<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 June 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 23-1462070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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>
<CAPTION>
<S> <C>
Class A Outstanding at August 2, 1999
Common Stock, $.01 par value 10,465,888 shares
Class B Outstanding at August 2, 1999
Common Stock, $.01 par value 16,421,594 shares
</TABLE>
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <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
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>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS (UNAUDITED)
Cash $ 18,896 $ 16,267
Federal funds sold 170,900 267,400
Restricted interest-bearing deposits 56,654 80,028
Trading investments 0 501,563
Investments available for sale 1,280,653 521,410
Subordinated trust assets 334,800 291,942
Loan and lease receivables, net:
Held for sale 663,123 527,644
Other 469,719 579,783
----------- -----------
Total loan and lease receivables, net 1,132,842 1,107,427
Retained interest-only strip 164,458 209,096
Premises and equipment(at cost, less accumulated
depreciation of $45,626 in 1999 and $38,377 in 1998) 88,339 84,396
Other assets 535,989 641,891
----------- -----------
TOTAL ASSETS $3,783,531 $3,721,420
----------- -----------
LIABILITIES
Deposits:
Noninterest-bearing $ 7,584 $ 4,324
Interest-bearing 1,922,544 1,745,466
----------- -----------
Total deposits 1,930,128 1,749,790
Long-term debt 911,956 1,030,147
Other borrowings 12,444 36,301
Other liabilities 261,960 244,878
----------- -----------
TOTAL LIABILITIES 3,116,488 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:
Authorized - 1,000,000 shares; Issued -
14,211 shares in 1999 and 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 - 16,356,455
shares in 1999, and 16,294,825 in 1998 163 163
Additional paid-in capital 228,767 229,304
Deferred compensation (14,444) (17,214)
Unearned ESOP shares (12,341) (12,550)
Accumulated other comprehensive income (5,405) (91)
Retained earnings 395,657 382,092
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 567,043 560,304
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,783,531 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of receivables, net $41,116 $41,487 $75,885 $62,210
Interest income 59,201 53,561 124,515 133,287
Servicing revenues 30,049 26,484 57,287 78,208
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 25,184 9,482 57,620 14,431
--------- --------- --------- ---------
TOTAL REVENUES 155,550 131,014 315,307 894,220
--------- --------- --------- ---------
EXPENSES:
Salaries and employee benefits 42,772 39,665 88,844 94,914
Other operating expenses 39,407 32,580 79,768 114,412
Interest expense 43,317 36,226 86,594 103,770
Provision for credit losses 7,407 6,846 17,555 40,807
Minority interest in income of
consolidated subsidiary 2,220 2,220 4,440 4,440
Unusual charges 0 0 6,713 125,072
--------- --------- --------- ---------
TOTAL EXPENSES 135,123 117,537 283,914 483,415
--------- --------- --------- ---------
Income before income taxes 20,427 13,477 31,393 410,805
Income taxes expense (benefit) 8,115 4,006 12,308 (17,452)
--------- --------- --------- ---------
NET INCOME $12,312 $9,471 $19,085 $428,257
--------- --------- --------- ---------
Basic earnings per share
Class A $.48 $.34 $.72 $14.38
Class B .50 .35 .76 14.41
Combined .49 .35 .74 14.40
--------- --------- --------- ---------
Diluted earnings per share
Class A $.48 $.34 $.72 $13.49
Class B .49 .35 .75 13.50
Combined .49 .35 .74 13.50
--------- --------- --------- ---------
Basic weighted average shares outstanding
Class A 8,976 10,362 9,127 12,524
Class B 14,187 14,161 13,998 17,083
Combined 23,163 24,523 23,125 29,607
--------- --------- --------- ---------
Diluted weighted average shares outstanding
Class A 9,009 10,372 9,151 12,534
Class B 14,364 14,330 14,131 19,187
Combined 23,373 24,702 23,282 31,721
--------- --------- --------- ---------
Cash dividends declared
Class A $.063 $.063 $.126 $.126
Class B .076 .076 .151 .151
--------- --------- --------- ---------
</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/tax 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 $19,085
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $2,862 (5,314)
---------
Comprehensive income $13,771
---------
Preferred and common cash
dividends declared
Exercise of stock options 80
Issuance of stock:
Dividend reinvestment
Benefit plans 1 3 4,740
Amortization of deferred
compensation
Termination/tax benefit-
Benefit plans (3) (5,374)
Stock buyback
ESOP shares committed to be
released 17
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 $1,010 $0 $105 $163 $228,767
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES INCOME 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/tax benefit-
Benefit plans 20,551 (3,558) 1,774
Stock buyback (4,549) (4,549)
ESOP shares committed to be
released 19 17
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1998 $(29,764) $(91) $382,092 $(22,514) $560,304
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 19,085 19,085
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $2,862 (5,314) (5,314)
Comprehensive income
Preferred and common
cash dividends declared (5,520) (5,520)
Exercise of stock options 80
Issuance of stock:
Dividend reinvestment 0
Benefit plans (4,744) 0
Amortization of deferred
compensation 2,137 2,137
Termination/tax benefit-
Benefit plans 5,377 0
Stock buyback (3,955) (3,955)
ESOP shares committed to be
released 209 226
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 $(26,785) $(5,405) $395,657 $(26,469) $567,043
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
6
<PAGE> 7
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
($ IN THOUSANDS) JUNE 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $19,085 $428,257
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity securities (gains) losses (28,447) 42,975
Noncash charges associated with exit of auto
finance business 16,900 --
Depreciation and amortization 9,216 11,875
Provision for credit losses, excluding auto 12,655 40,806
Gain on transfer of consumer credit card business -- (541,288)
Noncash expense associated with unusual charges -- 25,539
Investment in subordinated trust assets, net (47,030) (46,989)
Proceeds from sale of trading investments 185,042 --
Origination of loans and leases held for sale (1,635,360) (2,971,795)
Principal collected on loans and leases held for sale 48,879 42,069
Proceeds from sale of loans and leases held for sale 1,695,407 3,922,255
Change in other assets and other liabilities (6,934) 43,159
Change in retained interest-only strip, excluding auto charge 36,810 2,811
------------ ------------
Net cash provided by operating activities 306,223 999,674
------------ ------------
INVESTING ACTIVITIES
Change in federal funds sold and interest-
bearing deposits 119,874 (126,796)
Purchase of investments available for sale (11,140,102) (40,300,085)
Proceeds from sales of investments available for sale 479,313 1,000,466
Proceeds from maturing investments available for sale 10,238,331 39,305,266
Purchase of lease portfolios/Advanta Mortgage loans -- (16,234)
Principal collected on Advanta Mortgage loans 31,098 16,367
Advanta Mortgage loans made to customers (65,706) (48,987)
Excess of cash collections over income
recognized on direct financing leases 19,675 23,522
Equipment purchased for direct financing leases (20,705) (16,412)
Change in business card receivables, excluding sales 17,874 (14,954)
Change in consumer card receivables, excluding sales/transfers -- (121,845)
Net change in other loans 644 (5,784)
Purchases of premises and equipment, net (13,011) (594)
------------ ------------
Net cash used in investing activities (332,715) (306,070)
------------ ------------
FINANCING ACTIVITIES
Change in demand and savings deposits 104,271 (345,404)
Proceeds from sales of time deposits 338,073 582,223
Payments for maturing time deposits (262,006) (308,947)
Proceeds from issuance of subordinated/senior debt 45,799 11,765
Payments on redemption of subordinated/senior debt (23,609) (44,984)
Proceeds from issuance of medium-term notes -- 28
Payments on redemption of medium-term notes (145,721) (21,000)
Change in warehouse facility borrowings (18,517) 3,857
Change in notes payable -- 221,053
Stock Tender Offer -- (801,606)
Stock buy back (3,955) --
ESOP debt repayment 226 --
Proceeds from issuance of stock 80 4,885
