loan Trust 1998-4
securities. There were no trading investments held during 1997. Net unrealized
gains on trading investments of $1,471 in 1998 were included in other revenues.
Investments available for sale consisted of the following:
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- -------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury & other
U.S. Government
Securities $435,953 $178 $ (33) $436,098 $1,083,848 $ 82 $(184) $1,083,746
State and municipal
securities 4,636 182 0 4,818 5,195 123 0 5,318
Collateralized
mortgage obligations 12,278 0 (18) 12,260 15,639 0 (151) 15,488
Mortgage-backed
securities 4,265 0 (203) 4,062 47,387 150 0 47,537
Equity securities(1) 61,006 0 (250) 60,756 69,092 0 (250) 68,842
Other 3,411 5 0 3,416 1,344 0 (3) 1,341
- -------------------------------------------------------------------------------------------------------------------------
Total investments
available for sale $521,549 $365 $(504) $521,410 $1,222,505 $355 $(588) $1,222,272
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------
1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------- ----------------------------------------------
U.S. Treasury & other
U.S. Government
Securities $645,113 $ 21 $ (677) $644,457
State and municipal
securities 3,640 38 0 3,678
Collateralized
mortgage obligations 7,624 9 (108) 7,525
Mortgage-backed
securities 41,493 45 (464) 41,074
Equity securities(1) 69,830 440 (250) 70,020
Other 925 0 (4) 921
- -------------------------------------------------------------------------------------------------------------------------
Total investments
available for sale $768,625 $553 $(1,503) $767,675
- -------------------------------------------------------------------------------------------------------------------------
(1) Includes investments of the venture capital unit, Advanta Partners LP. The
amount shown as amortized cost represents carrying value for these
investments. See Note 1.
55
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1997, $139 and $233, respectively, of net
unrealized losses on securities were included in investments available for sale.
During 1998 and 1997, the net change in unrealized losses on available for sale
securities, net of tax, included in comprehensive income were unrealized gains
of $61 and $466, respectively. Unrealized losses on available for sale
securities, net of tax, of $91 and $152 were included in accumulated other
comprehensive income at December 31, 1998 and 1997, respectively.
Maturities of investments available for sale at December 31, 1998 were as
follows:
AMORTIZED MARKET
COST VALUE
- -----------------------------------------------------------------------------------
Due in 1 year $383,188 $383,396
Due after 1 but within 5 years 54,645 54,623
Due after 5 but within 10 years 2,070 2,183
Due after 10 years 686 714
- -----------------------------------------------------------------------------------
Subtotal 440,589 440,916
Mortgage-backed securities 4,265 4,062
Collateralized mortgage obligations 12,278 12,260
Equity and other securities 64,417 64,172
- -----------------------------------------------------------------------------------
Total investments available for sale $521,549 $521,410
- -----------------------------------------------------------------------------------
During 1998, proceeds from sales of available for sale securities were
$1,707,418. Gross gains of $7,457 and losses of $176 were realized on these
sales. Of the gross gains and losses, $5,791 of gains and $461 of losses relate
to realized gains/losses from sales of investments held by Advanta Partners LP.
Proceeds during 1997 were $1,736,050. Gross gains of $3,867 and losses of $181
were realized on these sales. Of the gross gains, $3,471 relate to realized
gains from sales of investments held by Advanta Partners LP. Proceeds during
1996 were $1,121,679. Gross gains of $2,492 and losses of $110 were realized on
these sales. Of the gross gains, $2,448 relate to realized gains from sales of
investments held by Advanta Partners LP. The specific identification method was
the basis used to determine the amortized cost in computing realized gains and
losses.
At December 31, 1998 and 1997, investment securities with a book value of
$5,778 and $5,370, 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, 1997, investment securities with
a book value of $2,016 were pledged at the Federal Reserve Bank. There were no
investment securities pledged at the Federal Reserve Bank at December 31, 1998.
NOTE 7. SELECTED BALANCE SHEET INFORMATION
Restricted interest-bearing deposits at December 31, 1997 included $438,838 of
amounts due from consumer credit card trusts, which represented initial deposits
and subsequent excess collections up to the required amount on consumer credit
card securitizations, and included amounts to be distributed to investors.
56
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other assets consisted of the following:
DECEMBER 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
Prepaid expenses $110,344 $131,305
Contractual mortgage servicing rights 49,097 24,546
Current and deferred federal income taxes, net (see Note 19) 31,243 0
Goodwill 3,600 5,134
Other real estate(A) 6,622 689
Amounts due from consumer credit card securitizations(B) 0 222,330
Other 378,608 431,254
- ----------------------------------------------------------------------------------
Total other assets $579,514 $815,258
- ----------------------------------------------------------------------------------
(A) Carried at the lower of cost or fair market value less selling costs.
(B) Includes retained interest-only strips, net of recourse liabilities, accrued
interest receivable and other amounts related to these securitizations.
Other liabilities consisted of the following:
DECEMBER 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 66,852 $ 91,821
Current and deferred income taxes 2,445 40,461
Other 249,911 208,343
- ----------------------------------------------------------------------------------
Total other liabilities $319,208 $340,625
- ----------------------------------------------------------------------------------
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of over one
year. The composition of long-term debt at December 31, 1998 and 1997, was as
follows:
DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
SENIOR DEBT
12 month senior notes (6.86%-8.39%) $ 48,948 $ 51,537
18 month senior notes (6.58%-8.48%) 6,565 6,795
24 month senior notes (6.16%-8.85%) 32,360 33,517
30 month senior notes (6.30%-8.85%) 13,609 14,441
48 month senior notes (5.97%-8.44%) 8,454 8,061
60 month senior notes (5.83%-9.53%) 20,779 21,999
Value notes, fixed (6.85%-7.85%) 9,300 30,755
Medium-term notes, fixed (6.41%-8.36%) 703,460 861,462
Medium-term notes, floating 163,000 238,000
Short-term bank notes, fixed (5.98%) 0 99,986
Short-term bank notes, floating 0 141,974
Medium-term bank notes, fixed (6.45%-7.12%) 7,338 408,651
Medium-term bank notes, floating 0 260,837
Other senior notes (4.50%-11.34%) 14,844 14,625
- --------------------------------------------------------------------------------------
Total senior debt 1,028,657 2,192,640
SUBORDINATED DEBT
Subordinated notes (5.83%-11.34%) 1,490 5,754
7% subordinated bank notes due 2003 0 49,778
- --------------------------------------------------------------------------------------
Total subordinated debt 1,490 55,532
- --------------------------------------------------------------------------------------
Total long-term debt $1,030,147 $2,248,172
- --------------------------------------------------------------------------------------
The Company's senior floating rate notes were priced based on a spread over
LIBOR. At December 31, 1998, the rates on these notes varied from 5.52% to
6.16%. At December 31, 1998 and 1997, the Company used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR based
variable rate (see Note 24).
The annual maturities of long-term debt at December 31, 1998 for the years
ending December 31 are as follows: $377.4 million in 1999; $275.3 million in
2000; $296.3 million in 2001; $75.5 million in 2002; $4.3 million in 2003; and
$1.4 million thereafter. The average interest cost of the Company's debt during
1998, 1997 and 1996 was 6.53%, 6.42%, and 6.39%, respectively.
NOTE 9. OTHER BORROWINGS
The composition of other borrowings was as follows:
DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Warehouse facility $18,517 $ 3,857
Other borrowings 17,784 48,917
- --------------------------------------------------------------------------------
Total $36,301 $52,774
- --------------------------------------------------------------------------------
58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has secured warehouse financing facilities for mortgage
products totaling $1.5 billion at December 31, 1998. Of the total, $1.1 billion
was committed. The Company pays a monthly facility fee on the unused commitments
of up to 35 basis points. These facilities provide for on-balance sheet and
off-balance sheet funding. At December 31, 1998, the Company had $963.9 million
available under these facilities as there was $536.1 million of mortgage loans
funded through these facilities, $18.5 million of which were accounted for as
secured borrowings. These facilities are generally renewable annually. The
Company chose to reduce one of these facilities by $196 million in the first
quarter of 1999, the remaining $304 million of which expires in the second
quarter of 1999. Upon the expiration of these facilities, management expects to
obtain the appropriate levels of replacement funding under similar terms and
conditions. At December 31, 1997, the Company had an on-balance sheet secured
warehouse financing facility of $500 million, of which $3.9 million was
outstanding.
Through February 20, 1998, the Company had a revolving credit facility of
$1.0 billion. There was a quarterly facility fee of up to 35 basis points on the
total amount of the revolving credit facility. There were no borrowings
outstanding under this facility at December 31, 1997. Following the closing of
the Fleet Transaction on February 20, 1998 as described in Note 2, the Company
terminated this facility.
The Company is subject to loan covenants related to the maintenance of
certain equity levels at the borrowing subsidiaries, limitations on mergers and
acquisitions, limitations on transactions with affiliates, and maintenance of
adequate investment base and interest rate protection agreements. Management
believes that at December 31, 1998, the Company was in compliance with all such
loan covenants.
