<PAGE> 1
Form 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission File Number 0-14120
Advanta Corp.
(Exact name of registrant as specified in its charter)
Delaware 23-1462070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code)
(215) 657-4000
(Registrant's telephone number, including area code)
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 [ ]
Applicable only to issuers involved in bankruptcy proceedings during
the preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class A Outstanding at November 3, 1999
Common Stock, $.01 par value 10,465,888 shares
Class B Outstanding at November 3, 1999
Common Stock, $.01 par value 18,040,337 shares
</TABLE>
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
PAGE
<S> <C> <C>
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Income Statements 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 40
PART II OTHER INFORMATION 41
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (UNAUDITED)
Cash $ 19,084 $ 16,267
Federal funds sold 371,000 267,400
Restricted interest-bearing deposits 81,767 80,028
Trading investments 0 501,563
Investments available for sale 952,908 521,410
Subordinated trust assets 382,928 291,942
Loan and lease receivables, net:
Held for sale 473,928 527,644
Other 463,872 579,783
----------- -----------
Total loan and lease receivables, net 937,800 1,107,427
Retained interest-only strip 157,093 209,096
Premises and equipment(at cost, less accumulated
depreciation of $50,077 in 1999 and $38,377 in 1998) 87,236 84,396
Other assets 535,778 641,891
----------- -----------
TOTAL ASSETS $ 3,525,594 $ 3,721,420
----------- -----------
LIABILITIES
Deposits:
Noninterest-bearing $ 10,923 $ 4,324
Interest-bearing 1,693,253 1,745,466
----------- -----------
Total deposits 1,704,176 1,749,790
Long-term debt 849,815 1,030,147
Other borrowings 10,581 36,301
Other liabilities 283,798 244,878
----------- -----------
TOTAL LIABILITIES 2,848,370 3,061,116
----------- -----------
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 1999 and 1998 1,010 1,010
Class B preferred stock, $.01 par value:
Issued and outstanding- 0 shares in 1999,
14,211 shares in 1998 0 0
Class A voting common stock, $.01 par value:
Authorized - 214,500,000 shares; Issued - 10,465,883
shares in 1999, and 10,375,489 shares in 1998 105 104
Class B non-voting common stock, $.01 par value;
Authorized - 230,000,000 shares; Issued - 17,997,755
shares in 1999, and 16,294,825 in 1998 180 163
Additional paid-in capital 229,825 229,304
Deferred compensation (14,732) (17,214)
Unearned ESOP shares (12,237) (12,550)
Accumulated other comprehensive loss (7,667) (91)
Retained earnings 407,209 382,092
Less: Treasury stock at cost, 405,000 Class A and 972,768
Class B common shares in 1999 and 55,000 Class A and
972,768 Class B common shares in 1998 (26,469) (22,514)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 577,224 560,304
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,525,594 $ 3,721,420
----------- -----------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE> 4
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of receivables, net $ 51,360 $ 50,489 $ 127,245 $ 112,699
Interest income 61,185 56,539 185,700 189,826
Servicing revenues 29,548 26,604 86,835 104,812
Consumer credit card
securitization income 0 0 0 64,796
Gain on transfer of consumer
credit card business 0 0 0 541,288
Other revenues, net 18,650 13,650 76,270 28,081
- -------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 160,743 147,282 476,050 1,041,502
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and employee benefits 44,951 41,908 133,795 136,822
Other operating expenses 37,751 36,111 117,519 150,523
Interest expense 41,935 39,165 128,529 142,935
Provision for credit losses 10,452 6,414 28,007 47,221
Minority interest in income of
consolidated subsidiary 2,220 2,220 6,660 6,660
Unusual charges 0 0 6,713 125,072
- -------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 137,309 125,818 421,223 609,233
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 23,434 21,464 54,827 432,269
Income tax expense (benefit) 9,256 6,439 21,564 (11,013)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,178 $ 15,025 $ 33,263 $ 443,282
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share
Class A $ .56 $ .57 $ 1.28 $ 15.77
Class B .57 .58 1.33 15.82
Combined .57 .58 1.31 15.80
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share
Class A $ .54 $ .56 $ 1.26 $ 14.87
Class B .56 .58 1.31 14.89
Combined .55 .58 1.30 14.88
- -------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding
Class A 8,984 10,316 9,078 11,780
Class B 14,429 14,166 14,143 16,100
Combined 23,413 24,482 23,221 27,880
- -------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding
Class A 9,030 10,320 9,110 11,790
Class B 14,960 14,194 14,410 17,986
Combined 23,990 24,514 23,520 29,776
- -------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Class A $ .063 $ .063 $ .187 $ .187
Class B .076 .076 .227 .227
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
<PAGE> 5
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS A CLASS B ADDITIONAL
COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON PAID-IN
INCOME STOCK STOCK STOCK STOCK CAPITAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DEC. 31, 1997 $1,010 $0 $182 $266 $379,543
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
Amortization of deferred
compensation
Termination benefit-
Benefit plans (5) (15,214)
Stock buyback
ESOP stock purchase
ESOP shares committed to be
released (2)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1998 $1,010 $0 $104 $163 $229,304
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $33,263
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $4,080 (7,576)
--------
Comprehensive income $25,687
=======
Preferred and common cash
dividends declared
Exercise of stock options 20
Issuance of stock:
Dividend reinvestment
Benefit plans 1 6 7,476
Conversion of Class B
Preferred Stock 14 (14)
Amortization of deferred
compensation
Termination benefit-
Benefit plans (3) (7,036)
Stock buyback
ESOP shares committed to be
released 75
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $1,010 $0 $105 $180 $229,825
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DEC. 31, 1997 $(25,353) $ 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 (20,605) 2,055
Amortization of deferred
compensation 8,193 8,193
Termination benefit-
Benefit plans 20,551 (3,558) 1,774
Stock buyback (4,549) (4,549)
ESOP stock purchase (12,569) (12,569)
ESOP shares committed to be
released 19 17
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1998 $(29,764) $ (91) $382,092 $(22,514) $560,304
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 33,263 33,263
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $4,080 (7,576) (7,576)
Comprehensive income
Preferred and common
cash dividends declared (8,146) (8,146)
Exercise of stock options 20
Issuance of stock:
Dividend reinvestment 0
Benefit plans (7,483) 0
Conversion of Class B
Preferred Stock 0
Amortization of deferred
compensation 2,926 2,926
Termination benefit-
Benefit plans 7,039 0
Stock buyback (3,955) (3,955)
ESOP shares committed to be
released 313 388
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $(26,969) $(7,667) $407,209 $(26,469) $577,224
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
6
<PAGE> 7
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
($ IN THOUSANDS) SEPTEMBER 30,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,263 $ 443,282
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity securities (gains) losses (29,781) 42,470
Noncash charges associated with exit of auto
finance business 16,900 0
Depreciation and amortization 13,754 15,797
Provision for credit losses, excluding auto 23,107 47,219
Gain on transfer of consumer credit card business 0 (541,288)
Noncash expense associated with unusual charges 0 25,539
Investment in subordinated trust assets, net (95,158) (67,551)
Proceeds from sale of trading investments 185,042 0
Origination of loans and leases held for sale (2,533,678) (4,202,775)
Proceeds from sales of loans and leases held for sale 2,831,799 5,085,744
Change in other assets and other liabilities 12,909 (50,696)
Change in retained interest-only strip, excluding auto charge 44,175 (29,248)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 502,332 768,493
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Change in federal funds sold and interest-
bearing deposits (105,339) (206,538)
Purchase of investments available for sale (12,160,787) (42,261,460)
Proceeds from sales of investments available for sale 621,660 1,226,360
Proceeds from maturing investments available for sale 11,451,104 41,500,657
Purchase of loan and lease portfolios 0 (23,136)
Principal collected on Advanta Mortgage loans and
leases not held for sale 125,649 105,476
Origination of Advanta Mortgage loans and leases
not held for sale (143,191) (499,763)
Change in business card receivables and other loans
not held for sale, excluding sales (8,493) (18,851)
Change in consumer card receivables not held for sale,
excluding sales/transfers 0 (121,845)
Purchases of premises and equipment, net (16,371) (30,502)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (235,768) (329,602)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in demand and savings deposits 97,015 (379,914)
Proceeds from sales of time deposits 539,584 1,143,128
Payments for maturing time deposits (682,213) (403,256)
Proceeds from issuance of long-term debt 83,452 18,584
Payments on redemption of long-term debt (270,987) (239,840)
Change in warehouse facility borrowings (18,517) 3,857
Change in notes payable 0 216,058
Stock Tender Offer 0 (801,606)
Stock buy back (3,955) (6,380)
Proceeds from issuance of stock 20 5,244
Cash dividends paid (8,146) (8,231)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (263,747) (452,356)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,817 (13,465)
Cash at beginning of period 16,267 27,736
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 19,084 $ 14,271
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
7
<PAGE> 8
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1) BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by Advanta Corp. (collectively with its subsidiaries, "Advanta" or "the
Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. Advanta has condensed or omitted certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles pursuant to such rules
and regulations. In the opinion of management, the statements include all
adjustments (which include only normal recurring adjustments) required for a
fair statement of financial position, results of operations and cash flows for
the interim periods presented. See Notes 8 and 13 related to unusual
transactions during the periods presented. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
Advanta's latest annual report on Form 10-K. The results of operations through
February 20, 1998 include the results of operations of Advanta's consumer credit
card business (see Note 8). The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
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 allowance for credit losses and income taxes, among
others. Actual results could differ from those estimates.
Certain prior period balances have been reclassified to conform to the
current period presentation.
NOTE 2) 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. Advanta adopted this SOP on January 1,
1999. The adoption of SOP 98-1 did not have a material effect on Advanta'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, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000 and cannot be applied
retroactively.
8
<PAGE> 9
Advanta will adopt SFAS No. 133 effective January 1, 2001. Advanta 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. Prior to the issuance of SFAS No. 134, Advanta was required to
account for resulting mortgage-backed securities or other retained interests as
trading securities. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. Advanta adopted SFAS No. 134 on January 1,
1999, and reclassified approximately $315 million of retained mortgage-backed
securities related to mortgage loan securitizations from trading to
available-for-sale securities based on Advanta's intent with respect to these
securities. Advanta continues to classify its retained interest-only strips and
subordinated trust assets from mortgage loan securitizations as trading
securities. The adoption of SFAS No. 134 did not have a material effect on
Advanta's financial statements.