Cash dividends paid (5,520) (5,485)
------------ ------------
Net cash provided by (used in) financing activities 29,121 (703,615)
------------ ------------
Net increase (decrease) in cash 2,629 (10,011)
Cash at beginning of period 16,267 27,736
------------ ------------
Cash at end of period $18,896 $17,725
------------ ------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
7
<PAGE> 8
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
JUNE 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, the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Company 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
the Company's latest annual report on Form 10-K. The results of operations
through February 20, 1998 include the results of operations of the Company'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. The Company adopted this SOP on January
1, 1999. The adoption of SOP 98-1 did not have a material effect on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. In June 1999,
the FASB issued SFAS No. 137 which deferred the effective date of SFAS 133 for
8
<PAGE> 9
one year, to fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 effective January 1, 2001. The Company anticipates that the
adoption of SFAS No. 133 will not have a material effect on the results of
operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. Prior to the issuance of SFAS No. 134, the Company was required to
account for resulting mortgage-backed securities or other retained interests as
trading securities. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. The Company 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 the Company's intent with respect to
these securities. The Company 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 the Company'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>
Six Months Year
Ended Ended
June 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 33,194 181,425
Interest income 12,419 21,674
Cash received and used to acquire
subordinated trust assets (56,201) (96,455)
Cash released to the Company (25,760) (29,874)
Fair value adjustments 0 (50,980)
Fair value adjustment related to
auto exit (7,828) 0
Other (462) 0
CMSR activity
Servicing rights retained 27,446 71,131
Amortization, net (17,398) (12,977)
Valuation provision (1,860) (8,275)
Ending Balance IO Strip $164,458 $209,096
Ending Balance CMSR $82,613 $74,425
========= =========
</TABLE>
In the first quarter of 1999, the Company reclassified approximately
$25.3 million from IO strip to CMSR. In the second quarter of 1999, the Company
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>
Six Months Year
Ended Ended
June 30, December 31,
1999 1998
---------- -----------
<S> <C> <C>
Beginning balance $291,942 $178,469
Initial collateral deposits 8,578 38,907
Subordinated trust assets acquired
with excess cash flows 56,201 96,455
Interest earned 9,773 10,270
Valuation adjustment related to
auto loans (4,172) 0
Excess cash flows released
to the Company (27,106) (46,141)
Net change in subordinated trust
assets associated with off-
balance sheet warehouse
facilities (416) 13,982
--------- ---------
Ending Balance $334,800 $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>
JUNE 30, DEC. 31,
1999 1998
---- ----
<S> <C> <C>
Advanta Mortgage loans $ 831,445 $ 829,819
Business cards 173,362 150,022
Leases 129,940 122,657
Other loans 17,187 17,862
----------- -----------
Gross loan and lease receivables 1,151,934 1,120,360
----------- -----------
Add: Unamortized purchase premiums and
deferred origination costs,
net of deferred fees 12,871 20,504
Less: Allowance for credit losses
Advanta Mortgage loans (14,955) (20,092)
Leases (3,310) (2,695)
Business cards (9,002) (6,916)
Other loans (4,696) (3,734)
----------- -----------
Total allowance for credit losses (31,963) (33,437)
----------- -----------
Net loan and lease receivables $1,132,842 $1,107,427
----------- -----------
</TABLE>
Receivables sold and now serviced for others consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1999 1998
---- ----
<S> <C> <C>
Advanta Mortgage loans $7,584,557 $7,447,502
Business cards 712,875 664,712
Leases 614,183 547,583
---------- ----------
Total $8,911,615 $8,659,797
---------- ----------
</TABLE>
"Advanta Mortgage loans" include mortgage and auto loans and exclude mortgage
loans which were never owned by the Company, but which the Company services for
a fee ("contract servicing" or "subservicing"). Contract servicing receivables
were $9.4 billion and $8.3 billion at June 30, 1999 and December 31, 1998,
respectively.
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>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DEC. 31,
1999 1998
---- ----
<S> <C> <C>
Beginning balance $33,437 $137,773
Provision for credit losses 17,555 67,193
Allowance on receivables sold (6,690) (118,420)
Gross charge-offs:
Advanta Mortgage loans (8,502) (14,313)
Business cards (4,571) (11,126)
Leases (1,627) (4,992)
Consumer credit cards 0 (30,999)
Other loans (38) 0
--------- ---------
Total gross charge-offs (14,738) (61,430)
Recoveries:
Advanta Mortgage loans 1,255 3,007
Business cards 416 1,093
Leases 721 1,501
Consumer credit cards 0 2,719
Other loans 7 1
--------- ---------
Total recoveries 2,399 8,321
Net charge-offs (12,339) (53,109)
Ending Balance $31,963 $33,437
--------- ---------
</TABLE>
NOTE 6) SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
OTHER ASSETS 1999 1998
- ------------ ---- ----
<S> <C> <C>
Contractual mortgage servicing rights $82,613 $74,425
Current and deferred federal income taxes, net 54,328 31,243
Goodwill 3,462 3,600
Other real estate (A) 7,159 6,622
Other 388,427 526,001
-------- --------
TOTAL OTHER ASSETS $535,989 $641,891
-------- --------
</TABLE>
(A) Carried at the lower of cost or fair market value less selling costs.
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
OTHER LIABILITIES 1999 1998
- ----------------- ---- ----
<S> <C> <C>
Accounts payable and accrued expenses $79,168 $66,852
Current and deferred income taxes 241 2,445
Other 182,551 175,581
-------- --------
TOTAL OTHER LIABILITIES $261,960 $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 June 30, 1999 and December 31, 1998,
was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Senior Debt
12 month senior notes (7.33%-8.53%) $ 61,456 $ 48,948
18 month senior notes (6.95%-8.57%) 6,184 6,565
24 month senior notes (6.77%-8.76%) 38,697 32,360
30 month senior notes (6.30%-8.85%) 13,642 13,609
48 month senior notes (5.97%-9.08%) 8,684 8,454
60 month senior notes (5.93%-9.53%) 25,183 20,779
Value notes, fixed (6.85%-7.85%) 9,275 9,300
Medium-term notes, fixed (6.41%-8.36%) 638,345 703,460
Medium-term notes, floating 82,400 163,000
Medium-term bank notes, fixed (6.45%-7.12%) 7,342 7,338
Other senior notes (4.50%-11.34%) 19,670 14,844
---------- ----------
Total senior debt 910,878 1,028,657
Subordinated notes (6.25%-11.34%) 1,078 1,490
---------- ----------
Total long-term debt $ 911,956 $1,030,147
========== ==========
</TABLE>
The Company's priced its senior floating rate notes based on a spread
over LIBOR. At June 30, 1999, the rates on these notes varied from 5.28% to
5.71%. At June 30, 1999 and December 31, 1998, the Company 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 the Company and Fleet
Financial Group, Inc. ("Fleet"), the Company and certain of its subsidiaries and
Fleet and certain of its subsidiaries each contributed certain assets and
liabilities of their respective consumer credit card businesses to 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. The Company
recognized a gain on the transfer of the consumer credit card business
representing the excess of liabilities transferred to the LLC over the net basis
of the assets transferred. The gain also included the Company's ownership
interest in the LLC. The gain on the transfer was not subject to income tax and
no tax provision was recorded. As further described in Note 15, the Company 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 the Company purchased 7,882,750
shares of its Class A Common Stock, 12,482,850 of its Class B Common Stock, each
at $40 per share net, and 1,078,930 of its depositary shares each representing
one one-hundredth interest in a share of 6 3/4% Convertible Class B Preferred
Stock, Series 1995 at $32.80 per share net, through an issuer tender offer (the
"Tender Offer") which was completed on February 20, 1998.