The following table displays information related to selected types of
short-term borrowings:
1998 1997 1996
- --------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------
At year end:
Term fed funds $ 0 0% $ 0 0% $ 10,000 5.42%
- --------------------------------------------------------------------------------------------------
Average for the year:
Securities sold under Repurchase
agreements $ 69,916 6.05% $ 9,796 5.66% $ 149,791 5.31%
Term fed funds and fed Funds purchased 272 5.61 11,925 5.71 100,793 5.71
- --------------------------------------------------------------------------------------------------
Total $ 70,188 6.05% $ 21,721 5.69% $ 250,584 5.47%
- --------------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under Repurchase
agreements $259,643 $149,130 $1,027,695
Term fed funds and fed Funds purchased 1,700 65,000 263,000
- --------------------------------------------------------------------------------------------------
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 10. COMMITMENTS AND CONTINGENCIES
On June 30, 1997, purported shareholders of the Company who are represented by a
group of law firms filed a putative class action complaint against the Company
and several of its current and former officers and directors in the United
States District Court for the Eastern District of Pennsylvania. A second,
similar complaint was filed in the same court a few days later by a different
group of law firms. Both complaints allege that the Company made
misrepresentations in certain of its public filings and statements in violation
of the Securities Exchange Act of 1934. The complaints seek damages of an
unspecified amount. On July 10, 1998, the complaints, which had previously been
consolidated, were dismissed by the Court for failing to state a claim. The
plaintiffs determined not to attempt to amend their complaints. Rather, they
have appealed the District Court's decision to the United States Courts of
Appeals for the Third Circuit. The appeal has been fully briefed and is awaiting
decision. The Company believes that the District Court's ruling will be affirmed
59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and that the allegations in the complaints are without merit. In the opinion of
management, the ultimate resolution of these complaints is not expected to have
a material adverse effect on the financial position or future operating results
of the Company.
Between August 25, 1997 and September 10, 1998, the Company and certain of
its subsidiaries were named as defendants in lawsuits by certain consumer credit
cardholders claiming to represent consumer credit cardholders in a specific
program. The class action complaints alleged that consumer credit cardholder
accounts in a specific program were improperly repriced to a higher percentage
rate of interest. The complaints asserted various violations of federal and
state law with regard to such repricings, and each sought damages of an
unspecified amount. On June 3, 1998, the Judicial Panel on multidistrict
litigation ordered that all of the federal court actions be consolidated into
one proceeding for pretrial purposes in the United States District Court for the
Eastern District of Pennsylvania. On November 5, 1998, the Company and counsel
for plaintiffs in two of the actions pending in the Superior Court of the State
of Delaware and in the consolidated litigation in the United States District
Court for the Eastern District of Pennsylvania entered into a Settlement
Agreement and Stipulation in the Delaware State Court to settle the claims
relating to the specific program referred to above. Pursuant to the Settlement
Agreement and Stipulation, which was approved by the Court on December 30, 1998,
the Company paid $7.25 million to the plaintiffs. With the exception of the
claims of persons who opted out of the settlement and certain class members who
are debtors in bankruptcy cases, all the claims in the other lawsuits related to
the specific program referred to above have been released.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit
against the Company and certain of its subsidiaries in Delaware Chancery Court.
Fleet's allegations, which the Company denies, center around Fleet's assertions
that the Company has failed to complete certain post-closing adjustments to the
value of the assets and liabilities the Company contributed to the LLC in
connection with the Fleet Transaction. Fleet seeks damages of approximately $141
million. The Company has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that the Company contributed
$1.8 million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities the Company has already assumed. The Company
also has filed a countersuit against Fleet for approximately $101 million in
damages the Company believes have been caused by certain actions of Fleet
following closing of the Fleet Transaction. Management expects that the ultimate
resolution of this litigation will not have a material adverse effect on the
financial position or future operating results of the Company.
The Company and its subsidiaries are involved in other legal proceedings,
claims and litigation, including those arising in the ordinary course of
business. Management believes that the aggregate liabilities, if any, resulting
from such actions will not have a material adverse effect on the consolidated
financial position or results of operations of the Company. However, as the
ultimate resolution of these proceedings is influenced by factors outside of the
Company's control, it is reasonably possible that the Company's estimated
liability under these proceedings may change.
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, 1998, 1997 and 1996 was $7.9 million, $11.3
million and $8.5 million, respectively. The future minimum lease payments of all
non-cancelable operating leases are as follows:
Year Ended December 31,
1999 $ 7,043
2000 6,484
2001 5,237
2002 4,063
2003 3,790
Thereafter 13,310
60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1996, Advanta Capital Trust I, a newly formed statutory business
trust established by and wholly-owned by the Company (the "Trust"), issued in a
private offering $100 million of capital securities, representing preferred
beneficial interests in the assets of the Trust (the "Capital Securities"). The
Company used the proceeds from the sale for general corporate purposes. The sole
assets of the Trust consist of $100 million of 8.99% junior subordinated
debentures issued by the Company due December 17, 2026 (the "Junior Subordinated
Debentures"). The Capital Securities will be subject to mandatory redemption
under certain circumstances, including at any time on or after December 17, 2006
upon the optional prepayment by the Company of the Junior Subordinated
Debentures at an amount per Capital Security equal to 104.495% of the principal
amount (declining ratably on each December 17 thereafter to 100% on December 17,
2016), plus accrued and unpaid distributions thereon. The obligations of the
Company with respect to the Junior Subordinated Debentures, when considered
together with the obligations of the Company under the Indenture relating to the
Junior Subordinated Debentures, the Amended and Restated Declaration of Trust
relating to the Capital Securities and the Capital Securities Guarantee issued
by the Company with respect to the Capital Securities will provide, in the
aggregate, a full and unconditional guarantee of payments of distributions and
other amounts due on the Capital Securities. In July 1997, the Company and the
Trust exchanged the outstanding Capital Securities and Junior Subordinated
Debentures for substantially identical securities which were registered under
the Securities Act of 1933, as amended (the "Act"). The Company also exchanged
the Capital Securities Guarantee for a substantially identical guarantee which
was also registered under the Act. Dividends on the Capital Securities are
cumulative, payable semi-annually in arrears, and are deferrable at the
Company's option for up to ten consecutive semi-annual periods. The Company
cannot pay dividends on its preferred or common stocks during such deferments.
Dividends on the Capital Securities have been classified in other operating
expenses in the Consolidated Income Statements. The Trust has no operations or
assets separate from its investment in the Junior Subordinated Debentures.
Separate financial statements of the Trust are not presented because management
has determined that they would not be meaningful to investors.
NOTE 12. CAPITAL STOCK
Class A Preferred Stock is entitled to 1/2 vote per share and a non-cumulative
dividend of $140 per share per year, which must be paid prior to any dividend on
the common stock. Dividends were declared on the Class A Preferred Stock for the
first time in 1989 and have continued through 1998 as the Company paid dividends
on its common stock. The redemption price of the Class A Preferred Stock is
equivalent to the par value.
In 1995, 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). The SAILS (and thereby the related depositary shares) were not
redeemable by the Company before September 15, 1998. The call price of each of
the depositary shares was $37.6244 at September 15, 1998 and $37.4683 at
December 31, 1998. The call price declines periodically and will be $37.00 at
September 15, 1999 (the mandatory conversion date). 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. The SAILS pay an annual dividend of $249.75 per share
and must be paid prior to any dividend on the 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.
On February 20, 1998, the Company purchased 7,882,750 shares of its Class A
Common Stock and 12,482,850 of its Class B Common Stock at $40 per share net,
and 1,078,930 of its depositary shares each representing one one-hundredth
interest in a share of SAILS at $32.80 per share net through the Tender Offer.
61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the third quarter of 1998, the Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's Class A and Class B
Common Stock and the formation of an Employee Stock Ownership Plan ("ESOP"). At
December 31, 1998, the Company had purchased approximately 445,600 Class B
shares and approximately 1,055,000 Class A shares at a total cost of $17.1
million. Of the total shares purchased, approximately 1,000,000 Class A shares
were purchased for the Company's newly formed ESOP.
NOTE 13. 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
(with each plan covering three performance years). 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 prior to vesting should the employee terminate employment with the
Company. Restricted shares vest 10 years from the date of grant but, with
respect to the restricted shares issued under each plan, vesting was and may
continue to be accelerated annually with respect to up to one-third of the
shares, based on the extent to which 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. Following the Tender Offer in 1998, the
Company granted additional restricted shares to certain participants in AMIPWISE
III and AMIPWISE IV and granted a phantom stock award of 50,627 shares in lieu
of additional restricted shares to an officer of the Company. The additional
restricted shares and phantom stock award were granted at $10.625.
The following table summarizes the Company's incentive plans:
RESTRICTED
PLAN PERFORMANCE ORIGINAL SHARES
PLAN YEARS COVERED STOCK PRICE OUTSTANDING
- -----------------------------------------------------------------------------------------------------
AMIPWISE III 1996-1998 $17.00 398,125
AMIPWISE IV 1999-2001 $25.00 943,350
- -----------------------------------------------------------------------------------------------------
The weighted average fair value of shares issued on or after January 1,
1995 are: $30 for 8,336 AMIPWISE III shares and $31 for 19,740 AMIPWISE IV
shares issued in 1995, $40 for both 31,694 AMIPWISE III shares and 89,760
AMIPWISE IV shares issued in 1996, $39 for both 16,808 AMIPWISE III shares and
50,496 AMIPWISE IV shares in 1997, and $14 for 303,713 AMIPWISE III shares and
$16 for 682,908 AMIPWISE IV shares in 1998.
At December 31, 1998, a total of 1,343,704 shares issued under these and
the predecessor plans to AMIPWISE III were subject to restrictions and were
included in the number of shares outstanding.
At December 31, 1998 the Company had two stock option plans and accounts
for these plans following APB 25, under which no compensation expense has been
recognized.
62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Net Income
As reported $447,880 $71,625 $175,657
Pro forma 436,960 58,576 168,193
Basic Earnings per Share
As reported
Combined $ 16.65 $ 1.52 $ 4.15
Class A 16.62 1.45 4.08
Class B 16.68 1.57 4.19
Pro forma
Combined $ 16.24 $ 1.22 $ 3.97
Class A 16.21 1.15 3.90
Class B 16.27 1.27 4.01
Diluted Earnings per Share
As reported
Combined $ 15.71 $ 1.50 $ 3.89
Class A 15.69 1.43 3.86
Class B 15.73 1.54 3.91
Pro forma
Combined $ 15.33 $ 1.20 $ 3.73
Class A 15.31 1.14 3.70
Class B 15.34 1.24 3.75
- ---------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used: risk-free interest rates of 5.7%, 6.7% and 6.0% for 1998,
1997, and 1996, respectively, expected dividend yields of 3% in 1998 and 1% in
1997 and 1996; expected lives of 10 years; expected volatility of 48% for 1998,
40% for 1997 and 41% for 1996. Because SFAS 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
During 1997 and 1998, the Company changed the exercise price of certain
options granted during 1996 and 1997 to the current market price on the date of
the modification. These modifications did not result in additional compensation
expense under the accounting prescribed by SFAS 123. Also in 1998, the Company
amended the terms of options granted to employees who became employees of the
LLC or whose employment was otherwise terminated in connection with the Fleet
Transaction to extend the post-employment exercise period. Contingent on the
Fleet Transaction in 1998, the Company accelerated vesting of 43.15% of
outstanding options that were not vested at the time of the Fleet Transaction.