NOTE 3) RETAINED INTEREST-ONLY STRIP, CONTRACTUAL MORTGAGE SERVICING RIGHTS AND
SUBORDINATED TRUST ASSETS
The following reflects activity in the Advanta Mortgage retained interest-only
("IO") strip and contractual mortgage servicing rights ("CMSR"):
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Beginning balance IO Strip $ 209,096 $ 183,306
Beginning balance CMSR $ 74,425 $ 24,546
IO activity:
Retained IO on sales, net 51,764 181,425
Interest income 15,934 21,674
Cash received and used to acquire
subordinated trust assets (87,393) (96,455)
Cash released to Advanta (25,760) (29,874)
Fair value adjustments 0 (50,980)
Fair value adjustment related to
auto exit (7,828) 0
Other 1,280 0
CMSR activity:
Servicing rights retained 45,771 71,131
Amortization, net (28,216) (12,977)
Valuation provision (3,522) (8,275)
Ending Balance IO Strip $ 157,093 $ 209,096
Ending Balance CMSR $ 88,458 $ 74,425
========= =========
</TABLE>
In the first quarter of 1999, Advanta reclassified $25.3 million from
IO strip to CMSR. In the second quarter of 1999, Advanta reclassified from IO
strip, $10.7 million as subordinated trust assets and $3.6 million as Due from
Trustee, as these amounts had already been collected by the Trust. There was no
earnings impact from these reclassifications. The 1998 balances have been
reclassified to conform to this presentation.
9
<PAGE> 10
The following table presents activity in subordinated trust assets related to
Advanta Mortgage loan securitizations:
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Beginning balance $ 291,942 $ 178,469
Initial collateral deposits 35,050 38,907
Subordinated trust assets acquired
with excess cash flows 87,393 96,455
Interest earned 19,172 10,270
Valuation adjustment related to
auto loans (4,172) 0
Excess cash flows released
to Advanta (46,041) (46,141)
Net change in subordinated trust
assets associated with off-
balance sheet warehouse
facilities (416) 13,982
--------- ---------
Ending Balance $ 382,928 $ 291,942
========= =========
</TABLE>
NOTE 4) LOAN AND LEASE RECEIVABLES
Loan and lease receivables on the balance sheet, including those held for sale,
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DEC. 31,
1999 1998
-------------- -----------
<S> <C> <C>
Advanta Mortgage loans $ 625,350 $ 829,819
Business cards 191,051 150,022
Leases 129,080 122,657
Other loans 17,478 17,862
----------- -----------
Gross loan and lease receivables 962,959 1,120,360
----------- -----------
Add: Unamortized purchase premiums and
deferred origination costs,
net of deferred fees 10,169 20,504
Less: Allowance for credit losses
Advanta Mortgage loans (16,480) (20,092)
Leases (3,368) (2,695)
Business cards (10,784) (6,916)
Other loans (4,696) (3,734)
----------- -----------
Total allowance for credit losses (35,328) (33,437)
----------- -----------
Net loan and lease receivables $ 937,800 $ 1,107,427
----------- -----------
</TABLE>
Receivables sold and now serviced for others consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DEC. 31,
1999 1998
------------ ----------
<S> <C> <C>
Advanta Mortgage loans $7,736,595 $7,447,502
Business cards 738,958 664,712
Leases 651,573 547,583
---------- ----------
Total $9,127,126 $8,659,797
---------- ----------
</TABLE>
"Advanta Mortgage loans" include mortgage and auto loans and exclude
mortgage loans which were never owned by Advanta, but which Advanta services for
a fee ("contract servicing" or "subservicing"). Contract servicing receivables
were $10.5 billion at September 30, 1999, and $8.3 billion at December 31, 1998.
10
<PAGE> 11
NOTE 5) ALLOWANCE FOR CREDIT LOSSES
The following table shows the changes in the allowance for credit
losses for the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DEC. 31,
1999 1998
------------- ----------
<S> <C> <C>
Beginning balance $ 33,437 $ 137,773
Provision for credit losses 28,007 67,193
Allowance on receivables sold (6,690) (118,420)
Gross charge-offs:
Advanta Mortgage loans (12,039) (14,313)
Business cards (8,735) (11,126)
Leases (2,949) (4,992)
Consumer credit cards 0 (30,999)
Other loans (38) 0
--------- ---------
Total gross charge-offs (23,761) (61,430)
Recoveries:
Advanta Mortgage loans 2,239 3,007
Business cards 861 1,093
Leases 1,228 1,501
Consumer credit cards 0 2,719
Other loans 7 1
--------- ---------
Total recoveries 4,335 8,321
Net charge-offs (19,426) (53,109)
Ending Balance $ 35,328 $ 33,437
========= =========
</TABLE>
NOTE 6) SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30, DEC. 31,
OTHER ASSETS 1999 1998
------------ --------
<S> <C> <C>
Contractual mortgage servicing rights $ 88,458 $ 74,425
Current and deferred income taxes, net 51,687 31,243
Goodwill 3,392 3,600
Other real estate (A) 8,342 6,622
Other 383,899 526,001
-------- --------
TOTAL OTHER ASSETS $535,778 $641,891
-------- --------
</TABLE>
(A) Carried at the lower of cost or fair market value less selling costs.
<TABLE>
<CAPTION>
SEPTEMBER 30, DEC. 31,
OTHER LIABILITIES 1999 1998
------------ --------
<S> <C> <C>
Accounts payable and accrued expenses $ 83,326 $ 66,852
Accrued interest payable 66,003 38,035
Current and deferred income taxes 0 2,445
Other 134,469 137,546
-------- --------
TOTAL OTHER LIABILITIES $283,798 $244,878
-------- --------
</TABLE>
11
<PAGE> 12
NOTE 7) LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of over one
year. The composition of long-term debt at September 30, 1999 and December 31,
1998, was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
- -------------------------------------------------------------------------------------------------------
SENIOR DEBT
<S> <C> <C>
12 month senior notes (7.33%-9.03%) $ 74,836 $ 48,948
18 month senior notes (8.57%-8.76%) 6,561 6,565
24 month senior notes (7.14%-9.03%) 42,711 32,360
30 month senior notes (7.23%-8.89%) 13,344 13,609
48 month senior notes (9.08%) 8,617 8,454
60 month senior notes (9.53%) 26,537 20,779
Value notes, fixed (6.85%-7.85%) 8,808 9,300
Medium-term notes, fixed (6.41%-8.36%) 560,150 703,460
Medium-term notes, floating 67,400 163,000
Medium-term bank notes, fixed (6.45%-7.12%) 7,344 7,338
Other senior notes (4.60%-11.34%) 32,588 14,844
- -------------------------------------------------------------------------------------------------------
Total senior debt 848,896 1,028,657
Subordinated notes (6.54%-11.34%) 919 1,490
- -------------------------------------------------------------------------------------------------------
Total long-term debt $ 849,815 $1,030,147
=======================================================================================================
</TABLE>
Advanta has priced its floating rate medium-term notes based on a spread
over LIBOR. At September 30, 1999, the rates on these notes varied from 5.28% to
5.71%. At September 30, 1999 and December 31, 1998, Advanta used derivative
financial instruments to effectively convert certain fixed rate debt to a LIBOR
based variable rate.
NOTE 8) DISPOSITION OF CONSUMER CREDIT CARD ASSETS
In accordance with the terms of the Contribution Agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between Advanta and Fleet
Financial Group, Inc. ("Fleet"), Advanta and certain of its subsidiaries and
Fleet and certain of its subsidiaries each contributed certain assets and
liabilities of their respective consumer credit card businesses to Fleet Credit
Card LLC (the "LLC") in exchange for an ownership interest in the LLC (the
"Fleet Transaction"). 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. Advanta
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 Advanta's ownership interest
in the LLC. The gain on the transfer was not subject to income tax and no tax
provision was recorded. As further described in Note 15, Advanta and Fleet are
parties to a lawsuit concerning disputes regarding the final determination of
the transferred assets and liabilities. It is possible that the outcome of the
litigation will result in an increase or decrease to the gain recorded.
Concurrently with the Fleet Transaction, Advanta 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 at $32.80 per share net, through an issuer tender offer (the
"Tender Offer") which was completed on February 20, 1998.
12
<PAGE> 13
NOTE 9) CAPITAL STOCK
On September 15, 1999, 1.4 million of outstanding depositary shares, each
representing a one-hundredth interest in a share of Stock Appreciation Income
Linked Securities ("SAILS"), mandatorily converted into 1.4 million shares of
Class B Common Stock. The SAILS constituted a series of the Company's Class B
Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock,
Series 1995.
During the third quarter of 1998, the Board of Directors authorized the
repurchase of up to 2.5 million shares of Advanta's Class A and Class B Common
Stock and the formation of an Employee Stock Ownership Plan ("ESOP"). Through
September 30, 1999, Advanta had purchased 445,600 shares of Class B Common Stock
and 1,405,000 shares of Class A Common Stock at a total cost of $21.1 million.
Of the total shares purchased, 1,000,000 shares of Class A Common Stock were
purchased for Advanta's ESOP.
NOTE 10) SEGMENT INFORMATION
Advanta 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.
Advanta has three reportable segments as of September 30, 1999: Advanta
Mortgage, Advanta Leasing Services and Advanta Business Cards. Each of these
business segments has separate management teams and infrastructures that offer
different products and services. Through February 20, 1998, Advanta also had a
fourth reportable segment, Advanta Personal Payment Services.
Advanta changed its reportable segments subsequent to December 31,
1998. Management considers Advanta Leasing Services and Advanta Business Cards
separate segments due to the development of separate management teams and
infrastructures in each unit, whereas at December 31, 1998, they were considered
one combined segment, Advanta Business Services. Advanta has restated the
corresponding items of segment information for earlier periods.
Advanta Mortgage 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 Advanta. 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 Cards offers MasterCard(R) business credit cards to
small businesses. Direct marketing techniques are the source of growth in
accounts in the business credit card operations.
Advanta Leasing Services offers flexible lease financing programs on
small-ticket equipment 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.
Prior to the Fleet Transaction, Advanta offered consumer credit cards
through Advanta Personal Payment Services. This business segment issued consumer
credit cards nationwide using direct marketing techniques. As of February 20,
1998, this segment had no operations, and the activity below reflects operations
through that date.
13
<PAGE> 14
The accounting policies of the segments are the same as those followed
by Advanta. Advanta evaluates performance based largely on the net income of the
respective business units.