NOTE 9) CAPITAL STOCK
During the third quarter of 1998, the Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's Class A and Class B
Common Stock and the formation of an Employee Stock Ownership Plan ("ESOP"). At
December 31, 1998, the Company had purchased approximately 445,600 shares of
Class B Common Stock and approximately 1,055,000 shares of Class A Common Stock
at a total cost of $17.1 million. Of the total shares purchased in 1998,
approximately 1,000,000 shares of Class A Common Stock were purchased for the
Company's newly formed ESOP. During the quarter ended March 31, 1999,
12
<PAGE> 13
the Company purchased an additional 350,000 shares of Class A Common Stock at a
cost of $4.0 million. There were no additional purchases in the quarter ended
June 30, 1999.
NOTE 10) SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," effective January 1, 1998. SFAS 131 establishes
revised standards for public companies related to the reporting of financial and
descriptive information about their operating segments in financial statements.
The Company has three reportable segments as of June 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, the Company also had a fourth
reportable segment, Advanta Personal Payment Services.
The Company 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. The Company 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 the Company. In addition to servicing and managing the loans it
originates, Advanta Mortgage contracts with third parties to service their home
equity loans on a subservicing basis.
Advanta 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.
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.
Prior to the Fleet Transaction, the Company offered consumer credit
cards through Advanta Personal Payment Services. This business segment issued
consumer credit cards nationwide. The primary method of account acquisition was
direct mail solicitation using credit scoring by independent third parties and
proprietary market segmentation and targeting models to target its mailing to
profitable segments of the market. As of February 20, 1998, this segment had no
operations, and the activity below reflects operations through that date.
The accounting policies of the segments are the same as those followed
by the Company. The Company evaluates performance based on net income of the
respective business units.
13
<PAGE> 14
<TABLE>
<CAPTION>
Advanta
Advanta Advanta Personal
THREE MONTHS ENDED Advanta Leasing Business Payment
JUNE 30, Mortgage Services Cards Services Other (1) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Noninterest revenues $ 54,278 $ 10,957 $ 19,808 $ -- $ 11,306 $ 96,349
Interest revenue 30,534 2,725 7,785 -- 18,157 59,201
Interest expense 21,820 2,689 2,851 -- 15,957 43,317
Unusual charges -- -- -- -- -- --
Net income 1,508 1,486 5,565 -- 3,753 12,312
Average managed
receivables 8,403,860 693,921 866,732 -- 17,019 9,981,532
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Noninterest revenues $ 56,480 $ 7,735 $ 12,496 $ -- $ 742 $ 77,453
Interest revenue 31,406 4,183 4,858 -- 13,114 53,561
Interest expense 23,105 2,847 2,405 -- 7,869 36,226
Gain on transfer of
consumer card business -- -- -- -- --
Unusual charges -- -- -- -- -- --
Net income 7,453 (210) 1,919 -- 309 9,471
Average managed
receivables 6,242,254 601,283 739,654 -- 14,784 7,597,975
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Advanta
Advanta Advanta Personal
SIX MONTHS ENDED Advanta Leasing Business Payment
JUNE 30, Mortgage Services Cards Services Other (1) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Noninterest revenues $ 114,652 $ 22,172 $ 36,362 $ -- $ 17,606 $ 190,792
Interest revenue 72,977 5,176 13,148 -- 33,214 124,515
Interest expense 45,427 5,341 5,139 -- 30,687 86,594
Unusual charges -- -- -- -- 6,713 6,713
Net income 7,356 2,332 9,528 -- (131) 19,085
Average managed
receivables 8,358,414 682,583 844,913 -- 17,418 9,903,328
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Noninterest revenues $ 95,609 $ 16,718 $ 21,467 $ 83,966 $ 1,885 $ 219,645
Interest revenue 55,490 7,322 10,853 23,465 36,157 133,287
Interest expense 31,869 5,738 5,392 33,352 27,419 103,770
Gain on transfer of
consumer card business -- -- -- 541,288 -- 541,288
Unusual charges -- -- -- 125,072 -- 125,072
Net income 12,270 152 3,037 412,452 346 428,257
Average managed
receivables 5,933,199 593,009 709,027 3,722,817 13,627 10,971,679
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other includes insurance operations, venture capital operations, costs
associated with exiting the auto finance business, and assets not attributable
to other segments.
14
<PAGE> 15
NOTE 11) NET INTEREST INCOME
The following table presents the components of net interest income:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $ 27,169 $ 27,515 $ 57,228 $ 74,323
Investments 28,235 21,163 52,372 48,020
Interest component of previously
discounted cash flows 3,797 4,883 14,915 10,944
--------- --------- --------- ---------
Total interest income 59,201 53,561 124,515 133,287
Interest expense:
Deposits 27,112 12,486 53,594 48,730
Debt and other borrowings 16,205 23,740 33,000 55,040
--------- --------- --------- ---------
Total interest expense 43,317 36,226 86,594 103,770
--------- --------- --------- ---------
Net interest income 15,884 17,335 37,921 29,517
Less: Provision for credit losses . (7,407) (6,846) (17,555) (40,807)
--------- --------- --------- ---------
Net interest after
provision for credit losses $ 8,477 $ 10,489 $ 20,366 $ (11,290)
--------- --------- --------- ---------
</TABLE>
NOTE 12) INCOME TAX EXPENSE
Income tax expense is based on the estimated annual effective tax rate of 40%
for the three month period ended June 30, 1999, compared to a 30% tax rate for
the comparable 1998 period.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current:
Federal $ 5,000 $ 4,395 $ 10,000 $(69,867)
State 529 (1,177) 2,295 6,629
-------- -------- -------- --------
Total current 5,529 3,218 12,295 (63,238)
-------- -------- -------- --------
Deferred:
Federal 1,949 1,755 1,013 46,369
State 637 (967) (1,000) (583)
-------- -------- -------- --------
Total deferred 2,586 788 13 45,786
-------- -------- -------- --------
Total tax expense
(benefit) $ 8,115 $ 4,006 $ 12,308 $(17,452)
-------- -------- -------- --------
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal
income tax $ 7,149 $ 4,717 $ 10,988 $ 143,782
State income taxes 758 (1,393) 842 7,830
Insurance program income 0 3,062 0 33,046
Tax credits 0 (2,321) 0 (4,642)
Compensation limitation 44 0 88 4,725
Transfer of consumer
credit card business
(see Note 8) 0 0 0 (200,494)
Non taxable investment income (156) (134) (316) (292)
Other 320 75 706 (1,407)
--------- --------- --------- ---------
Consolidated tax
expense (benefit) $ 8,115 $ 4,006 $ 12,308 $ (17,452)
--------- --------- --------- ---------
</TABLE>
NOTE 13) UNUSUAL CHARGES
Employee costs associated with staff reductions
In the first quarter of 1999, the Company 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 in the first quarter of 1998
discussed in Note 8, the Company 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, the Company incurred approximately $35.5
million of other compensation charges. This amount includes $21.3 million
attributable to payments under change of control plans and $14.2 million
associated with the execution of the Tender Offer.