See discussion in Note 20 of charges to earnings relating to these
modifications. Subsequent to the Tender Offer in 1998, the Company issued stock
appreciation rights to certain directors of the Company in exchange for or in
lieu of options. At December 31, 1998, 1,230 rights were outstanding with a
strike price of $4.75, 163,074 rights were outstanding with a strike price of
$12.33 and 231,342 were outstanding with a strike price between $19.00 and
$22.125.
The Company's two stock option plans together authorize the grant to
employees and directors of options to purchase an aggregate of 10.2 million
shares of common stock. The Company presently intends only to issue options to
purchase Class B Common Stock. Options generally vest over a four-year period
and expire 10 years after the date of grant.
63
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares available for future grant were approximately 2.2 million at
December 31, 1998, and 2.8 million at December 31, 1997. Transactions under the
plans for the three years ended December 31, 1998, were as follows:
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
(SHARES IN THOUSANDS) ------------------------------------------------------------------------------------------
Outstanding at beginning
of year 3,934 $27 4,109 $25 4,381 $21
Granted 1,186 18 967 27 578 39
Exercised (1,471) 24 (774) 11 (699) 9
Terminated (661) 21 (368) 33 (151) 30
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at end of
year 2,988 22 3,934 27 4,109 25
- ---------------------------------------------------------------------------------------------------------------------
Options exercisable at
year-end 1,353 2,003 2,138
- ---------------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the year $ 8.05 $22.90 $19.87
- ---------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 1998:
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
------------------------------------------------- ------------------------------
1 to 10 265 9.1 years $ 9 49 $ 8
11 to 20 851 8.9 19 81 18
21 to 30 1,609 7.2 23 1,017 23
31 to 40 221 6.7 35 171 35
40 to 46 42 6.9 44 35 44
- ----------------------------------------------------------------------------------------------------
2,988 1,353
- ----------------------------------------------------------------------------------------------------
The Company has an Employee Stock Purchase Plan which allows employees and
directors to purchase Class B Common Stock at a 15% discount from the market
price without paying brokerage fees. The Company reports this 15% discount as
compensation expense and incurred expense of $200, $339 and $248 in 1998, 1997
and 1996, respectively. Shares issued under the plan from unissued stock or from
treasury stock are issued at the average market price on the day of purchase.
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, 1998, 1997 and 1996, the Company contributions equaled 100% of the
first 5% of participating employees' compensation contributed to the plan. The
expense for this plan totaled $2,403, $3,494 and $2,546 in 1998, 1997, and 1996,
respectively. All shares purchased by the plan for the three years ended
December 31, 1998, 1997 and 1996 were acquired from the Company at the market
price on each purchase date or were purchased on the open market.
The Company offers an elective, nonqualified deferred compensation plan to
qualified executives and non-employee directors, which allows them to defer a
portion of their cash compensation on a pretax basis. The plan contains
provisions related to minimum contribution levels and deferral periods with
respect to any individual's participation. The plan participant makes
irrevocable elections at the date of deferral as to deferral period and date of
distribution. Interest is credited to the participant's account at the rate of
125% of the 10 year rolling average interest rate on 10-Year U.S. Treasury
Notes. Distribution from the plan may be either
64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
at retirement or at an earlier date, and can be either in a lump sum or in
installment payments. The Company has purchased life insurance contracts with a
face value of $53.4 million to fund this plan.
On September 10, 1998, the Company's Board of Directors authorized the
formation of an Employee Stock Ownership Plan, covering all employees of the
Company who have reached age 21 with one year of service. During 1998, the ESOP
borrowed approximately $12.6 million from the Company (the "ESOP Loan") and used
the proceeds to purchase approximately 1,000,000 shares of the Company's Class A
Common Stock. The ESOP Loan is repayable with an interest rate of 8% over 30
years. The Company makes annual contributions to the ESOP equal to the ESOP's
debt service less dividends received by the ESOP. All dividends received by the
ESOP are used to pay debt service. As the ESOP Loan is repaid, shares are
allocated to active employees, based on the proportion of debt service paid in
the year. The Company accounts for its ESOP in accordance with AICPA Statement
of Position 93-6, "Employer's Accounting for Employee Stock Ownership Plans."
Accordingly, unallocated shares are reported as unearned ESOP shares in the
balance sheet. As shares of common stock acquired by the ESOP are committed to
be released to each employee , the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
used to fund debt service of the ESOP. ESOP compensation expense for the year
ended December 31, 1998 was not material. There were 998,513 unearned ESOP
shares at December 31, 1998 with a fair value of $13 million.
NOTE 14. CAPITAL RATIOS
Advanta National Bank ("ANB") and Advanta Bank Corp. ("ABC", formerly Advanta
Financial Corp.) are wholly-owned subsidiaries of the Company. ANB and ABC are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory -- and possibly additional discretionary -- actions by
regulators that, if undertaken, could have a direct material effect on the
institutions' and the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
institutions must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The institutions' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the institution to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that as of December 31, 1998, ANB and
ABC meet all capital adequacy requirements to which they are subject and are
correctly categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the institutions
must maintain minimum total risk-based capital, Tier I risk-based capital and
Tier I leverage ratios as set forth in the following table. There have been no
events or conditions since those notifications that management believes have
changed such categorizations.
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998
Total Capital (to Risk Weighted
Assets)
ANB $380,107 12.12% $250,932 greater $313,665 greater
than or than or
equal equal
to 8.0% to
10.0%
ABC 41,840 14.13 23,683 greater 29,604 greater
than or than or
equal equal
to 8.0 to
10.0
Tier I Capital (to Risk Weighted
Assets)
ANB 370,281 11.80% 125,466 greater 188,199 greater
than or than or
equal equal
to 4.0% to 6.0%
ABC 38,139 12.88 11,842 greater 17,763 greater
than or than or
equal equal
to 4.0 to 6.0
Tier I Capital (to Average Assets)
ANB 370,281 17.13% 86,458 greater 108,074 greater
than or than or
equal equal
to 4.0% to 5.0%
ABC 38,139 16.10 9,474 greater 11,842 greater
than or than or
equal equal
to 4.0 to 5.0
AS OF DECEMBER 31, 1997
Total Capital (to Risk Weighted
Assets)
ANB $824,801 16.39% $402,640 greater $503,300 greater
than or than or
equal equal
to 8.0% to
10.0%
ABC 33,038 18.02 14,669 greater 18,337 greater
than or than or
equal equal
to 8.0 to
10.0
Tier I Capital (to Risk Weighted
Assets)
ANB 650,911 12.93% 201,320 greater 301,980 greater
than or than or
equal equal
to 4.0% to 6.0%
ABC 30,746 16.77 7,335 greater 11,002 greater
than or than or
equal equal
to 4.0 to 6.0
Tier I Capital (to Average Assets)
ANB 650,911 14.07% 185,015 greater 231,269 greater
than or than or
equal equal
to 4.0% to 5.0%
ABC 30,746 10.97 11,208 greater 14,010 greater
than or than or
equal equal
to 4.0 to 5.0
- --------------------------------------------------------------------------------
NOTE 15. 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.
ANB and ABC are subject to the following restrictions: FDIC-insured banks
are subject to certain provisions of the Federal Reserve Act which impose
various legal limitations on the extent to which such banks may finance or
otherwise supply funds to certain of their affiliates. In particular, ANB and
ABC 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 affiliates. Such restrictions prevent ANB and ABC 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 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 ANB continue to comply with certain restrictions on their
activities. These restrictions include limiting the scope of ANB's activities to
those in which it was engaged prior to March 5, 1987. Since ANB 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.
66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ANB is also subject to various legal limitations on the amount of dividends
that can be paid to its parent, the Company. ANB 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 1998, the OCC
approved the payment of a special dividend/return of capital of $1.3 billion
from ANB to the Company to effect the Tender Offer described in Note 2. ANB paid
no dividends to the Company during 1997, and paid $107 million of dividends
during 1996. Advances to bank subsidiaries totaled $15.1 million at December 31,
1998. The Company had advances from bank subsidiaries of $3.6 million at
December 31, 1997.
The Company's insurance subsidiaries are also subject to certain capital,
deposit and dividend rules and regulations as prescribed by state jurisdictions
in which they are authorized to operate. At December 31, 1998 and 1997, the
insurance subsidiaries were in compliance with such rules and regulations.
Dividends paid to the Company in 1998 by insurance subsidiaries were $39
million, including an extraordinary dividend of $35 million. There were no
dividends paid to the Company by insurance subsidiaries in 1997 or 1996.
At December 31, 1998 and 1997, total stockholders' equity of the Company's
banking and insurance affiliates approximated $429 million and $829 million,
respectively. At January 1, 1999, $146 million of stockholders' equity of the
Company's banking and insurance affiliates was available for payment of
dividends under applicable regulatory guidelines.
NOTE 16. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," effective January 1, 1998. SFAS 131 establishes
revised standards for public companies related to the reporting of financial and
descriptive information about their operating segments in financial statements.
The Company has three reportable segments: Advanta Mortgage, Advanta Business
Services, and, through February 20, 1998, Advanta Personal Payment Services.
Each of these business segments have or had separate management teams and
infrastructures that offer different products and services.