<TABLE>
<CAPTION>
ADVANTA
ADVANTA ADVANTA PERSONAL
THREE MONTHS ENDED ADVANTA BUSINESS LEASING PAYMENT
SEPTEMBER 30, MORTGAGE CARDS SERVICES SERVICES OTHER (1) TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Noninterest revenues $ 66,076 $ 20,509 $ 10,320 $ -- $ 2,653 $ 99,558
Interest revenue 28,239 12,428 3,023 -- 17,495 61,185
Interest expense 21,581 4,906 2,719 -- 12,729 41,935
Net income (loss) 7,900 5,965 1,085 -- (772) 14,178
Average managed
Receivables 8,389,792 906,032 741,571 -- 17,322 10,054,717
- ------------------------------------------------------------------------------------------------------------------------
1998
Noninterest revenues $ 65,780 $ 14,541 $ 9,598 $ -- $ 824 $ 90,743
Interest revenue 33,601 5,822 3,066 -- 14,050 56,539
Interest expense 20,828 2,348 2,521 -- 13,468 39,165
Net income (loss) 10,119 4,345 745 -- (184) 15,025
Average managed
receivables 7,125,403 768,348 611,847 -- 17,704 8,523,302
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADVANTA
ADVANTA ADVANTA PERSONAL
NINE MONTHS ENDED ADVANTA BUSINESS LEASING PAYMENT
SEPTEMBER 30, MORTGAGE CARDS SERVICES SERVICES OTHER (1) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Noninterest revenues $ 180,728 $ 56,871 $ 32,492 $ -- $ 20,259 $ 290,350
Interest revenue 101,216 25,576 8,199 -- 50,709 185,700
Interest expense 67,008 10,045 8,060 -- 43,416 128,529
Unusual charges -- -- -- -- 6,713 6,713
Net income (loss) 15,256 15,493 3,417 -- (903) 33,263
Average managed
Receivables 8,370,460 865,510 699,551 -- 17,385 9,952,906
- ------------------------------------------------------------------------------------------------------------------------------
1998
Noninterest revenues $ 161,389 $ 36,008 $ 26,316 $ 83,966 $ 2,709 $ 310,388
Interest revenue 89,091 16,675 10,388 23,465 50,207 189,826
Interest expense 52,697 7,740 8,259 33,352 40,887 142,935
Gain on transfer of
consumer card business -- -- -- 541,288 -- 541,288
Unusual charges -- -- -- 125,072 -- 125,072
Net income 22,389 7,382 897 412,452 162 443,282
Average managed
receivables 6,334,967 729,018 599,358 2,468,241 15,001 10,146,585
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other includes insurance operations, venture capital operations, assets
not attributable to other segments, and costs associated with exiting the
auto finance business in 1999.
14
<PAGE> 15
NOTE 11) NET INTEREST INCOME
The following table presents the components of net interest income:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $ 32,152 $ 30,892 $ 89,380 $ 105,215
Investments 28,014 20,710 80,386 68,730
Interest component of previously
discounted cash flows 1,019 4,937 15,934 15,881
------ ------ ------- -------
Total interest income 61,185 56,539 185,700 189,826
Interest expense:
Deposits 25,503 14,014 79,098 62,747
Debt and other borrowings 16,432 25,151 49,431 80,188
------ ------ ------- -------
Total interest expense 41,935 39,165 128,529 142,935
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 19,250 17,374 57,171 46,891
Less: Provision for credit losses (10,452) (6,414) (28,007) (47,221)
- ------------------------------------------------------------------------------------------------------------------------
Net interest after
provision for credit losses $ 8,798 $ 10,960 $ 29,164 $ (330)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12) INCOME TAX EXPENSE
Income tax expense is based on the estimated annual effective tax rate of 39.5%
for the three months ended September 30, 1999, compared to a 30.0% tax rate for
the comparable 1998 period.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ 5,000 $ 24,216 $ 15,000 $(45,651)
State (747) 1,937 1,548 8,566
- --------------------------------------------------------------------------------------------------------------------
Total current 4,253 26,153 16,548 (37,085)
- --------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 3,012 (19,843) 4,025 26,526
State 1,991 129 991 (454)
- --------------------------------------------------------------------------------------------------------------------
Total deferred 5,003 (19,714) 5,016 26,072
- --------------------------------------------------------------------------------------------------------------------
Total tax expense
(benefit) $ 9,256 $ 6,439 $ 21,564 $(11,013)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
The reconciliation of the statutory federal income tax to the consolidated tax
expense is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal
income tax $ 8,202 $ 7,512 $ 19,189 $ 151,294
State income taxes 808 1,343 1,650 9,173
Insurance program income 0 13 0 33,059
Tax credits 0 (2,321) 0 (6,963)
Compensation limitation 44 132 4,725
Transfer of consumer
credit card business
(see Note 8) 0 0 0 (200,494)
Non taxable investment income (144) (153) (460) (445)
Other 346 45 1,053 (1,362)
- -------------------------------------------------------------------------------------------------------------------------
Consolidated tax
expense(benefit) $ 9,256 $ 6,439 $21,564 $ (11,013)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13) UNUSUAL CHARGES
Employee costs associated with staff reductions
In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with the consolidation of support functions.
Employee costs associated with Fleet Transaction/Tender Offer
In connection with the Fleet Transaction/Tender Offer in the first quarter of
1998 discussed in Note 8, Advanta made major organizational changes and 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 re-measurement costs, and other employee costs
directly attributable to the Fleet Transaction/Tender Offer. Additionally,
during the first quarter of 1998, Advanta incurred approximately $35.5 million
of other compensation charges. This amount includes $21.3 million attributable
to payments under change of control plans and $14.2 million associated with the
execution of the Tender Offer.
Exited business/products
In the first quarter of 1999, Advanta recorded a $3.4 million charge for costs
associated with exited businesses/products. The charges include severance and
outplacement costs, and professional fees associated with exited
businesses/products.
In the first quarter of 1998, Advanta implemented a plan to exit
certain businesses and product offerings not directly associated with its
mortgage, leasing and business card units. In connection with this plan,
contractual vendor commitments of approximately $10.0 million associated with
discontinued development and other activities were accrued. Advanta has
substantially completed the settlement of these contractual commitments.
Advanta also has contractual commitments to certain customers and
non-related financial institutions that are providing benefits to those
customers, under a product that is no longer being offered and for which no
future revenues or benefits will be received. In the first quarter of 1998,
16
<PAGE> 17
Advanta recorded a charge of $22.8 million associated with this commitment, and
an $8.3 million charge associated with the write-down of assets associated with
this program. Advanta expects to pay a substantial portion of these costs over
the next 24 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 in 1998, Advanta also incurred $11.5
million of related professional fees and $1.5 million of other expenses related
to these plans.
Asset impairment/disposal
In connection with Advanta's plans to reduce corporate expenses and exit certain
business and product offerings in the first quarter of 1998, Advanta identified
certain assets for disposal and wrote off or wrote down the carrying costs of
those assets to estimated realizable value, resulting in a charge of $8.7
million. These assets consisted principally of leasehold improvements and
various other assets. Advanta has substantially completed the disposal of these
assets.
The accrual for unusual charges at September 30, 1999 is comprised of the
following:
<TABLE>
<CAPTION>
12/31/98 CHARGED TO 9/30/99
ACCRUAL ACCRUED ACCRUAL IN ACCRUAL
BALANCE IN 1999 1999 BALANCE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee costs associated with staff
reductions $ 0 $ 3,350 $ 2,399 $ 951
Employee costs associated with Fleet
Transaction/Tender Offer 3,291 0 283 3,008
Expenses associated with exited
business/products 14,766 3,363 6,389 11,740
Asset impairment/disposal 567 0 0 567
- -------------------------------------------------------------------------------------------------------
Total $ 18,624 $ 6,713 $ 9,071 $ 16,266
=======================================================================================================
</TABLE>
17
<PAGE> 18
NOTE 14) EARNINGS PER SHARE
The following table shows the calculation of basic earnings per share
and diluted earnings per share.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 14,178 $ 15,025 $ 33,263 $ 443,282
less: Preferred A dividends 0 0 (141) (141)
less: Preferred B dividends (887) (929) (2,661) (2,733)
- ----------------------------------------------------------------------------------------------------
Income available to common
shareholders $ 13,291 $ 14,096 $ 30,461 $ 440,408
Less: Class A dividends declared (567) (653) (1,789) (1,961)
Less: Class B dividends declared (1,172) (1,147) (3,555) (3,396)
- ----------------------------------------------------------------------------------------------------
Undistributed earnings $ 11,552 $ 12,296 $ 25,117 $ 435,051
Basic shares
Class A 8,984 10,316 9,078 11,780
Class B 14,429 14,166 14,143 16,100
Combined (2) 23,413 24,482 23,221 27,880
Options A 1 4 1 10
Options B 294 28 187 108
AMIP A 45 0 31 0
AMIP B 237 0 80 156
Preferred B (1) 0 0 0 1,622
Diluted shares
Class A 9,030 10,320 9,110 11,790
Class B 14,960 14,194 14,410 17,986
Combined (2) 23,990 24,514 23,520 29,776
Basic earnings per share
Class A $ .56 $ .57 $ 1.28 $ 15.77
Class B .57 .58 1.33 15.82
Combined (2) .57 .58 1.31 15.80
Diluted earnings per share
Class A $ .54 $ .56 $ 1.26 $ 14.87
Class B .56 .58 1.31 14.89
Combined (2) .55 .58 1.30 14.88
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) 14,211 shares of Advanta's Class B convertible preferred stock were
outstanding but were not included in the computation of diluted
earnings per share for the three or nine months ended September 30,
1999, or the three months ended September 30, 1998, because they were
antidilutive for those periods. Each share of Class B convertible
preferred stock was mandatorily converted into one share of Class B
Common Stock effective September 15, 1999.
(2) Combined represents a weighted average of Class A and Class B earnings
per share.
Options to purchase 1.4 million and 1.6 million shares of Class B Common
Stock were outstanding during the three and nine months ended September 30,
1999, respectively, but were not included in the computation of diluted EPS
because the exercise price of the option was greater than or equal to the
average market price of the common shares during the applicable period. Options
to purchase 3.0 million and 2.2 million shares of Class B Common Stock were
outstanding during the three and nine
18
<PAGE> 19
months ended September 30, 1998, respectively, but were not included in the
computation of diluted EPS because the exercise price of the option was greater
than or equal to the average market price of the common shares during the
applicable period.