Exited business/products
In the first quarter of 1999, the Company 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, the Company 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. The Company has
substantially completed the settlement of these contractual commitments.
The Company also has contractual commitments to certain customers and
non-related financial institutions that are providing benefits to those
customers, under a product that is no longer being offered and for which no
future revenues or benefits will be received. In the first quarter of 1998, the
Company recorded a charge of $22.8 million
16
<PAGE> 17
\associated with this commitment, and an $8.3 million charge associated with the
write-down of assets associated with this program. The Company expects to pay a
substantial portion of these costs over the next 27 months. The actions required
to complete this plan include the settlement of contractual commitments and the
payment of customer benefits.
In connection with the Fleet Transaction/Tender Offer and the other
exited business and product offerings, the Company also incurred $11.5 million
of related professional fees and $1.5 million of other expenses related to these
plans.
Asset impairment/disposal
In connection with the Company's plans to reduce corporate expenses and exit
certain business and product offerings in the first quarter of 1998, the Company
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. The Company has substantially completed the disposal of
these assets.
The accrual for unusual charges at June 30, 1999 is comprised of the following:
<TABLE>
<CAPTION>
Charged
12/31/98 to 6/30/99
Accrual Accrued Accrual Accrual
Balance in 1999 in 1999 Balance
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee costs associated with
staff reductions $ 0 $3,350 $2,189 $ 1,161
Employee costs associated with
Fleet Transaction/Tender Offer 3,291 0 240 3,051
Expenses associated with exited
business/products 14,766 3,363 4,749 13,380
Asset impairment/disposal 567 0 0 567
- ----------------------------------------------------------------------------------------------------------------------------
Total $18,624 $6,713 $7,178 $18,159
============================================================================================================================
</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 Six Months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 12,312 $ 9,471 $ 19,085 $ 428,257
less: Preferred "A" dividends 0 0 (141) (141)
less: Preferred "B" dividends (887) (887) (1,774) (1,774)
--------- --------- --------- ---------
Income available to common
shareholders $ 11,425 $ 8,584 $ 17,170 $ 426,342
Less: Class A dividends declared (568) (653) (1,222) (1,308)
Less: Class B dividends declared (1,126) (1,133) (2,383) (2,249)
--------- --------- --------- ---------
Undistributed earnings $ 9,731 $ 6,798 $ 13,565 $ 422,785
Basic shares
Class A 8,976 10,362 9,127 12,524
Class B 14,187 14,161 13,998 17,083
Combined (2) 23,163 24,523 23,125 29,607
Options A 1 10 1 10
Options B 177 49 133 198
AMIP A 32 0 23 0
AMIP B 0 120 0 186
Preferred B (1) 0 0 0 1,720
Diluted shares
Class A 9,009 10,372 9,151 12,534
Class B 14,364 14,330 14,131 19,187
Combined (2) 23,373 24,702 23,282 31,721
Basic earnings per share
Class A $ .48 $ .34 $ .72 $ 14.38
Class B .50 .35 .76 14.41
Combined (2) .49 .35 .74 14.40
Diluted earnings per share
Class A $ .48 $ .34 $ .72 $ 13.49
Class B .49 .35 .75 13.50
Combined (2) .49 .35 .74 13.50
--------- --------- --------- ---------
</TABLE>
(1) 14,211 shares of the Company's Class B convertible preferred stock were
outstanding but were not included in the computation of diluted earnings per
share for the three or six months ended June 30, 1999, or the three months ended
June 30, 1998, because they were antidilutive for those periods.
(2) Combined represents a weighted average of Class A and Class B earnings per
share.
Options to purchase 1.6 million and 1.7 million shares of Class B
Common Stock were outstanding during the three and six months ended June 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 2.2 million and 640 thousand shares of Class B Common Stock were
outstanding during the three and six months ended June 30, 1998, 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.
18
<PAGE> 19
NOTE 15) CONTINGENCIES
On June 30, 1998, purported shareholders of the Company who are represented by a
group of law firms filed a putative class action complaint against the Company
and several of its current and former officers and directors in the United
States District Court for the Eastern District of Pennsylvania. A second,
similar complaint was filed in the same court a few days later by a different
group of law firms. Both complaints allege that the Company made
misrepresentations in certain of its public filings and statements in violation
of the Securities Exchange Act of 1934. The complaints seek damages of an
unspecified amount. On July 10, 1998, the complaints, which had previously been
consolidated, were dismissed by the Court for failing to state a claim. The
plaintiffs determined not to attempt to amend their complaints. Rather, they
appealed the District Court's decision to the United States Courts of Appeals
for the Third Circuit, which court, on June 17, 1999, affirmed the District
Court.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit
against the Company and certain of its subsidiaries in Delaware Chancery Court.
Fleet's allegations, which the Company denies, center around Fleet's assertions
that the Company has failed to complete certain post-closing adjustments to the
value of the assets and liabilities the Company contributed to the LLC in
connection with the Fleet Transaction. Fleet seeks damages of approximately $141
million. The Company has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that the Company contributed
$1.8 million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities the Company has already assumed. The Company
also has filed a countercomplaint against Fleet for approximately $101 million
in damages the Company believes have been caused by certain actions of Fleet
following closing of the Fleet Transaction. Management expects that the ultimate
resolution of this litigation will not have a material adverse effect on the
financial position or future operating results of the Company.
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. The
Company's preliminary investigation suggests that if a change in interest rate
took place, as alleged by Uphaus, that change occurred after the contribution of
the Company'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 the Company 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.
The Company and its subsidiaries are involved in other legal
proceedings, claims and litigation, including those arising in the ordinary
course of business. Management believes that the aggregate liabilities, if any,
resulting from those actions will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
However, as the ultimate resolution of these proceedings is influenced by
factors outside of the Company's control, it is reasonably possible that the
Company's estimated liability under these proceedings may change.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
For the quarter ended June 30, 1999, the Company reported net income of $12.3
million or $0.49 per combined common share, assuming dilution, compared to $6.8
million or $.25 per combined diluted common share for the quarter ended March
31, 1999, and $9.5 million or $.35 per combined diluted common share for the
quarter ended June 30, 1998. The earnings for the quarter ended March 31, 1999
excluding non-recurring charges and non-operating gains were $10.2 million, or
$0.40 per combined diluted share. The quarter on quarter improvement in earnings
this year resulted primarily from continued decreases in operating expenses at
the Company's mortgage and leasing businesses and improved yields in the
business card portfolio.