Advanta Mortgage is engaged in nonconforming home equity lending directly
to consumers or through brokers and other originators. This business unit
originates, purchases, securitizes and services nonconforming credit first and
second lien mortgage loans and home equity lines of credit, directly through
subsidiaries of the Company. In addition to servicing and managing the loans it
originates, Advanta Mortgage contracts with third parties to service their home
equity loans on a subservicing basis.
Advanta Business Services offers flexible lease financing programs on
small-ticket equipment and business credit cards to small businesses. The
commercial equipment leasing business is generated primarily through third-party
referrals from manufacturers or distributors of equipment, as well as
independent brokers. Direct marketing techniques are the source of growth in
accounts in the business credit card operations.
Prior to the Fleet Transaction, the Company offered consumer credit cards
through Advanta Personal Payment Services. See further discussion of the Fleet
Transaction in Note 2. This business segment issued consumer credit cards
nationwide. The primary method of account acquisition was direct mail
solicitation using credit scoring by independent third parties and proprietary
market segmentation and targeting models to target its mailing to profitable
segments of the market. As of February 20, 1998, this segment had no operations,
and the activity below reflects operations through that date.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies with the exception of annual fees
on credit cards and deferred acquisition costs on mortgage loans and leases. For
management reporting purposes, annual fees recognized on credit cards are
included in other revenues rather than as an adjustment to operating expenses,
and amortization of deferred acquisition costs on leases are recorded as
operating expenses rather than as an adjustment to interest income. The Company
evaluates performance based on net income of the respective business units.
67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA
ADVANTA PERSONAL
ADVANTA BUSINESS PAYMENT RECONCILING
MORTGAGE SERVICES SERVICES OTHER(2) ITEMS TOTAL
- -----------------------------------------------------------------------------------------------------------------
1998
Noninterest revenues $ 240,366 $ 96,228 $ 126,466 $ 4,762 $(46,180)(3)(5) $ 421,642
Interest revenue 123,550 34,360 23,465 64,183 (4,468)(4) 241,090
Interest expense 76,056 20,854 33,352 54,013 0 184,275
Gain on transfer of consumer
credit card business 0 0 541,288 0 0 541,288
Other charges(1) 0 0 167,572 0 (42,500)(5) 125,072
Income taxes (benefit) 10,667 4,430 (24,141) 0 0 (9,044)
Net income 25,090 10,338 412,452 0 0 447,880
Average managed receivables 6,737,019 1,353,391 1,846,109 15,724 0 9,952,243
Total assets 1,794,491 430,058 0 1,571,201 0 3,795,750
Capital expenditures 835 3,658 2,469 38,398 0 45,360
Depreciation and
amortization 6,160 4,720 5,600 5,000 0 21,480
- -----------------------------------------------------------------------------------------------------------------
1997
Noninterest revenues $ 130,511 $ 75,665 $ 590,750 $ 34,854 $ (4,299)(3) $ 827,481
Interest revenue 94,499 44,971 179,844 120,034 (4,074)(4) 435,274
Interest expense 51,825 20,073 130,351 122,309 0 324,558
Income taxes (benefit) 1,107 7,856 16,042 (100) 0 24,905
Net income 33,316 14,726 22,877 706 0 71,625
Average managed receivables 3,918,240 1,063,056 11,356,944 31,810 0 16,370,050
Total assets 1,048,461 264,928 3,498,212 1,874,531 0 6,686,132
Capital expenditures 464 4,582 33,770 40,414 0 79,230
Depreciation and
amortization 3,534 4,203 22,339 5,204 0 35,280
- -----------------------------------------------------------------------------------------------------------------
1996
Noninterest revenues $ 87,916 $ 65,052 $ 633,554 $ 16,621 $ (3,573)(3) $ 799,570
Interest revenue 43,097 32,231 220,847 61,694 (2,942)(4) 354,927
Interest expense 23,773 17,372 147,133 81,422 0 269,700
Income taxes (benefit) 412 10,095 78,611 (14) 0 89,104
Net income (loss) 24,981 19,776 130,928 (28) 0 175,657
Average managed receivables 2,133,047 603,797 12,169,546 12,270 0 14,918,660
Total assets 767,408 466,092 3,189,955 1,160,504 0 5,583,959
Capital expenditures 3,781 6,882 60,920 12,584 0 84,167
Depreciation and
amortization 1,940 3,146 12,145 2,104 0 19,335
- -----------------------------------------------------------------------------------------------------------------
(1) Other charges represents the following: severance and outplacement costs
associated with workforce reduction, option exercise and other employee
costs associated with the Fleet Transaction/Tender Offer; expense associated
with exited business/product; asset impairment; and equity losses related to
exited business/product.
(2) Other includes insurance operations, venture capital operations and assets
not attributable to other segments.
(3) Annual fees recognized on credit cards are included in other revenues for
management reporting purposes, and are offset against deferred acquisition
costs in operating expenses for GAAP reporting.
(4) Amortization of deferred acquisition costs on leases is considered an
operating expense for management reporting purposes, but is considered an
adjustment to interest income for GAAP reporting.
(5) Equity losses related to exited business/product are included in other
charges for management reporting purposes, but are netted against equity
gains in other revenues for GAAP reporting.
68
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Equity securities (losses) gains(1) $(41,750) $(11,426) $ 6,522
Business card interchange income 20,741 11,617 4,396
Consumer credit card interchange income 11,881 85,208 102,804
Consumer credit card overlimit fees 16,233 46,447 16,465
Mortgage other revenues(2) 22,945 4,535 1,645
Leasing and business card other revenues 18,769 15,865 24,039
Insurance revenues, net 14,408 37,816 38,175
Other 1,149 18,021 3,276
- ---------------------------------------------------------------------------------------------
Total other revenues, net $ 64,376 $208,083 $197,322
- ---------------------------------------------------------------------------------------------
(1) Equity securities (losses) gains include losses of $42.5 million recognized
in 1998 reflecting changes in the fair value of Advanta Partners LP
investments. Most of the loss relates to investments not publicly traded for
which Advanta Partners LP decided to expedite a disposal plan.
(2) Mortgage other revenues in 1998 include an $11.2 million gain on the sale of
an investment in affordable housing partnerships, and $6 million from the
favorable settlement of certain prior year claims.
OTHER OPERATING EXPENSES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Marketing $ 53,109 $ 53,039 $ 31,975
Equipment expense 23,381 37,712 22,752
Amortization of credit card deferred origination costs, net 22,271 69,344 88,517
External processing 21,908 43,256 42,814
Occupancy expense 16,001 23,097 14,827
Credit and collection expense 15,715 20,017 13,784
Professional/consulting fees 14,767 38,600 40,247
Telephone expense 12,428 21,262 16,116
Postage 8,949 29,039 25,700
Minority interest in income of consolidated subsidiary 8,880 8,880 222
Credit card fraud losses 3,194 22,287 23,611
Other 2,475 17,021 19,943
- ---------------------------------------------------------------------------------------------
Total other operating expenses $203,078 $383,554 $340,508
- ---------------------------------------------------------------------------------------------
69
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. NET INTEREST INCOME
The following table presents the components of net interest income:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Interest income:
Loans and leases $129,748 $ 276,982 $267,823
Trading investments 10,374 0 0
Investments available for sale 79,294 140,636 80,142
Interest component of previously discounted cash flows 21,674 17,656 6,962
- ---------------------------------------------------------------------------------------------
Total interest income 241,090 435,274 354,927
Interest expense:
Deposits 85,935 150,164 110,879
Debt 87,900 161,295 136,654
Other borrowings 10,440 13,099 22,167
- ---------------------------------------------------------------------------------------------
Total interest expense 184,275 324,558 269,700
Net interest income 56,815 110,716 85,227
Less: Provision for loan losses (67,193) (210,826) (96,862)
- ---------------------------------------------------------------------------------------------
Net interest after provision for credit losses $(10,378) $(100,110) $(11,635)
- ---------------------------------------------------------------------------------------------
NOTE 19. INCOME TAXES
Income tax (benefit) expense consisted of the following components:
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
Current:
Federal $ 20,254 $ 5,953 $78,037
State 2,470 (651) 5,346
- --------------------------------------------------------------------------------------------
Total current 22,724 5,302 83,383
- --------------------------------------------------------------------------------------------
Deferred:
Federal (44,777) 16,950 5,800
State 13,009 2,653 (79)
- --------------------------------------------------------------------------------------------
Total deferred (31,768) 19,603 5,721
- --------------------------------------------------------------------------------------------
Total tax (benefit) expense $ (9,044) $24,905 $89,104
- --------------------------------------------------------------------------------------------
70
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the statutory federal income tax to the consolidated
tax expense is as follows:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Statutory federal income tax $ 153,593 $33,786 $92,740
State income taxes, net of federal income tax benefit 10,061 1,302 3,423
Insurance program income (expense) 30,414 (8,707) (4,492)
Tax credits (7,288) (5,271) (1,231)
Compensation limitation 4,725 0 0
Transfer of consumer credit card business (see Note 2) (200,494) 0 0
Nontaxable investment income (607) (560) (443)
Other 552 4,355 (893)
- ---------------------------------------------------------------------------------------------
Consolidated tax (benefit) expense $ (9,044) $24,905 $89,104
- ---------------------------------------------------------------------------------------------
Deferred taxes are provided to reflect the estimated future tax effects of
the differences between the financial statement and tax bases of assets and
liabilities and enacted tax laws. The net deferred tax asset/ (liability) is
comprised of the following:
DECEMBER 31,
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
Deferred taxes:
Gross assets $ 44,541 $ 84,676
Gross liabilities (80,566) (118,655)
- -----------------------------------------------------------------------------------
Total deferred taxes $(36,025) $ (33,979)
- -----------------------------------------------------------------------------------
A summary of deferred tax assets and liabilities follows:
DECEMBER 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
Deferred loan fees and costs $ (5,167) $(24,655)
Allowance for loan losses 17,415 45,224
Securitization income (32,538) (38,543)
Leasing income (16,092) (10,772)
Other 357 (5,233)
- ----------------------------------------------------------------------------------
Net deferred tax liability $(36,025) $(33,979)
- ----------------------------------------------------------------------------------
The net deferred federal tax liability is presented net with current
federal income taxes receivable for financial reporting purposes, and is
included in other assets.