NOTE 15) CONTINGENCIES
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's
allegations, which Advanta denies, center around Fleet's assertions that Advanta
has failed to complete certain post-closing adjustments to the value of the
assets and liabilities Advanta contributed to the LLC in connection with the
Fleet Transaction. Fleet seeks damages of approximately $141 million. Advanta
has filed an answer to the complaint denying the material allegations of the
complaint, but acknowledging that Advanta contributed $1.8 million in excess
liabilities in the post-closing adjustment process, after taking into account
the liabilities Advanta has already assumed. Advanta also has filed a
countercomplaint against Fleet for approximately $101 million in damages Advanta
believes have been caused by certain actions of Fleet following 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 Advanta.
On or about March 26, 1999, a complaint was filed by John Uphaus,
individually and on behalf of a class, against Household Bank (Nevada) N.A.
("Household") and Advanta National Bank in the United States District Court for
the Northern District of Illinois. Uphaus alleges that he had a credit card
account with Household, which account was purchased by Advanta National Bank. He
further alleges that the annual percentage rate on a portion of his account was
increased in a manner contrary to the promotional material he received.
Advanta's preliminary investigation suggests that if a change in interest rate
took place, as alleged by Uphaus, that change occurred after the contribution of
Advanta's consumer credit card portfolio, and it was made by Fleet Credit Card
LLC. In any event, Fleet Credit Card LLC is obligated to defend and indemnify
Advanta pursuant to the Contribution Agreement and the Licensing Agreement
between the parties. Advanta National Bank's response to this complaint was
filed with the court on June 21, 1999.
Advanta and its subsidiaries are involved in other legal proceedings,
claims and litigation, including those arising in the ordinary course of
business. Management believes that the aggregate liabilities, if any, resulting
from those actions will not have a material adverse effect on the consolidated
financial position or results of operations of Advanta. However, as the ultimate
resolution of these proceedings is influenced by factors outside of Advanta's
control, it is reasonably possible that Advanta's estimated liability under
these proceedings may change.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
For the quarter ended September 30, 1999, Advanta reported net income of $14.2
million or $.55 per combined common share, assuming dilution, compared to $12.3
million or $.49 per combined diluted common share for the quarter ended June 30,
1999, and $15.0 million or $.58 per combined diluted common share for the
quarter ended September 30, 1998. In the three months ended September 30, 1999,
revenues increased by $13.5 million and expenses increased by $11.5 million in
comparison with the same period in 1998, both resulting from higher levels of
average managed and serviced receivables. In addition, the tax provision
increased by $2.8 million in the three months ended September 30, 1999 in
comparison with the same period of 1998. Advanta's effective tax rate was lower
in 1998 than in 1999 as a result of certain credits included in the 1998
estimated tax rate.
For the nine months ended September 30, 1999, Advanta reported net
income of $33.3 million or $1.30 per combined common share, assuming dilution,
compared to $443.3 million or $14.88 per combined diluted common share for the
same period of 1998. The earnings for the nine months ended September 30, 1999
include non-recurring charges, after tax, of $14.5 million that are principally
related to Advanta's exit from the auto finance business and severance and
outplacement associated with cost cutting initiatives implemented in the first
quarter. In addition, Advanta recognized non-operating gains of $16.7 million,
after tax, in the nine months ended September 30, 1999, in connection with an
investment held by Advanta Partners LP, Advanta's private equity investment
affiliate. The earnings for the nine months ended September 30, 1999 also
include a reduction in Advanta's retained interest-only strip of $6.1 million,
after tax, reflecting the adoption of more conservative fair value assumptions.
Earnings reported for the nine months ended September 30, 1998 include
the $541.3 million gain on the Fleet Transaction (see Note 8 to Consolidated
Condensed 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, a $54.1
million pretax charge for expenses associated with exited businesses and
products, $42.5 million of equity securities losses and an $8.7 million pretax
charge for facility impairments.
This report contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Significant risks and uncertainties include:
Advanta's managed net interest margin; the receivables volume; the timing of
Advanta's securitizations; prepayment rates; the mix of account types and
interest rate fluctuations; the level of delinquencies, customer bankruptcies
and charge-offs; and the amount and rate of growth in Advanta's expenses.
Earnings also may be significantly affected by factors that affect consumer
debt, competitive pressures from other providers of financial services, the
effects of governmental regulation, the amount and cost of financing available
to Advanta and its subsidiaries, the difficulty or inability to securitize
Advanta's receivables and the impact of the ratings of debt of Advanta and its
subsidiaries. Additional risks that may affect Advanta's future performance are
set forth elsewhere in this Quarterly Report on Form 10-Q and in Advanta's
Annual Report on Form 10-K for the year ended December 31, 1998 and its other
filings with the Securities and Exchange Commission.
20
<PAGE> 21
ADVANTA MORTGAGE
OVERVIEW
Net income for Advanta Mortgage was $7.9 million for the quarter ended September
30, 1999, compared to net income of $10.1 million for the same period of 1998.
The decrease in net income is the result of a decrease in revenues of $5.1
million and a higher tax provision of $.8 million, partially offset by a
decrease in expenses of $3.7 million due to cost reduction measures implemented
during 1999. Revenues have decreased due to lower volumes of receivable
securitizations, as well as lower interest income resulting from a decrease in
on-balance sheet mortgage loans and the timing of cash flows on the retained
interest-only strip. The tax provision increased in 1999 in comparison with
1998, due to an increase in the overall effective tax rate of Advanta.
Net income for the nine months ended September 30, 1999 was $21.3 million, after
excluding net of tax charges of $6.1 million associated with additional reserves
recorded on Advanta's retained interest-only strip in the second quarter of
1999, as compared to $22.4 million in the nine months ended September 30, 1998.
Pretax income increased by $3.2 million in the nine months ended September 30,
1999 in comparison with the same period of 1998 due to a decrease in expenses as
a percentage of average managed receivables. The tax provision for the nine
months ended September 30, 1999 increased by $4.3 million in comparison with the
same period of the prior year due to an increase in the overall effective tax
rate of Advanta.
GAIN ON SALE OF RECEIVABLES
Advanta Mortgage recognized gains of $40.1 million from the securitization and
sale of $747 million of loans in the three months ended September 30, 1999, and
recognized gains of $115.1 million from the securitization and sale of $2.1
billion of loans in the nine months ended September 30, 1999. Total Advanta
Mortgage loan sales/securitization volume decreased 50.5% for the three months
ended September 30, 1999, and 44.1% for the nine months ended September 30,
1999, as compared to the same periods in 1998. The decrease in
sales/securitization volume resulted primarily from lower originations due to
Advanta's focus on profitable loan growth over volume, as well as Advanta's
decision to report income that is essentially equal to that of a portfolio
lender. The gain, which represents 5.4% of the loans sold in the quarter ended
September 30, 1999, is higher as a percentage of loans sold than the $59.8
million or 4.0% recognized in the third quarter of 1998. The gain recognized in
the nine months ended September 30, 1999, represents 5.5% of loans sold, as
compared to $148.1 million or 4.0% of loans sold in the same period of 1998. The
increase in gain as a percentage of loans sold is primarily due to the higher
proportion of loans sold during 1999 that were directly originated. 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. In the three months ended
September 30, 1999, direct originations represented 65.0% of total originations,
as compared to 31.2% in the same period of 1998. In the nine months ended
September 30, 1999, direct originations represented 58.8% of total originations,
as compared to 29.8% in the same period of 1998.
Gain on sale of receivables, net, in the nine months ended September 30, 1999,
included a $10.0 million charge associated with additional reserves recorded on
the retained interest-only strip that resulted from the adoption of more
conservative fair value assumptions. There were no similar charges in the three
months ended September 30, 1999. Gain on sale of receivables, net, included
pretax charges of $17.3 million in the three months ended September 30, 1998,
21
<PAGE> 22
and $51.0 million in the nine months ending September 30, 1998, to adjust the
retained interest-only strip to fair value, reflecting increases in prepayment
speeds experienced during the periods.
SERVICING REVENUES
Servicing revenues were $24.8 million for the three months ended September 30,
1999, as compared to $22.0 million for the same period in 1998. For the nine
months ended September 30, 1999, servicing revenues were $72.1 million as
compared to $65.9 million for the nine months ended September 30, 1998. The
increase in servicing revenues in both periods is due to an increase in average
serviced receivables in comparison with the same periods of 1998.
PORTFOLIO LENDER ANALYSIS
In the fourth quarter of 1998, Advanta 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, Advanta intends to
accomplish this by increasing its use of on-balance sheet funding and decreasing
its degree of reliance on securitizations structured as sales over time. In this
regard, Advanta began to analyze and evaluate Advanta Mortgage's financial
results from a portfolio lender's perspective as well as under generally
accepted accounting principles. The following tables present Advanta's reported
results adjusted to approximate the results of a portfolio lender for the three
and nine months ended September 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Advanta
Advanta Mortgage
Mortgage as a
As Pro forma Portfolio
Reported Adjustments Lender
--------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
Gain on sale of receivables, net $ 40,139 $ (40,139) $ 0
Interest income 28,239 182,379 210,618
Servicing revenues 24,802 (7,815) 16,987
Other revenues, net 1,135 0 1,135
--------- --------- ---------
Total revenues 94,315 134,425 228,740
EXPENSES:
Operating expenses 53,733 1,895 55,628
Interest expense 21,581 117,076 138,657
Provision for credit losses 4,078 15,454 19,532
Minority interest in income
of consolidated subsidiary 1,865 0 1,865
--------- --------- ---------
Total expenses 81,257 134,425 215,682
--------- --------- ---------
Income before income taxes 13,058 0 13,058
Income taxes 5,158 0 5,158
--------- --------- ---------
Net income $ 7,900 $ 0 $ 7,900
========= ========= =========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Advanta
Advanta Mortgage
Mortgage as a
As Pro forma Portfolio
Reported Adjustments Lender
--------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
Gain on sale of receivables, net $ 105,115 $(105,115) $ 0
Interest income 101,216 523,827 625,043
Servicing revenues 72,123 (24,143) 47,980
Other revenues, net 3,490 0 3,490
--------- --------- ---------
Total revenues 281,944 394,569 676,513
EXPENSES:
Operating expenses 175,016 5,576 180,592
Interest expense 67,008 343,076 410,084
Provision for credit losses 9,145 35,917 45,062
Minority interest in income
of consolidated subsidiary 5,617 0 5,617
--------- --------- ---------
Total expenses 256,786 384,569 641,355
--------- --------- ---------
Income before income taxes 25,158 10,000 35,158
Income taxes 9,902 3,950 13,852
--------- --------- ---------
Net income $ 15,256 $ 6,050 $ 21,306
--------- --------- ---------
</TABLE>
With respect to the portfolio lender results, individual line items are
stated as if the securitized mortgages were still owned by Advanta and remained
on the balance sheet. The pro forma adjustment to gain on sale of receivables
represents the reclassification of net gains recognized on the sale of Advanta
Mortgage loans. The pro forma adjustment to provision for credit losses
represents the amount by which the provision would have increased from that
reported had the securitized Advanta Mortgage loans remained on the balance
sheet and the provision for credit losses on the securitized 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 pro forma presentation for the nine months ending September 30,
1999 results in an increase in net income of $6.1 million resulting from the
elimination of a $10.0 million pretax charge to earnings reflecting the adoption
of more conservative valuation assumptions for the retained interest-only strip.