The earnings for the quarter ended June 30, 1999 include a reduction in
the Company's retained interest-only strip of approximately $6.1 million, after
tax, reflecting the adoption of more conservative fair value assumptions. Also
included in the results for the quarter were non-operating gains of
approximately $5.6 million, after tax, predominately associated with the sale of
an investment held by Advanta Partners LP, the Company's private equity
investment affiliate.
For the six months ended June 30, 1999, the Company reported net income of
$19.1 million or $0.74 per combined common share, assuming dilution, compared to
$428.3 million or $13.50 per combined diluted common share for the same period
of 1998. In addition to the items discussed above that affected earnings for the
quarter ended June 30, 1999, the earnings for the six months ended June 30, 1999
include non-recurring charges, after tax, of approximately $14.5 million that
are principally related to the Company's exit from the auto finance business and
severance and outplacement associated with cost cutting initiatives implemented
in the first quarter. The Company also recognized non-operating gains of
approximately $11.1 million, after tax, in the first quarter of 1999 in
connection with an investment held by Advanta Partners LP. Earnings reported for
the six months ended June 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: the Company's
managed net interest margin; the receivables volume; the timing of the Company'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 the Company'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 the
Company and its subsidiaries, the difficulty or inability to securitize the
Company's receivables and the impact of the ratings of debt of the Company and
its subsidiaries. Additional risks that may affect the Company's future
performance are set forth elsewhere in this Quarterly Report on Form 10-Q and in
the Company'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 $7.6 million for the quarter ended June 30,
1999, after excluding net of tax charges of $6.1 million associated with
additional reserves recorded on the Company's retained interest-only strip that
resulted from the adoption of more conservative fair value assumptions. This
compares to net income of $7.5 million for the same period of 1998. Net income
for the six month period ended June 30, 1999, was $13.4 million, excluding the
second quarter $6.1 million charge, as compared to $12.3 million in the same
period of 1998. The increase in after tax income resulted from higher lending
margins, increased servicing revenues and a lower operating expense ratio as a
percentage of average managed receivables, partially offset by a decrease in
gain on sale of receivables.
Net income in the three and six month periods ended June 30, 1998, included
pretax charges of $23.9 million and $33.7 million, respectively, to adjust the
retained interest-only strip to fair value, reflecting increases in prepayment
speeds experienced during the periods.
GAIN ON SALE OF RECEIVABLES
Advanta Mortgage recognized gains of $38.4 million from the securitization and
sale of approximately $636 million of loans in the three months ended June 30,
1999, and recognized gains of $75.0 million from the securitization and sale of
approximately $1.3 billion of loans in the six months ended June 30, 1999. Total
Advanta Mortgage sales/securitization volume decreased 47.7% and 42.9% for the
three and six month periods ended June 30, 1999, respectively, as compared to
the same periods in 1998. The decrease in sales/securitization volume resulted
primarily from lower originations as the Company focused on pricing and
efficiency over production volume, as well as the Company's decision to report
income that is essentially equal to that of a portfolio lender. The gain, which
represents 6.0% of the loans sold in the quarter ended June 30, 1999, is higher
as a percentage of loans sold than the $60.7 million or 4.9% recognized in the
second quarter of 1998. The gain recognized in the six month period ended June
30, 1999, represents 5.9% of loans sold, as compared to $88.2 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 June 30, 1999, direct originations
represented 56.1% of total originations, as compared to 30.6% in the same period
of 1998. In the six months ended June 30, 1999, direct originations represented
56.2% of total originations, as compared to 27.9% in the same period of 1998.
SERVICING REVENUES
Servicing revenues were $25.0 million for the three months ended June 30, 1999,
as compared to $22.2 million for the same period in 1998. For the six months
ended June 30, 1999, servicing revenues were $47.3 million as compared to $43.9
million for the six months ended June 30, 1998. The increase in servicing
revenues in both periods is due to an increase in average serviced receivables
in comparison with prior year.
21
<PAGE> 22
PORTFOLIO LENDER ANALYSIS
In the fourth quarter of 1998, the Company began to report income for Advanta
Mortgage that is essentially equal to that of a portfolio lender, rather than
the front-ended income typically reported through gain on sale accounting. Since
gain on sale accounting is required under generally accepted accounting
principles for securitizations structured as sales, the Company is accomplishing
this by increasing its use of on-balance sheet funding over time and decreasing
its degree of reliance on securitizations structured as sales. In this regard,
the Company began to analyze and evaluate Advanta Mortgage's financial results
from a portfolio lender's perspective as well as under generally accepted
accounting principles. The following tables present the Company's reported
results adjusted to approximate the results of a portfolio lender for the three
and six months ended June 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 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 $ 28,416 $ (28,416) $ --
Interest income 30,534 175,799 206,333
Servicing revenues 25,001 (8,846) 16,155
Other revenues, net 861 -- 861
--------- --------- ---------
Total revenues 84,812 138,537 223,349
EXPENSES:
Operating expenses 56,133 1,883 58,016
Interest expense 21,820 114,970 136,790
Provision for credit losses 2,364 11,684 14,048
Minority interest in income
of consolidated subsidiary 1,865 -- 1,865
--------- --------- ---------
Total expenses 82,182 128,537 210,719
--------- --------- ---------
Income before income taxes 2,630 10,000 12,630
Income taxes 1,122 3,950 5,072
--------- --------- ---------
Net Income $ 1,508 $ 6,050 $ 7,558
========= ========= =========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 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 $ 64,976 $ (64,976) $ --
Interest income 72,977 341,448 414,425
Servicing revenues 47,321 (16,328) 30,993
Other revenues, net 2,355 -- 2,355
--------- --------- ---------
Total revenues 187,629 260,144 447,773
EXPENSES:
Operating expenses 121,283 3,681 124,964
Interest expense 45,427 226,000 271,427
Provision for credit losses 5,067 20,463 25,530
Minority interest in income
of consolidated subsidiary 3,752 -- 3,752
--------- --------- ---------
Total expenses 175,529 250,144 425,673
--------- --------- ---------
Income before income taxes 12,100 10,000 22,100
Income taxes 4,744 3,950 8,694
--------- --------- ---------
Net Income $ 7,356 $ 6,050 $ 13,406
========= ========= =========
</TABLE>
With respect to the portfolio lender results, individual line items are
stated as if the securitized mortgages were still owned by the Company and
remained on the balance sheet. The pro forma adjustment to gain on sale of
receivables represents the reclassification of net gains recognized on the sale
of Advanta Mortgage loans. The pro forma adjustment to provision for credit
losses represents the amount by which the provision would have increased had the
securitized Advanta Mortgage loans remained on the balance sheet and the
provision for credit losses on the securitized Advanta Mortgage loans been equal
to actual reported charge-offs. The actual provision for credit losses of a
portfolio lender could differ from the recorded charge-offs depending upon the
age and composition of the portfolio and the timing of charge-offs. The pro
forma presentation results in an increase in net income of $6.1 million
resulting from the elimination of the $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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Direct $ 407,880 $ 382,242 $ 811,084 $ 665,290
Broker 152,533 106,188 262,071 184,611
Conduit 153,575 376,145 335,410 779,956
Corporate Finance 13,701 324,484 30,474 673,899
Auto 0 58,356 5,103 79,459
---------- ---------- ---------- ----------
$ 727,689 $1,247,415 $1,444,142 $2,383,215
---------- ---------- ---------- ----------
</TABLE>
Total Advanta Mortgage originations in the three months ended June 30,
1999 decreased 41.7% over the comparable 1998 period. Direct mortgage
originations for the three months ended June 30, 1999 increased 6.7% over direct
originations in the same period of 1998 and indirect mortgage originations for
the three months ended June 30, 1999 decreased 60.4% from the comparable period
of the prior year. Total year-to-date originations for Advanta Mortgage
decreased 39.4% from the comparable period of the prior year. Year-to-date
direct mortgage originations increased 21.9% and year-to-date indirect mortgage
originations decreased 61.7% as compared to the same period of the prior year.