71
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20. COSTS ASSOCIATED WITH FLEET TRANSACTION/TENDER OFFER AND OTHER EXITED
BUSINESS/PRODUCTS
In connection with the Fleet Transaction more fully discussed in Note 2, the
Company effected major organizational changes during the first quarter of 1998
to reduce corporate expenses incurred in the past: (a) to support the business
contributed to the LLC in the Fleet Transaction; and (b) associated with the
business and products no longer being offered or not directly associated with
its mortgage and business services units. Costs associated with these changes
include:
CHARGED TO
ACCRUAL IN 1998
------------------ 12/31/98
1998 NON- ACCRUAL
ACCRUAL CASH CASH BALANCE
- -----------------------------------------------------------------------------------------------
Employee costs associated with Fleet
Transaction/Tender Offer $ 62,257 $55,192 $ 3,774 $ 3,291
Expenses associated with exited business/products 54,115 25,717 13,632 14,766
Asset impairment/disposal 8,700 0 8,133 567
- -----------------------------------------------------------------------------------------------
Total $125,072 $80,909 $25,539 $18,624
- -----------------------------------------------------------------------------------------------
EMPLOYEE COSTS ASSOCIATED WITH FLEET TRANSACTION/TENDER OFFER
In connection with the organizational changes, the Company incurred
approximately $26.8 million of severance and related costs classified as
employee costs associated with Fleet Transaction/Tender Offer. These expenses
included severance and outplacement costs associated with the workforce
reduction, option exercise and remeasurement costs, and other employee costs
directly attributable to the Fleet Transaction/ Tender Offer.
In connection with these organizational changes, approximately 255
employees who ceased to be employed by the Company were entitled to benefits, of
which 190 employees were directly associated with the business contributed to
the LLC and approximately 65 employees were associated with the workforce
reduction.
Additionally, during the first quarter of 1998, the Company incurred
approximately $35.5 million of other compensation charges. This amount includes
$21.3 million attributable to payments under change of control plans and $14.2
million associated with the execution of the Tender Offer.
EXITED BUSINESS/PRODUCTS
During the first quarter of 1998, the Company implemented a plan to exit certain
businesses and product offerings not directly associated with its mortgage and
business services units. In connection with this plan, contractual vendor
commitments of approximately $10.0 million associated with discontinued
development and other activities were accrued. The Company has substantially
completed the settlement of these contractual commitments.
The Company also has contractual commitments to certain customers, and
non-related financial institutions that are providing benefits to those
customers, under a product that will no longer be offered and for which no
future revenues or benefits will be received. The Company has recorded a charge
of $22.8 million associated with this commitment, and an $8.3 million charge
associated with the write-down of assets associated with this program. The
Company expects to pay a substantial portion of these costs over the next 33
months. The actions required to complete this plan include the settlement of
contractual commitments and the payment of customer benefits.
In connection with the Fleet Transaction/Tender Offer and the other exited
business and product offerings, the Company also incurred $11.5 million of
related professional fees and $1.5 million of other expenses related to these
plans.
72
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSET IMPAIRMENT/DISPOSAL
In connection with the Company's plans to reduce corporate expenses and exit
certain business and product offerings, certain assets were identified for
disposal and the carrying costs thereof were written off or written down to
estimated realizable value resulting in a charge of $8.7 million. These assets
consisted principally of leasehold improvements and various other assets. The
disposal of these assets has been substantially completed.
NOTE 21. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of basic earnings per share and
diluted earnings per share for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Net income $447,880 $ 71,625 $175,657
less: Preferred "A" dividends (141) (141) (141)
less: Preferred "B" dividends (3,549) (6,409) (6,403)
- ---------------------------------------------------------------------------------------------
Income available to common shareholders $444,190 $ 65,075 $169,113
less: Class A dividends declared (2,615) (7,997) (6,703)
less: Class B dividends declared (4,589) (13,754) (11,334)
- ---------------------------------------------------------------------------------------------
Undistributed Earnings $436,986 $ 43,324 $151,076
Basic Shares
Class A 11,174 18,172 17,621
Class B 15,500 24,635 23,174
Combined(2) 26,674 42,807 40,795
- ---------------------------------------------------------------------------------------------
Options A 8 63 410
Options B 103 532 1,293
AMIP B 138 99 507
Preferred B 1,572 0(1) 2,068
- ---------------------------------------------------------------------------------------------
Diluted Shares
Class A 11,182 18,235 18,031
Class B 17,313 25,266 27,042
Combined(2) 28,495 43,501 45,073
- ---------------------------------------------------------------------------------------------
Basic Earnings Per Share
Class A $ 16.62 $ 1.45 $ 4.08
Class B 16.68 1.57 4.19
Combined(2) 16.65 1.52 4.15
- ---------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Class A $ 15.69 $ 1.43 $ 3.86
Class B 15.73 1.54 3.91
Combined(2) 15.71 1.50 3.89
- ---------------------------------------------------------------------------------------------
(1) 25,000 shares of the Company's Class B convertible preferred stock were
outstanding during 1997 but were not included in the computation of diluted
earnings per share for the year ended December 31, 1997 because they were
antidilutive for that period.
(2) Combined represents a weighted average of Class A and Class B earnings per
share.
Options to purchase 2.7 million shares of Class B Common Stock were outstanding
during 1998 but were not included in the computation of diluted EPS because the
option's exercise price was greater than or equal to the average market price of
the common shares during the applicable periods.
73
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22. PARENT COMPANY FINANCIAL STATEMENTS
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
(IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
ASSETS
Cash $ 17,276 $ 94,887
Commercial paper equivalent(1) 440,900 0
Investments 20,592 29,046
Other assets, principally investments in and advances to
wholly owned subsidiaries(2) 1,244,656 2,314,852
- --------------------------------------------------------------------------------------
Total assets $1,723,424 $2,438,785
- --------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses and other liabilities $ 37,218 $ 121,797
Debt 1,125,902 1,390,038
- --------------------------------------------------------------------------------------
Total liabilities 1,163,120 1,511,835
- --------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 267 448
Other stockholders' equity 559,027 925,492
- --------------------------------------------------------------------------------------
Total stockholders' equity 560,304 926,950
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,723,424 $2,438,785
- --------------------------------------------------------------------------------------
(1) Commercial paper equivalent refers to unsecured loans made to Advanta
National Bank for terms less than 35 days in maturity which are not
automatically renewable, consistent with commercial paper issuance.
(2) Includes advances to wholly-owned non-bank subsidiaries to fund $329.1
million in loans, $70.5 million of retained interest-only strips, $128.1
million in subordinated trust assets and $41.2 million of equity securities
accounted for at fair value as of December 31, 1998.
74
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
($ IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
INCOME:
Dividends from subsidiaries(1) $ 560,015 $ 12,300 $135,006
Interest 78,210 81,656 62,144
Gain on transfer of credit card business 48,944 0 0
Other, net 44,623 33,649 29,450
- ----------------------------------------------------------------------------------------------
Total Income 731,792 127,605 226,600
- ----------------------------------------------------------------------------------------------
EXPENSES:
General and administrative 44,289 69,010 75,768
Interest 86,557 97,067 72,219
Severance and outplacement costs associated with
workforce reduction, option exercise and other
employee costs associated with Fleet
Transaction/Tender Offer 55,007 0 0
Expense associated with exited business/product 2,000 0 0
Asset impairment 2,700 0 0
- ----------------------------------------------------------------------------------------------
Total expense 190,553 166,077 147,987
- ----------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in
subsidiaries 541,239 (38,472) 78,613
- ----------------------------------------------------------------------------------------------
Income tax benefit 8,566 20,677 24,784
- ----------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net (loss)
profit in subsidiaries 549,805 (17,795) 103,397
- ----------------------------------------------------------------------------------------------
Equity in undistributed net (loss) profit of subsidiaries (101,925) 89,420 72,260
- ----------------------------------------------------------------------------------------------
Net income $ 447,880 $ 71,625 $175,657
- ----------------------------------------------------------------------------------------------
(1) Dividends from subsidiaries include only dividends from current year net
income of subsidiaries. See Parent Company Only Condensed Statements of Cash
Flows for total dividends received from subsidiaries.
The Parent Company Only Statements of Changes in Stockholders' Equity is
the same as the Consolidated Statements of Changes in Stockholder's Equity.
75
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 447,880 $ 71,625 $ 175,657
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net profit of subsidiaries (458,090) (101,719) (207,266)
Dividends received from subsidiaries 903,831 12,300 135,006
Gain on transfer of consumer credit card business (48,944) 0 0
Depreciation and amortization 6,880 5,083 1,375
Noncash expense associated with Fleet
Transaction/Tender Offer and other exited
business/products 11,974 0 0
Change in other assets and interest-bearing deposits (19,339) (154,043) (162,600)
Change in accrued liabilities (81,886) 94,401 51,853
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 762,306 (72,353) (5,975)
INVESTING ACTIVITIES
Net change in premises & equipment 4,793 (8,793) (9,408)
Net change in commercial paper equivalents (440,900) 0 0
Investments in subsidiaries (124,500) 0 (149,925)
Return of investment from subsidiaries 470,000 0 46,867
Purchase of investments available for sale (471,582) (87,324) (3,754,047)
Proceeds from sales of investments available for sale 143,770 49,946 77,404
Proceeds from maturing investments available for sale 327,200 25,000 3,771,981
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (91,219) (21,171) (17,128)
FINANCING ACTIVITIES
Change in lines of credit 0 (40,000) 40,000
Proceeds from issuance of subordinated/senior debt 29,858 24,747 41,036
Payments on redemption of subordinated/senior debt (60,991) (97,609) (38,541)
Decrease (increase) in affiliate borrowings 339,822 (26,827) (324,341)
Proceeds from issuance of medium-term notes 0 511,255 720,545
Payments on maturity of medium-term notes (233,035) (261,873) (494,400)
Proceeds from issuance of affiliate subordinated
debentures 0 0 103,093
Issuance of stock 5,249 14,000 11,974
Tender offer (801,606) 0 0
Stock buyback (4,549) 0 0
ESOP stock purchase (12,569) 0 0
ESOP debt repayment 17 0 0
Cash dividends paid (10,894) (28,301) (24,581)
- ----------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (748,698) 95,392 34,785
- ----------------------------------------------------------------------------------------------
Net (decrease) increase in cash (77,611) 1,868 11,682
Cash at beginning of year 94,887 93,019 81,337
Cash at end of year $ 17,276 $ 94,887 $ 93,019
- ----------------------------------------------------------------------------------------------
76
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Noncash transactions of the Parent Company include capital contributions to bank
subsidiaries through the forgiveness of debt of $67.5 million in 1998, and $76
million to nonbank subsidiaries in 1998.
NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
1998 1997
- ------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
Financial assets:
Cash $ 90,597 $ 90,597 $ 57,953 $ 57,953
Federal funds sold 267,400 267,400 156,500 156,500
Restricted interest-bearing deposits 80,028 80,028 543,239 543,239
Trading investments 501,563 501,563 0 0
Investments available for sale 521,410 521,410 1,222,272 1,222,272
Subordinated trust assets 284,528 284,528 170,281 170,281
Loans and lease receivables, net 1,138,933 1,189,124 3,376,546 3,412,823
Retained interest-only strip-Advanta
Mortgage loans 247,381 247,381 191,868 191,868
Amounts due from consumer credit card
securitizations 0 0 208,330 208,330
Contract mortgage servicing rights 49,097 49,097 24,546 24,546
Financial liabilities:
Demand and savings deposits $ 185,782 $ 185,782 $ 548,440 $ 548,440
Time deposits and debt 2,594,155 2,560,034 4,717,343 4,693,887
Other borrowings 36,301 36,301 52,774 53,411
Off-balance sheet financial instruments --
Asset/(Liability):
Interest rate swaps $ 0 $ 11,589 $ 0 $ 8,323
Interest rate options:
Caps purchased 45 130 360 596
Caps written (45) (130) (1,350) (616)
Forward contracts 0 365 0 (522)
- ------------------------------------------------------------------------------------------------
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 position as described in Note
24.
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 RESTRICTED INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable estimate
of the fair value.
INVESTMENTS
The fair values of trading investments and investment securities available for
sale are based on quoted market prices, dealer quotes or estimates using quoted
market prices for similar securities. For investments that are
77
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not publicly traded, management has made estimates of fair value that consider
several factors including the investees' financial results, conditions and
prospects, and the values of comparable public companies.
SUBORDINATED TRUST ASSETS
Subordinated trust assets earn a variable rate, risk-adjusted return. These
assets are classified and measured in accordance with SFAS 115 as trading
securities, and are reported at fair value.
LOAN AND LEASE RECEIVABLES, NET
For mortgage loans, business card receivables and consumer credit card
receivables, 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 these loans also includes the estimated
value of the portion of the retained interest-only strip and, for mortgage
loans, servicing which are not sold with securities backed by these types of
loans. The value of the retained interest-only strips and, for mortgage loans,
servicing is estimated based on a discounted cash flow analysis. The cash flows
are estimated as the excess of the weighted average yield on each pool of the
loans sold over the sum of the pass-through interest rate plus the servicing fee
and an estimate of future credit losses over the life of the loans and other
amounts described in Note 1. The value of other loans is estimated based on the
market prices of similar receivables with similar characteristics.
RETAINED INTEREST-ONLY STRIPS, CONTRACTUAL MORTGAGE SERVICING RIGHTS AND AMOUNTS
DUE FROM CONSUMER CREDIT CARD SECURITIZATIONS
The fair values of retained interest-only strips and contractual mortgage
servicing rights are estimated based on discounted cash flow analyses as
described in Note 1. For the other components of amounts due from consumer
credit card securitizations, the carrying amount is a reasonable estimate of the
fair value. For purposes of estimating the fair value of the retained
interest-only strip from Advanta Mortgage loan securitizations, management has
assumed a discount rate of 14%, a prepayment rate of 29% CPR for fixed rate
loans and 43% for adjustable rate loans and a loss rate of 100 basis points at
December 31, 1998, and has assumed a discount rate of 14%, a prepayment rate of
24% CPR for fixed rate loans and 29% CPR for adjustable rate loans and a loss
rate of 80 basis points at December 31, 1997. For purposes of estimating the
fair value of contractual mortgage servicing rights, management has assumed a
discount rate of 12% at December 31, 1998 and 1997, and prepayment rates
consistent with retained interest-only strip assumptions at those dates. For
purposes of estimating the fair value of the retained interest-only strip from
consumer credit card securitizations, management assumed a discount rate of 12%,
a principal payment rate of 10% and a loss rate of 7.8% at December 31, 1997.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts, and money market
deposits is the amount payable on demand at the reporting date. This fair value
does not include any benefit that may result from the low cost of funding
provided by these deposits compared to the cost of borrowing funds in the
market.
TIME DEPOSITS 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.
78
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS
The fair value of interest rate swaps, options and forward contracts (used
for managing interest rate risk) is the estimated amount that the Company would
pay or receive to terminate the agreement at the reporting date, taking into
account current interest rates and the current creditworthiness of the
counterparty.
COMMITMENTS TO EXTEND CREDIT
Although the Company had $2.1 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 24. DERIVATIVE FINANCIAL INSTRUMENTS
In managing its interest rate risk, the Company may use derivative
financial instruments. These instruments are used for the express purpose of
managing interest rate exposures and are not used for any trading or speculative
activities. During 1998, 1997, and 1996, 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, 1998 and 1997:
1998 1997
- --------------------------------------------------------------------------------------
Interest rate swaps $2,997,912 $2,111,711
Interest rate options:
Caps written 268,633 1,018,781
Caps purchased 268,633 328,781
Forward contracts 499,000 400,437
- --------------------------------------------------------------------------------------
$4,034,178 $3,859,710
- --------------------------------------------------------------------------------------
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 23). 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 flows on certain deposit, debt, and off-balance
sheet receivable securitizations.
As of December 31, 1998, the Company used interest rate swaps for the
following purposes: $575.5 million to effectively convert fixed rate debt to a
LIBOR based variable rate; and $2.4 billion to effectively
79
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
convert certain off-balance sheet variable pass-through rate home equity and
leasing securitizations to a fixed rate. As of December 31, 1997, the Company
used interest rate swaps for the following purposes: $1.0 billion to effectively
convert fixed rate debt to a LIBOR based variable rate; and $1.1 billion to
effectively convert certain off-balance sheet variable pass-through rate home
equity and leasing securitizations to a fixed rate. In 1997, as part of its
asset/liability risk management process, the Company chose to effectively
convert $598 million of fixed rate off-balance sheet consumer credit card
securitizations to a LIBOR based variable rate through the use of interest rate
swaps. In 1997, the Company elected to terminate all of these interest rate swap
positions after a 7 month period and realized a gain of $16.3 million. Gains or
losses resulting from these interest rate swap terminations are deferred and
amortized over the remaining life of the underlying fixed rate credit card
securitization. As of December 31, 1997, the unamortized gain amounted to $15.6
million with the remaining amortization period of 4.2 years. During 1998, the
unamortized gain was recorded as part of the gain on the Fleet Transaction
described in Note 2.
The following table summarizes by notional amounts the Company's interest
rate swap and swaption activity by major category for the periods presented:
RECEIVE PAY
FIXED RATE FIXED RATE TOTAL
- -----------------------------------------------------------------------------------------------
Balance at 1/1/96 $ 203,835 $ 664,000 $ 867,835
Additions 635,000 594,804 1,229,804
Net accretion 0 41,805 41,805
Maturities (26,000) (400,000) (426,000)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/96 $ 812,835 $ 900,609 $1,713,444
Additions 967,250 472,496 1,439,746
Net amortization 0 (142,894) (142,894)
Maturities (136,835) (10,500) (147,335)
Swaptions exercised 0 (153,000) (153,000)
Terminations (598,250) 0 (598,250)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/97 $1,045,000 $1,066,711 $2,111,711
Additions 0 1,948,046 1,948,046
Net amortization (4,000) (380,533) (384,533)
Maturities (249,000) 0 (249,000)
Terminations (54,790) (211,812) (266,602)
Contributed to Fleet Credit Card LLC (161,710) 0 (161,710)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/98 $ 575,500 $2,422,412 $2,997,912
- -----------------------------------------------------------------------------------------------
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 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 receivables. For credit enhancement purposes,
certain variable pass-through rate receivable 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
80
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
synthetically altered the interest rate structure on certain off-balance sheet
receivable 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
with third parties are included in other assets and are amortized to other
revenues over the life of the contract. Any obligations which may arise under
these contracts are recorded in other revenues on an accrual basis. As of
December 31, 1998, unamortized premiums for both caps written and caps purchased
amounted to $44.6 thousand. The weighted average maturities for caps written and
purchased were 2.8 years. As of December 31, 1997, unamortized premiums for caps
written and purchased amounted to $1.3 million and $360 thousand, respectively.
The weighted average maturities for caps written and purchased were 3.3 years
and 4.6 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 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) gains of ($3.8) million and $4.2 million were deferred
as of December 31, 1998 and 1997, respectively.
The Company may choose to hedge market value changes on its trading
investments with forward contracts. Gains and losses on the forward contracts
hedging the Company's trading investments are recognized currently and reported
in other revenues with the gains and losses on trading investments.