23
<PAGE> 24
ORIGINATIONS
Originations for Advanta Mortgage were as follows ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Direct $368,654 $ 483,290 $1,179,738 $1,148,580
Broker 125,204 162,531 387,275 347,142
Conduit 66,952 584,418 402,362 1,364,374
Corporate Finance 6,505 320,871 36,979 994,770
Auto 0 18,593 5,103 98,052
-------- ---------- ---------- ----------
$567,315 $1,569,703 $2,011,457 $3,952,918
</TABLE>
Total Advanta Mortgage originations decreased 63.9% in the three months
ended September 30, 1999, and decreased 49.1% in the nine months ended September
30, 1999, over the comparable 1998 periods. Direct mortgage originations
decreased 23.7% in the three months ended September 30, 1999, and increased 2.7%
in the nine months ended September 30, 1999, over the comparable 1998 periods.
Indirect mortgage originations decreased 81.4% for the three months ended
September 30, 1999 and decreased 69.5% in the nine months ended September 30,
1999, over the comparable 1998 periods. The decrease in direct originations in
the three months ended September 30, 1999 as compared to the same three months
of the prior year, is due to Advanta's focus on profitable loan growth over
volume. In addition, there were unusually low direct originations in September
1999, attributable to a number of factors including training and other efforts
associated with new systems implementations and severe weather conditions. The
decrease in indirect originations in 1999 over the comparable 1998 periods
resulted from management's decision to substantially reduce the purchase of
loans from the conduit and corporate finance channels. This decision was based
on unfavorable market pricing and management's strategy of purchasing loans only
when the loans meet certain minimum profitability characteristics. The decrease
in auto loan originations was due to Advanta's exit from the auto finance
business in the first quarter of 1999.
Advanta originated more second lien home equity loans and home equity lines
of credit as a percentage of total originations during the three months ended
September 30, 1999 than it originated during the first six months of 1999. This
was primarily due to rising interest rates that created increased demand for
these types of loans. Second lien home equity loans represented 25% of the
dollar value of originations in the three months ended September 30, 1999,
compared to 21% in the three months ended June 30, 1999. Home equity lines of
credit represented 9.2% of the managed mortgage loan portfolio as of September
30, 1999, as compared to 4.5% at December 31, 1998.
ADVANTA BUSINESS CARDS
OVERVIEW
Advanta Business Cards offers MasterCard(R) business credit cards to small
businesses. Net income for Advanta Business Cards was $6.0 million for the three
months ended September 30, 1999 as compared to $4.3 million for the same period
in 1998. Net income for the nine months ended September 30, 1999 was $15.5
million as compared to $7.4 million for the same period of 1998. The increase in
net income in both periods resulted from increased volume, significant
improvement in portfolio yields due to changes in pricing and increased
interchange income.
24
<PAGE> 25
GAIN ON SALE OF RECEIVABLES
Advanta Business Cards recognized $7.2 million in securitization income in the
three months ended September 30, 1999, and recognized $21.1 million in
securitization income in the nine months ended September 30, 1999. Advanta
Business Cards sells receivables to an existing securitization trust on a
continuous basis to replenish the investors' interest in trust receivables that
have been repaid by the cardholders. This compares to $5.3 million in
securitization income recognized in the three months ended September 30, 1998,
and $11.1 million recognized in the nine months ended September 30, 1998. The
increase in securitization income in both periods is due primarily to increased
yields on the securitized receivables and a decrease in receivable charge-off
rates.
ORIGINATIONS
Originations for business cards were $484.7 million for the three months ended
September 30, 1999 and $349.6 million for the same period of 1998. Business card
originations for the nine months ended September 30, 1999 were $1.4 billion and
were $987.3 million in the same period of 1998. The increases in business card
originations over comparable periods in 1998 resulted from programs designed to
expand the target market and encourage existing customers to increase their use
of the business cards.
ADVANTA LEASING SERVICES
OVERVIEW
Advanta Leasing Services offers flexible lease financing programs on
small-ticket equipment to small businesses. Net income for Advanta Leasing
Services was $1.1 million for the three months ended September 30, 1999 as
compared to $0.7 million for the same period in 1998. Net income for the nine
months ended September 30, 1999 was $3.4 million, and was $0.9 million for the
same period of 1998. The increase in net income in 1999 was attributable to
increased volume as well as a decrease in operating expenses that resulted from
cost reduction measures implemented this year.
GAIN ON SALE OF RECEIVABLES
Advanta Leasing Services recognized $4.0 million in gains on the sale of $107
million of leases in the three months ended September 30, 1999, as compared to
$2.6 million in gains on the sale of $78 million of leases for the same period
in 1998. In the nine months ended September 30, 1999, Advanta Leasing Services
recognized $13.3 million in gains on the sale of $308 million of leases, as
compared to $7.9 million in gains on the sale of $210 million of leases in the
same period of 1998. The sales were through a combination of commercial paper
conduit programs and a public lease securitization.
ORIGINATIONS
Originations for Advanta Leasing Services were as follows ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Vendor $ 52,441 $44,749 $152,560 $125,628
Broker 55,115 40,033 170,442 84,889
Other 5,059 6,954 12,833 17,449
-------- ------- -------- --------
$112,615 $91,736 $335,835 $227,966
</TABLE>
25
<PAGE> 26
Lease originations increased 22.8% for the three months ended September 30, 1999
and 47.3% for the nine months ended September 30, 1999, in comparison with the
same periods of the prior year. The increase in lease originations over the
comparable periods of 1998 is due to the growth in the number of vendor and
broker relationships, as well as the expansion of existing relationships.
ADVANTA CORP.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments, excluding the interest component
of previously discounted cash flows, increased by $8.6 million in the three
months ended September 30, 1999 as compared to the same period in 1998, and
decreased $4.2 million for the nine months ended September 30, 1999 as compared
to the same period of 1998. During the three months ended September 30, 1999,
interest expense increased $2.8 million as compared to the same period in 1998,
and decreased $14.4 million for the nine months ended September 30, 1999 as
compared to the same period of 1998. The increase in interest income and
interest expense in the three months ended September 30, 1999 as compared to the
same period of the prior year resulted from an increase in Advanta's average
on-balance sheet assets and liabilities. The decreases in interest income and
interest expense in the nine months ended September 30, 1999 as compared to the
same period of 1998 were mainly attributable to a decrease in interest bearing
assets and liabilities owned by Advanta in connection with the Fleet Transaction
and Tender Offer in February 1998. The mix of on-balance sheet receivables had a
favorable impact on interest income as the proportion of higher-yielding
business card receivables to total receivables has increased in 1999 relative to
the same periods in 1998. The increase in on-balance sheet receivables was due
to the timing of securitizations. Both periods reflect decreased margins as a
result of carrying higher cash, cash equivalent and investment balances as a
percent of owned assets for liquidity purposes.
Securitization activity shifts revenues from interest income to
non-interest revenues. This activity reduces the level of higher-yielding
receivables on-balance sheet while proportionately increasing the balance sheet
levels of lower-yielding receivables and short-term, high quality investments
earning money market rates.
The owned average cost of funds decreased to 5.84% in the three months
ended September 30, 1999 from 6.17% in the same period in 1998, and decreased to
5.80% in the nine months ended September 30, 1999 from 6.31% in the same period
of 1998. The decrease in the cost of funds was attributable to the increase in
the use of deposits as a funding source. Deposits represented 66% of total
average interest-bearing liabilities for the three months ended September 30,
1999 as compared to 41% for the same period in 1998. Deposits represented 66% of
total average interest-bearing liabilities for the nine months ended September
30, 1999 as compared to 47% for the same period in 1998. Advanta has utilized
derivatives to manage interest rate risk (see discussion under "Derivatives
Activities").
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 the three and nine months ended September 30, 1999
and 1998. Interest revenues on loan and lease receivables include the
amortization of certain loan fees and costs.
26
<PAGE> 27
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ON-BALANCE SHEET
Mortgage loans $ 697,713 $16,477 9.37% $ 869,133 $20,701 9.45%
Business cards 284,874 12,367 17.22 136,338 5,770 16.79
Leases 110,132 2,918 10.60 98,514 2,620 10.64
Auto loans 2,699 84 12.40 37,670 1,462 15.40
Other loans 17,322 548 12.56 17,704 574 12.87
---------- ------- --------- -------
Gross receivables(2) 1,112,740 32,394 11.56 1,159,359 31,127 10.66
Subordinated trust
assets 343,018 7,103 8.28 52,046 874 6.71
Investments(2) 1,396,623 20,937 5.97 1,294,986 19,870 6.11
---------- ------- ---------- -------
Total interest earning
assets $2,852,381 $60,434 8.43% $2,506,391 $51,871 8.23%
Interest-bearing
liabilities $2,788,784 $40,975 5.84% $2,391,471 $37,133 6.17%
Net interest spread 2.59% 2.06%
Net interest margin (3) 2.71% 2.33%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,580,722 $6,012,374
Business cards
securitized 621,158 632,010
Leases securitized 631,439 513,333
Auto loans securitized 108,658 206,226
----------- ----------
Total average
securitized receivables $ 8,941,977 $7,363,943
=========== ==========
Total average managed
receivables $10,054,717 $8,523,302
=========== ==========
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Interest and average rate for tax-free securities, loans and leases
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin for the three months ended September 30,
1999 was 3.26%, representing a combination of owned interest-earning
assets/owned interest-bearing liabilities and securitized mortgage
assets/liabilities.