the increase in direct originations is the result of the Company's decision to
capitalize on its direct marketing experience and centralized telemarketing and
processing capabilities. The Company typically generates higher yields on direct
versus indirect loan originations. The decrease in indirect originations in 1999
over the comparable 1998 periods resulted from the Company's decision to
selectively purchase loans from the conduit and corporate finance channels only
when the loans meet certain profitability characteristics. The decrease in auto
loan originations was due to the Company's exit from the auto finance business
in the first quarter of 1999.
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 $1.5 million for the three months ended June 30, 1999 as compared
to a net loss of $0.2 million for the same period in 1998. Net income for the
six month period was $2.3 million and $.2 million for 1999 and 1998,
respectively. The increase in net income resulted from increased volume and a
decrease in operating expenses.
GAIN ON SALE OF RECEIVABLES
Advanta Leasing Services recognized $4.9 million in gains on the sale of $106
million of leases in the three months ended June 30, 1999, as compared to $3.0
million in gains on the sale of $73 million of leases for the same period in
1998. In the six months ended June 30, 1999, Advanta Leasing Services recognized
$9.3 million in gains on the sale of $201 million of leases, as compared to $5.3
million in gains on the sale of $132 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.
24
<PAGE> 25
ORIGINATIONS
Originations for Advanta Leasing Services were as follows ( $in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Vendor $ 54,625 $ 39,687 $100,119 $ 80,879
Broker 54,812 28,430 115,328 44,856
Other 3,947 6,235 7,773 11,268
-------- -------- -------- --------
$113,384 $ 74,352 $223,220 $137,003
-------- -------- -------- --------
</TABLE>
Lease originations for the three and six months ended June 30, 1999 increased
53% and 63%, respectively, 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 BUSINESS CARDS
OVERVIEW
Advanta Business Cards offers MasterCard(R) business credit cards to small
businesses. Net income for Advanta Business Cards was $5.6 million for the three
months ended June 30, 1999 as compared to $1.9 million for the same period in
1998. Net income for the six month periods ended June 30, 1999 and 1998, was
$9.5 million and $3.0 million, respectively. The increase in net income resulted
from increased volume and significant improvement in portfolio yields due to
changes in pricing.
GAIN ON SALE OF RECEIVABLES
In the three and six month periods ended June 30, 1999, Advanta Business Cards
recognized $7.8 million and $13.9 million, respectively, in gains on the sale of
new business card receivables. Advanta Business Cards sells these 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 $3.6 million and $5.7 million in gains recognized
in the three and six month periods ended June 30, 1998, respectively. The
increase in gain on sale is due primarily to increased yields on the securitized
receivables.
ORIGINATIONS
Originations for business cards were $471.2 million and $348.2 million for the
three months ended June 30, 1999 and 1998, respectively. Business card
originations for the six months ended June 30, 1999 and 1998 were $871.7 million
and $637.6 million, respectively. The increases in business card originations
over comparable periods in 1998 resulted from programs designed to increase
market penetration and encourage existing customers to increase the use of the
business cards.
25
<PAGE> 26
ADVANTA CORP.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments, excluding the interest component
of previously discounted cash flows, increased by $6.7 million in the three
months ended June 30, 1999 as compared to the same period in 1998, and decreased
$12.7 million for the six months ended June 30, 1999 as compared to the same
period of 1998. During the three months ended June 30, 1999, interest expense
increased $7.1 million as compared to the same period in 1998, and decreased
$17.2 million for the six months ended June 30, 1999 as compared to the same
period of 1998. The increase in interest income and interest expense in the
three months ended June 30, 1999 as compared to the same period of the prior
year, resulted from an increase in the Company's average on-balance sheet assets
and liabilities. The decreases in interest income and interest expense in the
six months ended June 30, 1999 were mainly attributable to a decrease in
interest bearing assets and liabilities owned by the Company in connection with
the Fleet Transaction and Tender Offer in February 1998. Also impacting interest
income on receivables were consumer credit card securitization transactions
prior to the Fleet Transaction in 1998 as well as the mix of receivables. Both
periods reflect suppressed margins as a result of carrying higher cash, cash
equivalent and investment balances as a percent of owned assets for liquidity
purposes.
Securitization activity shifts revenues from interest income to
non-interest revenues. This activity reduces the level of higher-yielding
receivables on the balance sheet while proportionately increasing the balance
sheet levels of lower-yielding receivables and short-term, high quality
investments earning money market rates.
The owned average cost of funds decreased to 5.75% in the three months
ended June 30, 1999 from 6.36% in the same period in 1998, and decreased to
5.78% in the six months ended June 30, 1999 from 6.36% 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 67% of total average
interest-bearing liabilities for the three months ended June 30, 1999 as
compared to 38% for the same period in 1998. Also contributing to the cost of
funds decrease was a general decrease in market interest rates between the
comparable periods. The Company 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 six months ended June 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 June 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 $ 729,335 $ 16,532 9.09% $ 660,498 $ 15,908 9.66%
Business Cards 181,510 7,735 17.09 148,408 4,803 12.98
Leases 109,608 2,618 9.55 101,438 3,729 14.70
Auto loans 9,938 283 11.44 62,249 2,869 18.49
Other loans 17,019 544 12.83 14,784 412 11.19
---------- ---------- ---------- ----------
Gross receivables(2) 1,047,410 27,712 10.61 987,377 27,721 11.26
Investments(2) 1,885,796 28,170 5.97 1,425,514 21,200 5.94
---------- ---------- ---------- ----------
Total interest earning
assets $2,933,206 $ 55,882 7.62% $2,412,891 $ 48,921 8.11%
Interest-bearing
liabilities $2,929,081 $ 42,024 5.75% $2,219,722 $ 35,314 6.36%
Net interest spread 1.87% 1.75%
Net interest margin (3) 1.90% 2.26%
OFF-BALANCE SHEET
Mortgage loans
securitized $7,533,965 $5,361,279
Business cards
securitized 685,222 591,246
Leases securitized 584,313 499,845
Auto loans securitized 130,622 158,228
---------- ----------
Total average
securitized receivables $8,934,122 $6,610,598
========== ==========
Total average managed
receivables $9,981,532 $7,597,975
---------- ----------
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Interest and average rate for tax-free securities, loans and leases
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin for the three months ended June 30, 1999 was
3.00%, representing a combination of owned interest-earning assets/owned
interest-bearing liabilities and Advanta Mortgage securitized mortgage
assets/liabilities.