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 ----------------------------------------------------------------------------------
12/31/98 1999 2000 2001 2002 2003 2004 2005 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable:
Notional Value $2,422,412 $ 66,325 $ 11,495 $118,318 $348,710 $531,348 $ 0 $414,029 $932,187
Weighted Average Pay Rate 5.32% 5.62% 5.72% 5.72% 5.93% 5.35% 0.00% 5.54% 4.90%
Weighted Average Receive Rate 5.60% 5.62% 5.33% 5.44% 5.56% 5.62% 0.00% 5.62% 5.62%
Receive Fixed/Pay Variable:
Notional Value $ 575,500 $141,000 $124,000 $250,500 $ 60,000 $ 0 $ 0 $ 0 $ 0
Weighted Average Receive Rate 6.52% 6.46% 6.32% 6.63% 6.60% 0.00% 0.00% 0.00% 0.00%
Weighted Average Pay Rate 5.27% 5.29% 5.29% 5.23% 5.33% 0.00% 0.00% 0.00% 0.00%
Total Notional Value $2,997,912 $207,325 $135,495 $368,818 $408,710 $531,348 $ 0 $414,029 $932,187
Total Weighted Average Rates on
Swaps:
Pay Rate 5.31% 5.40% 5.33% 5.39% 5.85% 5.35% 0.00% 5.54% 4.90%
Receive Rate 5.78% 6.19% 6.24% 6.25% 5.71% 5.62% 0.00% 5.62% 5.62%
- ---------------------------------------------------------------------------------------------------------------------------------
81
83
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, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA
January 26, 1999
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: (l) organizational and budgetary arrangements which
provide reasonable assurance that errors or irregularities would be detected
promptly; (2) careful selection of personnel and communications programs aimed
at assuring that policies and standards are understood by employees; (3) a
program of internal audits; and (4) continuing review and evaluation of the
control program itself.
The financial statements in this Annual Report have been audited by Arthur
Andersen 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/ Dennis Alter /s/ Philip M. Browne /s/ John J. Calamari
- ---------------------------- ---------------------------- ----------------------------
Chairman of the Board and Senior Vice President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer Chief Accounting Officer
82
84
SUPPLEMENTAL SCHEDULES (UNAUDITED)
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31,
($ IN THOUSANDS) 1998
- ----------------------------------------------------------------------------
Maturity:
3 months or less $ 41,062
Over 3 months through 6 months 32,878
Over 6 months through 12 months 134,219
Over 12 months 64,926
- ----------------------------------------------------------------------------
Total $273,085
- ----------------------------------------------------------------------------
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market tier of The Nasdaq
Stock Market under the symbols ADVNB (Class B non-voting common stock) and ADVNA
(Class A voting common stock). Following are the high, low and closing sale
prices and cash dividends declared for the last two years as they apply to each
class of stock:
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
Class B:
- ------------------------------------------------------------------------------------------------
March 1997 $53.63 $25.50 $25.88 $.132
June 1997 36.25 18.88 35.69 .132
September 1997 36.50 24.75 27.25 .132
December 1997 37.63 23.38 25.38 .132
March 1998 $31.25 $19.69 $21.00 $.076
June 1998 24.25 17.50 19.88 .076
September 1998 20.56 8.25 10.50 .076
December 1998 12.00 5.25 11.06 .076
- ------------------------------------------------------------------------------------------------
Class A:
- ------------------------------------------------------------------------------------------------
March 1997 $54.75 $26.63 $26.88 $.110
June 1997 37.25 20.00 36.75 .110
September 1997 37.50 26.19 29.13 .110
December 1997 38.75 24.25 26.25 .110
March 1998 $32.75 $21.00 $22.50 $.063
June 1998 26.25 19.25 21.94 .063
September 1998 22.75 9.38 12.88 .063
December 1998 14.88 7.13 13.25 .063
- ------------------------------------------------------------------------------------------------
At December 31, 1998, the Company had approximately 775 and 338 holders of
record of Class B and Class A Common Stock, respectively.
83
85
QUARTERLY DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
Gain on sale of receivables $ 44,964 $ 46,428 $ 57,145 $ 104
Interest income 54,170 55,199 33,428 98,293
Gain on transfer of consumer credit card
business 0 0 0 541,288
Other revenues 63,384 45,655 40,441 123,521
- ----------------------------------------------------------------------------------------------------
Total revenues 162,518 147,282 131,014 763,206
Interest expense 41,340 39,165 36,226 67,544
Provision for credit losses 19,972 6,414 6,846 33,961
Salaries and other operating expenses 94,639 80,239 74,465 139,301
Other charges(2) 0 0 0 125,072
- ----------------------------------------------------------------------------------------------------
Total expenses 155,951 125,818 117,537 365,878
Pretax income 6,567 21,464 13,477 397,328
- ----------------------------------------------------------------------------------------------------
Net income 4,597 15,025 9,471 418,787
- ----------------------------------------------------------------------------------------------------
Basic earnings per share
Class A $ .15 $ .57 $ .34 $ 11.84
Class B .17 .58 .35 11.85
Combined(1) .16 .58 .35 11.84
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share
Class A $ .15 $ .56 $ .34 $ 11.04
Class B .17 .58 .35 11.04
Combined(1) .16 .58 .35 11.04
- ----------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic
Class A 9,374 10,316 10,362 14,798
Class B 13,811 14,166 14,161 20,480
Combined(1) 23,185 24,482 24,523 35,278
- ----------------------------------------------------------------------------------------------------
Weighted average common shares -- assuming
dilution
Diluted
Class A 9,377 10,320 10,372 14,822
Class B 13,817 14,194 14,330 23,093
Combined(1) 23,194 24,514 24,702 37,915
- ----------------------------------------------------------------------------------------------------
84
86
QUARTERLY DATA -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
Gain on sale of receivables $ 33,647 $ 28,575 $ 29,298 $ 25,954
Interest income 91,832 138,777 103,468 101,197
Other revenues 244,684 175,369 163,177 126,777
- ----------------------------------------------------------------------------------------------------
Total revenues 370,163 342,721 295,943 253,928
Interest expense 84,885 88,414 79,797 71,462
Provision for credit losses 51,940 48,243 50,279 60,364
Salaries and other operating expenses 174,562 148,904 158,564 148,811
- ----------------------------------------------------------------------------------------------------
Total expenses 311,387 285,561 288,640 280,637
Pretax income 58,776 57,160 7,303 (26,709)
- ----------------------------------------------------------------------------------------------------
Net income (loss) 43,612 42,412 5,419 (19,818)
- ----------------------------------------------------------------------------------------------------
Basic earnings (loss) per share
Class A $ .96 $ .94 $ .07 $ (.52)
Class B .99 .96 .09 (.49)
Combined(1) .98 .95 .09 (.51)
- ----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
Class A $ .94 $ .91 $ .07 $ (.52)
Class B .95 .92 .09 (.49)
Combined(1) .95 .92 .09 (.51)
- ----------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
Basic
Class A 18,201 18,188 18,178 18,129
Class B 24,802 24,687 24,594 24,392
Combined(1) 43,003 42,875 42,772 42,521
- ----------------------------------------------------------------------------------------------------
Weighted average common shares -- assuming
dilution
Diluted
Class A 18,250 18,245 18,239 18,129
Class B 27,775 27,870 24,969 24,392
Combined(1) 46,025 46,115 43,208 42,521
- ----------------------------------------------------------------------------------------------------
(1) See Note 1 to Consolidated Financial Statements.
(2) Other charges represents the following: severance and outplacement costs
associated with workforce reduction, option exercise and other employee
costs associated with the Fleet Transaction/Tender Offer; expense associated
with exited business/product; and asset impairment.
85
87
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
($ IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------------
Advanta Mortgage Loans(1) $20,092 60% $ 5,822 4% $ 8,785 10% $ 3,360 6% $ 5,164 12%
Leases and business cards(2) 9,611 29 9,798 7 4,241 5 977 2 1,076 3
Consumer Credit cards -- 0 118,420 86 76,084 85 36,889 69 27,486 66
Other 3,734 11 3,733 3 74 -- 12,268 23 7,891 19
- --------------------------------------------------------------------------------------------------------------------------
Total $33,437 100% $137,773 100% $89,184 100% $53,494 100% $41,617 100%
- --------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF GROSS RECEIVABLES
($ IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------------------
Advanta Mortgage Loans(1) $ 837,744 72% $ 478,433 14% $ 376,260 14% $ 321,711 12% $ 142,874 7%
Leases and business
cards(2) 304,185 26 298,789 9 214,327 8 93,660 3 86,157 5
Consumer Credit cards -- 0 2,579,890 76 2,045,219 77 2,338,280 85 1,730,176 88
Other loans 17,862 2 40,978 1 20,835 1 9,276 -- 5,237 --
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,159,791 100% $3,398,090 100% $2,656,641 100% $2,762,927 100% $1,964,444 100%
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(2) Includes leases for all years presented and business cards beginning in
1996.
86
88
YIELD AND MATURITY OF INVESTMENTS AT DECEMBER 31, 1998
($ IN THOUSANDS) MATURING
- ---------------------------------------------------------------------------------------------------------
AFTER ONE BUT WITHIN FIVE AFTER FIVE BUT
WITHIN ONE YEAR YEARS WITHIN TEN YEARS
------------------------ -------------------------- ------------------------
MARKET VALUE YIELD(C) MARKET VALUE YIELD(C) MARKET VALUE YIELD(C)
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury and
other U.S.
Government
securities $382,954 5.45% $53,144 5.00% $ 0 0.00%
State and municipal
securities(A) 442 4.74 1,479 4.86 2,183 5.98
Other(B) 0 0.00 0 0 0 0.00
- ---------------------------------------------------------------------------------------------------------
Total investments
available for sale $383,396 5.45% $54,623 4.99% $2,183 5.98%
- ---------------------------------------------------------------------------------------------------------
Trading investments $ 0 0.00% $ 0 0.00% $ 0 0.00%
- ---------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) MATURING
- --------------------- ------------------------
AFTER TEN YEARS
------------------------
MARKET VALUE YIELD(C)
- --------------------- ------------------------
U.S. Treasury and
other U.S.