27
<PAGE> 28
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ON-BALANCE SHEET
Mortgage loans $ 781,960 $ 53,549 9.16% $ 691,622 $ 49,474 9.56%
Business cards 204,189 25,218 16.51 147,741 16,544 14.97
Leases 108,371 7,639 9.40 101,768 8,965 11.75
Auto loans 18,827 2,079 14.77 48,174 6,179 17.15
Consumer credit cards 0 0 0.00 514,338 23,457 6.10
Other loans 17,385 1,640 12.61 15,001 1,288 11.48
----------- -------- ----------- --------
Gross receivables(2) 1,130,732 90,125 10.66 1,518,644 105,907 9.32
Subordinated trust
assets 316,400 19,172 8.08 46,077 2,462 7.12
Investments(2) 1,454,935 60,960 5.57 1,509,837 66,376 5.86
----------- -------- ----------- --------
Total interest earning
assets $ 2,902,067 $170,257 7.83% $ 3,074,558 $174,745 7.59%
Interest-bearing
liabilities $ 2,881,632 $125,030 5.80% $ 2,960,501 $139,992 6.31%
Net interest spread 2.03% 1.28%
Net interest margin (3) 2.08% 1.51%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,438,740 $ 5,413,782
Business cards
securitized 661,321 581,277
Leases securitized 591,180 497,590
Auto loans securitized 130,933 181,389
Consumer credit cards
securitized 0 1,953,903
----------- -----------
Total average
securitized receivables $ 8,822,174 $ 8,627,941
=========== ===========
Total average managed
receivables $ 9,952,906 $10,146,585
=========== ===========
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Interest and average rate for tax-free securities, loans and leases
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin for the nine months ended September 30,
1999 was 3.13%, representing a combination of owned interest-earning
assets/interest-bearing liabilities and securitized mortgage
assets/liabilities.
28
<PAGE> 29
OTHER REVENUES
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity securities gains (losses) $ 2,109 $ 19 $ 29,781 $(42,470)
Business card interchange income 8,909 5,688 23,273 14,540
Leasing other revenues 3,862 4,177 12,613 11,542
Consumer credit card overlimit fees 0 0 0 16,094
Insurance revenues, net and other 3,770 3,766 10,603 28,375
-------- -------- -------- --------
Total other revenues, net $ 18,650 $ 13,650 $ 76,270 $ 28,081
======== ======== ======== ========
</TABLE>
Other revenues in the nine months ended September 30, 1999 include equity
securities gains of $29.8 million, reflecting changes in the fair value and
realized gains on Advanta Partners LP ("Advanta Partners") investments. Included
in this amount is an $18 million gain on an investment in a company that was
merged with another company in exchange for that company's stock in the first
quarter of 1999. The stock received had a value significantly higher than
Advanta Partners' basis in the investment. In the second quarter of 1999,
Advanta Partners sold the majority of their interest in this investment
realizing an additional gain of approximately $10 million. Partially offsetting
this gain in the second quarter was the write-down of another equity investment
of approximately $0.8 million. Other revenues in the nine months ended September
30, 1998 include equity securities losses of $42.5 million. Most of the loss
relates to investments not publicly traded for which Advanta Partners decided to
expedite a disposal plan.
Insurance revenues, net and other decreased $17.8 million in the nine
months ended September 30, 1999 as compared with the same period in 1998. This
decline is attributable to the transfer of the consumer credit card portfolio in
connection with the Fleet Transaction. Business card interchange income
increased in the three and nine month periods ended September 30, 1999, in
comparison with the same periods of 1998, due to an increase in interchange
rates, as well as an increase in average managed business card receivables.
29
<PAGE> 30
OPERATING EXPENSES
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 44,951 $ 41,908 $133,795 $136,822
Other operating expenses:
Marketing 11,644 13,569 39,785 37,932
Professional fees 6,503 1,606 22,519 8,150
Credit and collection expense 5,697 3,381 14,606 11,454
Occupancy expense 4,132 3,243 12,297 11,694
External processing 4,112 3,740 11,001 18,262
Telephone expense 2,743 2,361 8,279 9,811
Amortization of credit card
deferred origination costs, net 1,208 1,175 3,564 21,109
Credit card fraud losses 191 100 625 3,000
Other 1,521 6,936 4,843 29,111
- ----------------------------------------------------------------------------------------------
Total other operating expenses 37,751 36,111 $117,519 $150,523
- ----------------------------------------------------------------------------------------------
Total operating expenses $ 82,702 $ 78,019 $251,314 $287,345
==============================================================================================
At quarter end (in thousands):
Number of accounts managed 621 540 N/A N/A
Number of employees 2,574 2,544 N/A N/A
For the quarter:
Operating expenses
as a percentage of average
managed receivables(1) 3.24% 3.61% 3.32% 3.50%
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes amortization of credit card deferred origination costs, net
Operating expenses as a percentage of average managed receivables for
the three and nine month periods ended September 30, 1999 decreased in
comparison with the same periods of 1998 due to cost reduction measures
implemented during 1999.
Total operating expenses in the three months ended September 30, 1999
increased by $4.7 million as compared to the same period of the prior year. This
increase is aligned with growth in the portfolio of average managed receivables.
Total operating expenses in the nine months ended September 30, 1999 decreased
by $36.0 million as compared to the same period of the prior year. This decrease
is the result of the Fleet Transaction in 1998 as well as exit and disposition
plans associated with business and product offerings not directly associated
with Advanta's mortgage, leasing and business card units. Professional fees
increased by $4.9 million for the three months ended September 30, 1999 and
$14.4 million for the nine months ended September 30, 1999, as compared to the
same periods of 1998. These increases are due to consulting costs and
outsourcing costs associated with Advanta's management of capacity and
resources.
PROVISION FOR CREDIT LOSSES
For the three months ended September 30, 1999 the provision for credit losses
increased $4.1 million to $10.5 million in comparison with the provision in the
same period in 1998 of $6.4 million. The majority of this increase was in the
30
<PAGE> 31
Advanta Business Cards provision for loan losses, which increased by $3.3
million in the three months ended September 30, 1999 in comparison with the same
period of 1998. The increase in the Advanta Business Cards provision relates to
the increase in average on-balance sheet business card receivables from $136
million for the three months ended September 30, 1998 to $285 million in the
three months ended September 30, 1999.
For the nine months ended September 30, 1999, the provision for credit
losses decreased to $28.0 million from $47.2 million for the same period in 1998
and charge-offs on owned receivables decreased to $19.4 million from $47.3
million during the same period in 1998. These decreases are mainly attributable
to the February 1998 transfer of the consumer credit card receivables in
connection with the Fleet Transaction.
ASSET QUALITY
Impaired assets include both nonperforming assets (Advanta Mortgage loans,
credit card receivables and lease receivables 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 leases and other loans. Advanta charges off
expected losses on all nonperforming mortgage loans at the earlier of
foreclosure or when they have become 12 months delinquent. 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.
The consolidated managed charge-off rate for the three months ended
September 30, 1999 was 1.6% compared to 1.3% in the same period of 1998. On the
total owned portfolio, the charge-off rate was 2.6% in the three months ended
September 30, 1999 compared to 1.9% for the same period in 1998. The following
represents the quarterly managed charge-off rates by product:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------------------------
9/30/99 6/30/99 9/30/98
------- ------- -------
<S> <C> <C> <C>
Mortgage 0.86% 0.66% 0.56%
Auto 12.33 15.99 7.11
Business Card 5.25 5.22 5.79
Leases 3.76 3.23 2.29
</TABLE>
Advanta Mortgage continues to emphasize profitability enhancement over loan
growth, and to emphasize the direct to consumer channels over indirect channels
for originations. This has resulted in a significant reduction in the rate of
portfolio growth relative to prior periods. The decline in the growth rate has
reduced the proportion of new, unseasoned loans in the portfolio. This
"seasoning" effect results in higher reported delinquencies and charge-offs
consistent with an aging portfolio. The increase in reported delinquency and
charge-off rates is primarily attributable to seasoning of the mortgage loan
portfolio.
31
<PAGE> 32
The following tables provide a summary of impaired assets, delinquencies and
charge-offs, as of and for the year-to-date periods indicated ($ in thousands).
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, SEPT. 30,
CONSOLIDATED-MANAGED 1999 1998 1998
<S> <C> <C> <C>
Nonperforming assets (2) $497,859 $410,584 $343,788
Accruing loans past due 90 days or more 0 30 36
Impaired assets 497,859 410,614 343,824
Total loans 30 days or more delinquent 767,406 753,251 616,858
As a percentage of gross receivables:
Nonperforming assets (2) 4.9% 4.2% 3.9%
Impaired assets 4.9 4.2 3.9
Total loans 30 days or more delinquent 7.6 7.7 6.9
Net charge-offs:
Amount (1) $109,951 $247,287 $213,287
As a percentage of average gross
receivables (annualized) (1) 1.5% 2.5% 2.8%
ADVANTA MORTGAGE LOANS - MANAGED
Nonperforming assets (2) $465,115 $375,520 $315,415
Total loans 30 days or more delinquent 669,954 656,789 533,695
As a percentage of gross receivables:
Nonperforming assets (2) 5.6% 4.5% 4.2%
Total loans 30 days or more delinquent 8.0 7.9 7.2
Net charge-offs - Mortgage Loans:
Amount $ 41,940 $ 36,142 $ 25,273
As a percentage of average gross
receivables (annualized) .7% .6% .6%
Net charge-offs - Auto Loans:
Amount $ 15,757 $ 21,238 $ 13,570
As a percentage of average gross
receivables (annualized) 14.0% 9.3% 7.9%
LEASES - MANAGED
Nonperforming assets (2) $ 11,109 $ 9,595 $ 7,386
Impaired assets 11,109 9,602 7,386
Total loans 30 days or more delinquent 64,780 60,154 48,990
As a percentage of receivables:
Nonperforming assets (2) 1.4% 1.4% 1.2%
Impaired assets 1.4 1.4 1.2
Total loans 30 days or more delinquent 8.3 9.0 7.7
Net charge-offs - Leases:
Amount $ 17,501 $ 16,220 $ 11,532
As a percentage of average gross
receivables (annualized) 3.3% 2.7% 2.6%
BUSINESS CARDS - MANAGED
Nonperforming assets (2) $ 21,178 $ 25,231 $ 20,671
Impaired assets 21,178 25,231 20,671
Total loans 30 days or more delinquent 31,829 35,900 33,560
As a percentage of receivables:
Nonperforming assets (2) 2.3% 3.1% 2.7%
Impaired assets 2.3 3.1 2.7
Total loans 30 days or more delinquent 3.4 4.4 4.3
Net charge-offs - Business Cards:
Amount $ 34,725 $ 43,732 $ 32,959
As a percentage of average gross
receivables (annualized) 5.4% 5.9% 6.0%
</TABLE>
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage loans, auto loans, business cards
and leases past due 90 days or more; real estate owned; and bankrupt,
decedent and fraudulent business cards.