27
<PAGE> 28
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 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 $ 824,781 $ 37,072 9.06% $ 601,395 $ 28,773 9.65%
Business Cards 163,178 12,851 15.88 153,537 10,774 14.15
Leases 107,477 4,720 8.78 103,421 6,345 12.27
Auto loans 27,025 1,995 14.89 53,514 4,717 17.78
Consumer credit cards 0 0 0.00 775,769 23,457 6.10
Other loans 17,418 1,092 12.64 13,627 714 10.57
----------- --------- ----------- -----------
Gross receivables(2) 1,139,879 57,730 10.21 1,701,263 74,780 8.86
Investments(2) 1,787,446 52,091 5.82 1,662,087 48,094 5.79
----------- --------- ----------- -----------
Total interest earning
Assets $ 2,927,325 $ 109,821 7.53% $ 3,363,350 $ 122,874 7.34%
Interest-bearing
liabilities $ 2,928,829 $ 84,055 5.78% $ 3,249,731 $ 102,858 6.36%
Net interest spread 1.75% 0.98%
Net interest margin (3) 1.78% 1.20%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,364,352 $ 5,109,525
Business cards
securitized 681,735 555,490
Leases securitized 575,106 489,588
Auto loans securitized 142,256 168,765
Consumer credit cards
securitized 0 2,947,048
----------- -----------
Total average
securitized receivables $ 8,763,449 $ 9,270,416
=========== ===========
Total average managed
receivables $ 9,903,328 $10,971,679
=========== ===========
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Interest and average rate for tax-free securities, loans and leases
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin for the six months ended June 30, 1999 was
3.07%, representing a combination of owned interest-earning assets/owned
interest-bearing liabilities and Advanta Mortgage securitized mortgage
assets/liabilities.
28
<PAGE> 29
OTHER REVENUES
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities gains (losses) $ 9,298 $ 6 $ 27,672 $(42,490)
Business card interchange income 8,134 5,133 14,364 8,853
Leasing other revenues 4,082 2,700 8,752 7,365
Consumer credit card overlimit fees 0 0 0 16,094
Insurance revenues, net and other 3,670 1,643 6,832 24,609
- -------------------------------------------------------------------------------------------------
Total other revenues, net $ 25,184 $ 9,482 $ 57,620 $ 14,431
=================================================================================================
</TABLE>
Other revenues in the six months ended June 30, 1999 include equity
securities gains of $27.7 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 Partner's 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 $800 thousand. Other revenues in the six months ended June 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 from $24.6 million to $6.8
million in the six months ended June 30, 1999 as compared with the same period
in 1998. This decline is attributable to the transfer of the consumer credit
card portfolio in connection with the Fleet Transaction.
29
<PAGE> 30
OPERATING EXPENSES
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $42,772 $39,665 $ 88,844 $ 94,914
Other operating expenses:
Marketing 14,016 10,295 28,141 24,363
Professional fees 6,357 1,753 16,016 6,544
Occupancy expense 4,054 3,003 8,165 8,451
Credit and collection expense 3,756 3,456 8,909 8,073
External processing 3,554 3,256 6,889 14,522
Telephone expense 2,697 2,091 5,536 7,450
Amortization of credit card
deferred origination costs, net 1,200 1,419 2,356 19,934
Credit card fraud losses 182 128 434 2,900
Other 3,591 7,179 3,322 22,175
- -----------------------------------------------------------------------------------------------------------------------
Total other operating expenses 39,407 $32,580 $ 79,768 $114,412
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses $82,179 $72,245 $168,612 $209,326
=======================================================================================================================
At quarter end:
Number of accounts managed 613 515 N/A N/A
Number of employees 2,417 2,365 N/A N/A
For the quarter:
Operating expenses
as a percentage of average
managed receivables(1) 3.25% 3.73% 3.36% 3.45%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes amortization of credit card deferred origination costs, net.
The Company's operating expenses for the three months ended June 30, 1999
and 1998, totaled 3.25% and 3.73%, respectively, as a percentage of average
managed receivables. The operating expense ratio decrease was due to cost
reduction measures implemented during 1999. The operating expense ratio for the
six months ended June 30, 1998 included the operating expenses and average
managed receivables associated with the consumer credit card business prior to
the Fleet Transaction.
Total operating expenses in the three months ended June 30, 1999
increased by $9.9 million as compared to the same period of the prior year. This
increase is aligned with growth in the portfolio of average managed receivables.
The increases in marketing expenses of $3.7 million and $3.8 million in the
three and six months ended June 30, 1999 as compared to the same periods of 1998
resulted from the Company's decision to capitalize on its direct marketing
experience and centralized telemarketing and processing capabilities by focusing
on direct origination channels. The increases in professional fees of $4.6
million and $9.5 million for the three and six months ended June 30, 1999 as
compared to the same periods of 1998, are due to increases in Year 2000
consulting costs and outsourcing costs associated with the Company's management
of resources and capacity.
Salaries and employee benefits were $88.8 million for the six months
ended June 30, 1999 as compared to $94.9 million in the same period in 1998.
This reduction reflects the decrease in the number of employees as a result of
the Fleet Transaction in 1998 as
30
<PAGE> 31
well as workforce reductions and exit and disposition plans associated with
business and product offerings not directly associated with the Company's
mortgage, leasing and business card units. Total other operating expenses of
$79.8 million for the six months ended June 30, 1999 were lower by $34.6
million, or 30%, as compared to the $114.4 million in the same period in 1998,
principally resulting from decreases in operating expenses following the Fleet
Transaction.
PROVISION FOR CREDIT LOSSES
For the three months ended June 30, 1999 the provision for credit losses of $7.4
million was relatively flat in comparison with the $6.8 million provision in the
same period in 1998. For the six months ended June 30, 1999, the provision for
credit losses decreased to $17.6 million from $40.8 million for the same period
in 1998 and charge-offs on owned receivables decreased to $12.3 million from
$41.9 million during the same period in 1998. These decreases are mainly
attributable to the transfer in February 1998 of the consumer credit card
receivables in connection with the Fleet Transaction.
ASSET QUALITY
Impaired assets include both nonperforming assets (Advanta Mortgage loans and
credit cards and leases past due 90 days or more; real estate owned; and
bankrupt, decedent and fraudulent credit cards) and accruing loans past due 90
days or more on leases and other loans. The Company charges off expected losses
on all nonperforming mortgage loans at the earlier of foreclosure or when they
have become 12 months delinquent, regardless of anticipated collectibility.
Lease receivables are written off no later than when they have become 120 days
delinquent. All other loans are generally charged off upon the earlier of
approximately 6 months delinquency or after an investigative period for bankrupt
and fraudulent accounts. The carrying value for real estate owned is based on
fair value, net of costs of disposition and is reflected in other assets.