Government
securities $ 0 0.00%
State and municipal
securities(A) 714 5.53
Other(B) 16,322 6.29
- --------------------------------------------------------
Total investments
available for sale $ 17,036 6.25%
- ------------------------------------------------------------------
Trading investments $501,563 6.29%
- ----------------------------------------------------------------------------
(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.
(C) Yields are computed by dividing annualized interest by the amortized cost of
the respective investment securities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
87
89
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" are hereby
incorporated by reference, as is the text in Part I of this Report under the
caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive
Compensation," "Compensation Committee Report on Executive Compensation" and
"Election of Directors -- Committees, Meetings and Compensation of the Board of
Directors", "-- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The text of the Proxy Statement under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" are hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the Proxy Statement under the captions "Election of
Directors -- Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Financial Statements, Schedules, and Other Information of the
Registrant and its subsidiaries are included in this Form 10-K:
(a)(1) Financial Statements.
1. Consolidated Balance Sheets at December 31, 1998 and 1997.
2. Consolidated Income Statements for each of the three years
in the period ended December 31, 1998.
3. Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December 31,
1998.
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998.
5. Notes to Consolidated Financial Statements.
(a)(2) Schedules.
1. 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.
88
90
(a)(3) Exhibits
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994) , as
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS)) (incorporated
by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated August 15, 1995, as further amended
by the Certificate of Designations, Preferences, Rights and
Limitations of the Registrant's Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to the Registrant's Registration Statement on Form
8-A, dated March 17, 1997)).
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K dated March 17, 1997).
3-c Rights Agreement, dated as of March 14, 1997, by and between
the Registrant and the Rights Agent, which includes as
Exhibit B thereto the Form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A dated March 17, 1997), as
amended by Amendment No. 1 to the Rights Agreement, dated as
of June 4, 1998 (incorporated by reference to Exhibit 1 to
the Registrant's Amended Registration Statement on Form
8-A/A, dated June 11, 1998), as amended by Amendment No. 2
to the Rights Agreement, dated as of September 10, 1998
(incorporated by reference to Exhibit 1 to the Company's
Amended Registration Statement on Form 8-A/A, dated
September 23, 1998).
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).
4-g Indenture dated as of December 17, 1996 between Advanta
Corp. and The Chase Manhattan Bank, as trustee relating to
the Junior Subordinated Debentures. (incorporated by
reference to Exhibit 4-g to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
4-h Declaration of Trust dated as of December 5, 1996 of Advanta
Capital Trust I. (incorporated by reference to Exhibit 4-h
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
89
91
4-i Amended and Restated Declaration of Trust dated as of
December 17, 1996 for Advanta Capital Trust I. (incorporated
by reference to Exhibit 4-I to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
4-j Series A Capital Securities Guarantee Agreement dated as of
December 17, 1996. (incorporated by reference to Exhibit 4-j
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by
reference to Exhibit 10-b to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989).+
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996).+
10-c Advanta Management Incentive Plan, as amended (incorporated
by reference to Exhibit 10-c to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).+
10-d* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National Bank USA
on March 25, 1983.
10-e* Application for membership in MasterCard(R) International,
Inc. and Card Member License Agreement executed by Colonial
National Bank USA on March 25, 1983.
10-f* Indenture of Trust dated May 11, 1984 between Linda Alter,
as settlor, and Dennis Alter, as trustee.
10-f(i) Agreement dated October 20, 1992 among Dennis Alter, as
Trustee of the trust established by the Indenture of Trust
filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his
individual capacity, Linda Alter, and Michael Stolper, which
Agreement modifies the Indenture (incorporated by reference
to Exhibit 10-g(i) to the Registrant's Registration
Statement on Form S-3 (File No. 33-58660), filed February
23, 1993).
10-g Agreement dated as of March 5, 1998 between the Registrant
and Olaf Olafsson (incorporated by reference to Exhibit 10-g
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997).+
10-h Advanta Management Incentive Plan with Stock Election
(incorporated by reference to Exhibit 4-c to Amendment No. 1
to the Registrant's Registration Statement on Form S-8 (File
No. 33-33350), filed February 21, 1990).+
10-i Advanta Corp. Executive Deferral Plan (incorporated by
reference to the Exhibit 10-j to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).+
10-j Advanta Corp. Non-Employee Directors Deferral Plan
(incorporated by reference to Exhibit 10-K to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).+
10-k Advanta Management Incentive Plan With Stock Election II
(incorporated by reference to Exhibit 10-o to the
Registrant's Registration Statement on Form S-2 (File No.
33-39343), filed March 8, 1991).+
10-l Amended and Restated Advanta Management Incentive Plan With
Stock Election III (filed herewith).+
10-m Life Insurance Benefit for Certain Key Executives and
Directors (filed herewith).+
10-n Amended and Restated Advanta Management Incentive Plan With
Stock Election IV (filed herewith). +
10-o Amended and Restated Agreement of Limited Partnership of
Advanta Partners LP, dated as of October 1, 1996
(incorporated by reference to Exhibit 10-o to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
90
92
10-p Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated by
reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1995).+
10-q Pooling and Servicing Agreement, dated as of June 1, 1996, among Advanta Business Receivables Corp.,
Advanta Financial Corp. and First National Bank of Chicago, as Trustee (incorporated by reference to
Exhibit 10-q to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
10-r Agreement dated May 11, 1998 between the Registrant and Philip M. Browne (filed herewith).+
10-s Master Business Receivables Asset-Backed Financing Facility Agreement, dated as of May 1, 1997, by
and among Advanta Business Service Corp., Advanta Leasing Receivables Corp. III and The Chase
Manhattan Bank (incorporated by reference to Advanta Business Services Corp.'s Registration
Statement on Form S-1 (File No. 333-38575).
10-t Contribution Agreement, dated as of October 28, 1997, by and between Advanta Corp. and Fleet
Financial Group (incorporated by reference to Exhibit(c)(2) to the Registrant's Schedule 13E-4,
dated January 20, 1998), as amended by the First Amendment to the Contribution Agreement, dated as
of February 20, 1998, by and among Advanta Corp., Fleet Financial Group and Fleet Credit Card, LLC
(incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K, filed
March 6, 1998).
10-u Agreement dated July 27, 1998 between the Registrant and George O. Deehan (filed herewith).+
10-v Amended and Restated Master Loan and Security Agreement, dated as of August 21, 1998, by and among
Morgan Stanley Mortgage Capital Inc., as Lender and Advanta Mortgage Holding Company, AMCUSA,
Advanta Mortgage Corp. Midwest, Advanta Mortgage Corp. of New Jersey, Advanta Mortgage Corp.
Northeast, Advanta Mortgage Conduit Services, Inc. and Advanta Finance Corp., as Borrowers, as
amended (filed herewith).
10-w Master Repurchase Agreement, dated as of August 21, 1998, between Morgan Stanley Capital Inc., as
Buyer and Advanta National Bank, as Seller, as amended (filed herewith).
10-x Sale and Servicing Agreement, dated as of September 25, 1998 among Advanta Home Equity Loan Owner
Trust 1998-MS1, as Issuer, Advanta Loan Warehouse Corporation, as Depositor, Bankers Trust Company
of California, N.A., AMCUSA, Advanta Bank Corp., Advanta National Bank and Advanta Corp. (filed
herewith).
11 Inapplicable.
12 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of Independent Public Accountants (filed herewith).
24 Powers of Attorney (included on the signature page hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
- --------------------------------------------------------------------------------
* Incorporated by reference to the Exhibit with corresponding number
constituting part of the Registrant's Registration Statement on Form S-2
(No. 33-00071), filed on September 4, 1985.
+ Management contract or compensatory plan or arrangement.
91
93
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the Company on October 27, 1998
regarding consolidated earnings of the Company and its subsidiaries
for the fiscal quarter ended September 30, 1998. Summary earnings and
balance sheet information as of that date were filed with such
report.
92
94
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 30, 1999 By: /s/ OLAF OLAFSSON
------------------------------------
Olaf Olafsson, President and
Director
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
constitute and appoint Dennis Alter, William A. Rosoff, Olaf Olafsson, Philip M.
Browne, John J. Calamari and Elizabeth H. Mai, or any of them (with full power
to each of them to act alone), his or her true and lawful attorney in-fact and
agent, with full power of substitution, for him or her and on his or her behalf
to sign, execute and file an Annual Report on Form 10-K under the Securities
Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1998
relating to Advanta Corp. and any or all amendments thereto, with all exhibits
and any and all documents required to be filed with respect thereto, with the
Securities and Exchange Commission or any regulatory authority, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises in order to effectuate the same as fully to all
intents and purposes as he or she might or could do if personally present,
hereby ratifying and confirming all that such attorneys-in-fact and agents, or
any of them, or their substitute or substitutes, may lawfully do or cause to be
done.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the 30th day of March, 1999.
NAME TITLE
---- -----
/s/ DENNIS ALTER Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer
Dennis Alter
/s/ WILLIAM A. ROSOFF Vice Chairman and Director
- -----------------------------------------------------
William A. Rosoff
/s/ OLAF OLAFSSON President and Director
- -----------------------------------------------------
Olaf Olafsson
/s/ PHILIP M. BROWNE Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Philip M. Browne
/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/ WILLIAM C. DUNKELBERG Director
- -----------------------------------------------------
William C. Dunkelberg
93
95
NAME TITLE
---- -----
/s/ DANA BECKER DUNN Director
- -----------------------------------------------------
Dana Becker Dunn
/s/ ROBERT C. HALL Director
- -----------------------------------------------------
Robert C. Hall
/s/ JAMES E. KSANSNAK Director
- -----------------------------------------------------
James E. Ksansnak
/s/ RONALD LUBNER Director
- -----------------------------------------------------
Ronald Lubner
/s/ MICHAEL STOLPER Director
- -----------------------------------------------------
Michael Stolper
94