32
<PAGE> 33
<TABLE>
<CAPTION>
SEPT. 30, DEC. 31, SEPT. 30,
CONSOLIDATED-OWNED 1999 1998 1998
<S> <C> <C> <C>
Allowance for credit losses $ 35,328 $ 33,437 $ 19,153
Nonperforming assets (2) 51,158 49,568 38,561
Accruing loans past due 90 days or more 0 30 36
Impaired assets 51,158 49,598 38,597
Total loans 30 days or more delinquent 62,618 73,755 60,928
As a percentage of gross receivables:
Allowance for credit losses 3.7% 3.0% 2.3%
Nonperforming assets (2) 5.3 4.4 4.6
Accruing loans past due 90 days or more 0.0 0.0 0.0
Impaired assets 5.3 4.4 4.6
Total loans 30 days or more delinquent 6.5 6.5 7.2
Net charge-offs:
Amount (1) $ 19,426 $ 53,109 $ 47,310
As a percentage of average gross
receivables (annualized) (1) 2.3% 3.7% 4.2%
ADVANTA MORTGAGE LOANS - OWNED
Allowance for credit losses $ 16,480 $ 20,092 $ 6,235
Nonperforming assets (2) 42,355 38,734 30,858
Total loans 30 days or more delinquent 45,527 56,131 42,267
As a percentage of gross receivables:
Allowance for credit losses 2.6% 2.4% 1.1%
Nonperforming assets (2) 6.8 4.6 5.4
Total loans 30 days or more delinquent 7.3 6.7 7.4
Net charge-offs - Mortgage:
Amount $ 6,023 $ 3,658 $ 2,469
As a percentage of average gross
receivables (annualized) 1.0% .5% .5%
Net charge-offs - Auto:
Amount $ 3,777 $ 7,648 $ 5,697
As a percentage of average gross
receivables (annualized) 26.7% 16.1% 15.8%
LEASES - OWNED
Allowance for credit losses $ 3,368 $ 2,695 $ 2,421
Nonperforming assets (2) 2,440 3,115 2,898
Impaired assets 2,440 3,122 2,904
Total loans 30 days or more delinquent 8,456 9,739 11,218
As a percentage of receivables:
Allowance for credit losses 2.6% 2.2% 2.1%
Nonperforming assets (2) 1.9 2.5 2.5
Impaired assets 1.9 2.6 2.5
Total loans 30 days or more delinquent 6.6 7.9 9.6
Net charge-offs - Leases:
Amount $ 1,721 $ 3,491 $ 3,030
As a percentage of average gross
receivables (annualized) 2.1% 3.4% 4.0%
BUSINESS CARDS - OWNED
Allowance for credit losses $ 10,784 $ 6,916 $ 6,763
Nonperforming assets (2) 5,906 7,481 4,489
Impaired assets 5,906 7,481 4,489
Total loans 30 days or more delinquent 7,792 7,207 6,830
As a percentage of receivables:
Allowance for credit losses 5.6% 4.6% 4.9%
Nonperforming assets (2) 3.1 5.0 3.3
Impaired assets 3.1 5.0 3.3
Total loans 30 days or more delinquent 4.1 4.8 5.0
Net charge-offs - Business Cards:
Amount $ 7,874 $ 10,033 $ 7,836
As a percentage of average gross
receivables (annualized) 5.1% 6.9% 7.1%
</TABLE>
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage loans, auto loans, business cards
and leases past due 90 days or more; real estate owned; and bankrupt,
decedent and fraudulent business cards.
33
<PAGE> 34
UNUSUAL CHARGES
Employee costs associated with staff reductions
In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with the consolidation of support functions.
Employee costs associated with Fleet Transaction/Tender Offer
In connection with the Fleet Transaction and Tender Offer in the first quarter
of 1998 more fully discussed in Note 8 to the Consolidated Condensed Financial
Statements, Advanta made major organizational changes and 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 re-measurement costs, and other employee costs directly
attributable to the Fleet Transaction/Tender Offer. Additionally, during the
first quarter of 1998, Advanta incurred approximately $35.5 million of other
compensation charges. This amount includes $21.3 million attributable to
payments under change of control plans and $14.2 million associated with the
execution of the Tender Offer.
Exited business/products
In the first quarter of 1999, Advanta recorded a $3.4 million charge for costs
associated with exited businesses/products. The charges include severance and
outplacement costs, and professional fees associated with exited
businesses/products.
In the first quarter of 1998, Advanta implemented a plan to exit
certain businesses and product offerings not directly associated with its
mortgage, leasing and business card units. In connection with this plan,
contractual vendor commitments of approximately $10.0 million associated with
discontinued development and other activities were accrued. Advanta has
substantially completed the settlement of these contractual commitments.
Advanta also has contractual commitments to certain customers and
non-related financial institutions that are providing benefits to those
customers, under a product that is no longer being offered and for which no
future revenues or benefits will be received. In the first quarter of 1998,
Advanta recorded a charge of $22.8 million associated with this commitment, and
an $8.3 million charge associated with the write-down of assets associated with
this program. Advanta expects to pay a substantial portion of these costs over
the next 24 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 in 1998, Advanta also incurred $11.5
million of related professional fees and $1.5 million of other expenses related
to these plans.
34
<PAGE> 35
Asset impairment/disposal
In connection with Advanta's plans to reduce corporate expenses and exit certain
business and product offerings in the first quarter of 1998, Advanta identified
certain assets for disposal and wrote down or wrote off the carrying costs of
those assets to estimated realizable value, resulting in a charge of $8.7
million. These assets consisted principally of leasehold improvements and
various other assets. Advanta has substantially completed the disposal of these
assets.
ASSET/LIABILITY MANAGEMENT
Advanta manages its financial condition with a focus on maintaining disciplined
management of market risks and prudent levels of leverage and liquidity.
MARKET RISK SENSITIVITY
Advanta 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. Advanta estimates
that its net interest income over a twelve month period would increase or
decrease by approximately 3.5% 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 Advanta'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, Advanta has other financial
instruments, namely capitalized servicing rights and interest-only strips, which
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, Advanta 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.
Advanta's capitalized servicing rights and interest only strips result
from the sale of both fixed and variable rate loans, the majority of which are
fixed. Fixed and variable rate loans are currently prepaying at different rates
and Advanta expects them to continue to do so in the future. Advanta has
estimated the impact on the fair value of
35
<PAGE> 36
these assets assuming a change in prepayments of 2.6% CPR for fixed rate loans
and 3.7% CPR for variable rate loans. Advanta has estimated that these changes
in prepayment assumptions could result in a $29 million change in the combined
fair value of these assets. These estimates do not factor in the impact of
changes in the interest rate environment associated with the changes in the
prepayment rates. Changes in interest rates also generally affect the level of
new loan origination. Prepayment assumptions are not the only assumptions in the
fair value calculation for these assets, but they are the most influential.
Other key assumptions are not directly impacted by market forces as defined
earlier. The above prepayment scenario does not reflect management's expectation
regarding the future direction of prepayments, and depicts only one possibility
out of a large set of possible scenarios.
DERIVATIVES ACTIVITIES
The following table summarizes by notional amounts Advanta's derivative
instruments as of September 30, 1999 and December 31, 1998 ($ in thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
SEPT. 30,
SEPT. 30, DEC. 31, 1999 ASSET/
1999 1998 (LIABILITY)
---------- ---------- ----------
<S> <C> <C> <C>
Interest rate swaps $3,086,310 $2,997,912 $ 19,853
Interest rate options:
Caps written 420,511 268,633 (1,293)
Caps purchased 420,511 268,633 1,293
Put options purchased 101,000 0 188
Forward contracts 484,000 499,000 (28)
---------- ---------- ----------
$4,512,332 $4,034,178 $ 20,013
========== ========== ==========
</TABLE>
The notional amounts of derivatives do not represent amounts exchanged
by the counterparties and, thus, are not a measure of Advanta's exposure through
its use of derivatives. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivative contracts.
Put options provide the holder the right, but not the obligation, to
sell the underlying financial instrument at a specified exercise or strike price
at a specific point in time. Put options, therefore, protect Advanta from losses
in a rising interest rate environment, but allow for the appreciation of
underlying assets should interest rates fall. Advanta regularly securitizes and
sells receivables. Advanta may choose to hedge the changes in the market value
of the index on which the securitization is priced, relating to the warehouse
and/or pipeline of receivables anticipated to be securitized, by purchasing put
options on the underlying index. Gains and losses from put options are deferred
and included in the measurement of the dollar basis of the loans sold.
The fair value of interest rate swaps, options and forward contracts is
the estimated amount that Advanta would pay or receive to terminate the
agreement at the reporting date, taking into account current interest and
foreign exchange rates and the current creditworthiness of the counterparty.
36
<PAGE> 37
Advanta's credit exposure to derivatives, with the exception of caps
written, is represented by contracts with a positive fair value without giving
consideration to the value of any collateral exchanged. For caps written, credit
exposure does not exist since the counterparty has performed its obligation to
pay Advanta a premium payment.
LIQUIDITY AND CAPITAL RESOURCES
Advanta'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 the nine months ended September 30, 1999, Advanta, through its
subsidiaries, securitized or sold approximately $2.1 billion of Advanta Mortgage
loans, $308 million of leases and $283 million of net business card receivables.
Advanta temporarily invested cash generated from these transactions in
short-term, high quality investments at money market rates awaiting redeployment
to pay down borrowings and to fund future mortgage loan, business card and lease
receivable growth. At September 30, 1999, Advanta had $0.4 billion of federal
funds sold, $0.5 billion of loan and lease receivables held for sale, and $1.0
billion of investments available for sale which could be sold to generate
additional liquidity. Equity, including capital securities, was $677 million at
September 30, 1999.
Advanta's funding strategy relies on cash, cash equivalents and
investments as well as deposit gathering activity at Advanta National Bank
("ANB") and Advanta Bank Corp. ("ABC", together with ANB, the "Banks") and
securitizations. Advanta and the Banks use both retail and institutional
on-balance sheet funding sources and have the ability to issue a variety of debt
and deposit products. As of September 30, 1999, ANB's total deposits were $1.4
billion and ABC's total deposits were $276 million.
After paying down approximately $239 million in long-term debt in the
nine months ended September 30, 1999, Advanta had unrestricted cash, cash
equivalents and marketable securities in excess of $400 million at the parent
company level and more than $800 million at Advanta National Bank ("ANB") and
Advanta Bank Corp. ("ABC" together with ANB, the "Banks") on September 30, 1999.
The parent company's assets include advances to wholly-owned non-bank
subsidiaries to fund $159.8 million in loans, $27.4 million in retained
interest-only strips and contractual mortgage servicing rights, $182.6 million
in subordinated trust assets, and $31.8 million of equity securities accounted
for at fair value as of September 30, 1999. Total parent company advances to
non-bank subsidiaries of $401.6 million have decreased by $208.6 million in
comparison to advances at December 31, 1998.
At September 30, 1999, Advanta Mortgage Corp. USA ("AMCUSA"), its
subsidiaries and the Banks have a secured committed revolving credit facility of
$500 million, and a $250 million commercial paper conduit facility. AMCUSA and
ANB have additional uncommitted secured revolving credit facilities of $550
million. At September 30, 1999, ABC has $740 million of commercial paper
facilities secured by business credit card receivables, and a $350 million
commercial paper facility secured by lease contracts and lease residuals. At
September 30, 1999, Advanta had available $1.4 billion in unused warehouse lines
and commercial paper conduit facilities. In addition, notwithstanding Advanta's
current liquidity, efforts continue to develop new sources of funding, both
through previously untapped customer segments and through development of new
financing structures.
37
<PAGE> 38
At September 30, 1999, ANB's combined total capital ratio (combined Tier
I and Tier II capital) was 13.62%, and ABC's combined total capital ratio was
12.90%. At December 31, 1998, ANB's combined total capital ratio (combined Tier
I and Tier II capital) was 12.12% and ABC's combined total capital ratio was
14.13%. In each case, ANB and ABC met the requirements of their respective
regulatory agencies, and each was categorized as well-capitalized under the
regulatory framework for prompt corrective action. Advanta intends to maintain
capital ratios at both institutions in order to meet "well capitalized"
guidelines.
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 Advanta are not properly equipped to identify and recognize
the Year 2000, Advanta's IT systems and non-IT systems could fail or create
erroneous results. This could cause Advanta 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
Advanta's products, services, operations and financial results.
In connection with the Year 2000 Issue, Advanta 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 Advanta 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 Advanta's Year 2000 Steering Committee which consists of
Advanta's Chief Information Officer, the General Counsel and other key members
of senior management. In addition, Advanta's Internal Audit Department has
assigned a senior information technology auditor to monitor all Year 2000 Issues
and developments for the Audit Committee of Advanta's Board of Directors.
Independent consultants have assisted in the verification and validation
processes to assure the reliability of Advanta's risk and cost estimates.
Advanta has implemented 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").
Advanta'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.
38
<PAGE> 39
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 Develop options in the event that any or all of the
PLANNING 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.
Advanta has completed all six phases of its Year 2000 compliance
program with respect to its internal and external mission-critical systems as of
September 30, 1999. On an ongoing basis, Advanta is also providing customer
awareness training for customer-centered employees that will equip them to
respond to customer inquiries about Advanta's Year 2000 readiness.
Advanta has identified its significant business relationships,
including without limitation vendors, customers and asset management and funding
counterparties, to assess the potential impact on Advanta's operations if those
third parties and/or their products or systems fail to become Year 2000
compliant in a timely manner. Advanta 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, Advanta regularly reviews Internet websites to
monitor and assess the level of Year 2000 compliance of vendors, suppliers and
other third parties. Evaluation of questionnaire responses, risk assessments,
action steps and contingency plans related to significant third party
relationships have been completed within the time frames established by the
FFIEC guidelines as adopted by the OCC and FDIC. Non-compliant products have
been remediated, replaced or retired. To date, Advanta 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
Advanta. However, there can be no assurance that the systems and products used
by outside service providers or other third parties upon which Advanta's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with Advanta's systems, would not have a
material adverse effect on Advanta.
Advanta's Year 2000 compliance program also includes the development of
contingency plans for each of Advanta'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 Advanta's business units has developed, and has
validated, its contingency plans. These plans are reviewed regularly and
updated. Many of the functions performed by the products and systems used by
Advanta, which operate automatically, can be performed manually.
39
<PAGE> 40
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 Advanta. There
can be no assurances, however, that any of Advanta's contingency plans will be
sufficient to anticipate or address all of the problems or issues that may
arise.
Advanta established a two-year budget for 1998 and 1999 of
approximately $21 million, including capital expenditures, to address the Year
2000 Issue. This budget includes approximately $5 million to cover the costs
associated with diverted personnel. Of the total budget, Advanta has allocated
approximately $10 million to $12 million for contingencies. Based on current
information, Advanta believes that the budget will be sufficient to cover its
expenditures associated with the Year 2000 Issue. As of September 30, 1999,
exclusive of costs associated with diverted personnel, Advanta has spent
approximately $6.6 million in operating expenses and approximately $1.2 million
in capital expenditures. Funding for the project is being provided out of
operating revenues. Advanta 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, Advanta will expense the cost of the Year 2000 project
as incurred. Advanta 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 Advanta.
Advanta 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 Advanta has no control and may be updated from time
to time as additional information becomes available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth in Item 2-Management's
Discussion and Analysis of Financial Condition and Results of Operations.
40
<PAGE> 41
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit
against Advanta and certain of its subsidiaries in Delaware Chancery Court.
Fleet's allegations, which Advanta denies, center around Fleet's assertions that
Advanta has failed to complete certain post-closing adjustments to the value of
the assets and liabilities Advanta contributed to the LLC in connection with the
Fleet Transaction. Fleet seeks damages of approximately $141 million. Advanta
has filed an answer to the complaint denying the material allegations of the
complaint, but acknowledging that Advanta contributed $1.8 million in excess
liabilities in the post-closing adjustment process, after taking into account
the liabilities Advanta has already assumed. Advanta also has filed a
countercomplaint against Fleet for approximately $101 million in damages Advanta
believes have been caused by certain actions of Fleet following 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 Advanta.
On or about March 26, 1999, a complaint was filed by John Uphaus,
individually and on behalf of a class, against Household Bank (Nevada) N.A.
("Household") and Advanta National Bank in the United States District Court for
the Northern District of Illinois. Uphaus alleges that he had a credit card
account with Household, which account was purchased by Advanta National Bank. He
further alleges that the annual percentage rate on a portion of his account was
increased in a manner contrary to the promotional material he received.
Advanta's preliminary investigation suggests that if a change in interest rate
took place, as alleged by Uphaus, that change occurred after the contribution of
Advanta's consumer credit card portfolio, and it was made by Fleet Credit Card
LLC. In any event, Fleet Credit Card LLC is obligated to defend and indemnify
Advanta pursuant to the Contribution Agreement and the Licensing Agreement
between the parties. Advanta National Bank's response to this complaint was
filed with the court on June 21, 1999.
41
<PAGE> 42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are being filed with this
report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
12 Consolidated Computation of Ratio of Earnings to Fixed
Charges.
27 Financial data schedule.
(b) Reports on Form 8-K
(b)(1) A Current Report on Form 8-K, dated July 27, 1999,
was filed by Advanta setting forth the financial
highlights of Advanta's results of operations for the
three months ended June 30, 1999.
(b)(2) A Current Report on Form 8-K, dated September 17,
1999, was filed by Advanta reporting the conversion
of Depositary Shares issued in respect of the
Company's 6.75% Convertible Class B Preferred Stock,
Series 1995 into Class B Common Stock effective
September 15, 1999.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
November 12, 1999 By /s/Philip M. Browne
-------------------
Senior Vice President and
Chief Financial Officer
November 12, 1999 By /s/James L. Shreero
-------------------
Vice President and
Chief Accounting Officer
43
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
12 Consolidated Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
44
<PAGE> 1
EXHIBIT 12
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------
1999 1998 1999 1998(A)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 14,178 $ 15,025 $ 33,263 $ 443,282
Federal and state
income taxes 9,256 6,439 21,564 (11,013)
Earnings before income taxes 23,434 21,464 54,827 432,269
Fixed charges:
Interest 41,935 39,165 128,529 142,935
One-third of all rentals 771 583 2,364 2,006
Preferred stock dividend
of subsidiary trust 2,248 2,248 6,743 6,743
Total fixed charges 44,954 41,996 137,636 151,684
Earnings before income taxes
and fixed charges 68,388 63,460 192,463 583,953
Ratio of earnings to fixed
charges (B) 1.52x 1.51x 1.40x 3.85x
</TABLE>
(A) Earnings before income taxes in 1998 include a $541.3 million gain on
the transfer of the consumer credit card business and $125.1 million of
other charges including 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.
(B) For purposes of computing these ratios, "earnings" represent income
before income taxes plus fixed charges. "Fixed charges" consist of
interest expense, one-third (the proportion deemed representative of
the interest factor) of rental expense on operating leases, and
preferred stock dividends of subsidiary trust.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 19084
<INT-BEARING-DEPOSITS> 81767
<FED-FUNDS-SOLD> 371000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 952908
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 973128
<ALLOWANCE> 35328
<TOTAL-ASSETS> 3525594
<DEPOSITS> 1704176
<SHORT-TERM> 408603
<LIABILITIES-OTHER> 283798
<LONG-TERM> 451793
0
1010
<COMMON> 285
<OTHER-SE> 575929
<TOTAL-LIABILITIES-AND-EQUITY> 3525594
<INTEREST-LOAN> 89380
<INTEREST-INVEST> 80386
<INTEREST-OTHER> 15934
<INTEREST-TOTAL> 185700
<INTEREST-DEPOSIT> 79098
<INTEREST-EXPENSE> 128529
<INTEREST-INCOME-NET> 57171
<LOAN-LOSSES> 28007
<SECURITIES-GAINS> 29781
<EXPENSE-OTHER> 264687
<INCOME-PRETAX> 54827
<INCOME-PRE-EXTRAORDINARY> 33263
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33263
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 2.08
<LOANS-NON> 51158
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 33437
<CHARGE-OFFS> 23761
<RECOVERIES> 4335
<ALLOWANCE-CLOSE> 35328
<ALLOWANCE-DOMESTIC> 35328
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