The consolidated managed charge-off rate for the three months ended
June 30, 1999 and 1998 was 1.5%. On the total owned portfolio, the charge-off
rate was 2.5% in the three months ended June 30, 1999 compared to 2.6% for the
same period in 1998. The following represents the quarterly managed charge-off
rates by product:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------------------------------------
6/30/99 3/31/99 6/30/98
------- ------- -------
<S> <C> <C> <C>
Mortgage .66% 0.51% 0.60%
Auto 15.99 13.53 6.54
Business Card 5.22 5.61 6.57
Leases 3.23 2.94 2.26
</TABLE>
Advanta Mortgage continues to emphasize profitability enhancement over loan
growth, and to emphasize the direct to consumer channels over wholesale 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 consistent with an
aging portfolio. The increase in reported delinquency 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>
JUN. 30, DEC. 31, JUN 30,
CONSOLIDATED-MANAGED 1999 1998 1998
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Nonperforming assets (2) $ 486,124 $ 410,584 $ 294,398
Accruing loans past due 90 days or more 0 30 75
Impaired assets 486,124 410,614 294,473
Total loans 30 days or more delinquent 814,103 753,251 528,059
As a percentage of gross receivables:
Nonperforming assets (2) 4.8% 4.2% 3.7%
Accruing loans past due 90 days or more 0.0 0.0 0.0
Impaired assets 4.8 4.2 3.7
Total loans 30 days or more delinquent 8.1 7.7 6.6
Net charge-offs:
Amount (1) $ 69,931 $ 247,287 $ 184,733
As a percentage of average gross
receivables (annualized)(1) 1.4% 2.5% 3.4%
ADVANTA MORTGAGE LOANS - MANAGED
Nonperforming assets(2) $ 450,359 $ 375,520 $ 267,271
Total loans 30 days or more delinquent 725,596 656,789 455,775
As a percentage of gross receivables:
Nonperforming assets (2) 5.4% 4.5% 4.0%
Total loans 30 days or more delinquent 8.6 7.9 6.9
Net charge-offs - Mortgage Loans
Amount $ 24,206 $ 36,142 $ 15,674
As a percentage of average
receivables (annualized) .6% .6% .6%
Net charge-offs - Auto Loans $ 12,325 $ 21,238 $ 9,235
As a percentage of average
receivables (annualized) 14.6% 9.3% 8.3%
LEASES - MANAGED
Nonperforming assets(2) $ 12,006 $ 9,595 $ 6,702
Impaired assets 12,006 9,602 6,755
Total loans 30 days or more delinquent 54,568 60,154 40,553
As a percentage of receivables:
Nonperforming assets(2) 1.6% 1.4% 1.1%
Impaired assets 1.6 1.4 1.1
Total loans 30 days or more delinquent 7.3 9.0 6.6
Net charge-offs - Leases
Amount $ 10,525 $ 16,220 $ 8,028
As a percentage of average
receivables (annualized) 3.1% 2.7% 2.7%
BUSINESS CARDS - MANAGED
Nonperforming assets(2) $ 23,437 $ 25,231 $ 20,271
Impaired assets 23,437 25,231 20,271
Total loans 30 days or more delinquent 33,126 35,900 31,381
As a percentage of receivables:
Nonperforming assets(2) 2.6% 3.1% 2.7%
Impaired assets 2.6 3.1 2.7
Total loans 30 days or more delinquent 3.7 4.4 4.1
Net charge-offs - Business Cards
Amount $ 22,844 $ 43,732 $ 21,842
As a percentage of average
receivables (annualized) 5.4% 5.9% 6.2%
</TABLE>
(1) Includes consumer credit cards through February 20, 1998.
(2) Nonperforming assets include mortgage loans, auto loans, and 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>
JUN. 30, DEC. 31, JUN. 30,
CONSOLIDATED-OWNED 1999 1998 1998
- ------------------ ---- ------- -------
<S> <C> <C> <C>
Allowance for credit losses $ 31,963 $ 33,437 $ 18,528
Nonperforming assets (2) 53,611 49,568 37,198
Accruing loans past due 90 days or more 0 30 75
Impaired assets 53,611 49,598 37,273
Total loans 30 days or more delinquent 68,867 73,755 56,406
As a percentage of gross receivables:
Allowance for credit losses 2.8% 3.0% 2.4%
Nonperforming assets (2) 4.7 4.4 4.7
Accruing loans past due 90 days or more 0.0 0.0 0.1
Impaired assets 4.7 4.4 4.8
Total loans 30 days or more delinquent 6.0 6.5 7.2
Net charge-offs:
Amount (1) $ 12,339 $ 53,109 $ 41,921
As a percentage of average gross
receivables (annualized) (1) 2.2% 3.7% 4.9%
ADVANTA MORTGAGE LOANS - OWNED
Allowance for credit losses $ 14,955 $ 20,092 $ 5,619
Nonperforming assets (2) 44,842 38,734 29,699
Total loans 30 days or more delinquent 54,114 56,131 39,991
As a percentage of gross receivables:
Allowance for credit losses 1.8% 2.4% 1.1%
Nonperforming assets (2) 5.4 4.6 5.6
Total loans 30 days or more delinquent 6.5 6.7 7.5
Net charge-offs - Mortgage:
Amount $ 3,744 $ 3,658 $ 1,327
As a percentage of average gross
receivables (annualized) .9% .5% .4%
Net charge-offs - Auto:
Amount $ 3,503 $ 7,648 $ 4,131
As a percentage of average gross
receivables (annualized) 25.9% 16.1% 15.4%
LEASES - OWNED
Allowance for credit losses $ 3,310 $ 2,695 $ 2,314
Nonperforming assets (2) 2,822 3,115 2,833
Impaired assets 2,822 3,122 2,886
Total loans 30 days or more delinquent 6,249 9,739 9,300
As a percentage of receivables:
Allowance for credit losses 2.6% 2.2% 2.2%
Nonperforming assets (2) 2.2 2.5 2.6
Impaired assets 2.2 2.6 2.7
Total loans 30 days or more delinquent 4.8 7.9 8.6
Net charge-offs - Leases:
Amount $ 906 $ 3,491 $ 2,647
As a percentage of average
receivables( annualized) 1.7% 3.4% 5.1%
BUSINESS CARDS - OWNED
Allowance for credit losses $ 9,002 $ 6,916 $ 6,861
Nonperforming assets (2) 5,625 7,481 4,511
Impaired assets 5,625 7,481 4,511
Total loans 30 days or more delinquent 7,691 7,207 6,764
As a percentage of receivables:
Allowance for credit losses 5.2% 4.6% 5.3%
Nonperforming assets (2) 3.2 5.0 3.5
Impaired assets 3.2 5.0 3.5
Total loans 30 days or more delinquent 4.4 4.8 5.2
Net charge-offs - Business Cards:
Amount $ 4,155 $ 10,033 $ 5,538
As a percentage of average gross
receivables (annualized) 5.1% 6.9% 7.2%
</TABLE>
(1) Includes consumer credit cards through February 20, 1998
(2) Nonperforming assets include mortgage loans, auto loans, and 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, the Company 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, the Company 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, the Company incurred
approximately $35.5 million of other compensation charges. This amount includes
$21.3 million attributable to payments under change of control plans and $14.2
million associated with the execution of the Tender Offer.
Exited business/products
In the first quarter of 1999, the Company 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, the Company 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. The Company has
substantially completed the settlement of these contractual commitments.
The Company also has contractual commitments to certain customers and
non-related financial institutions that are providing benefits to those
customers, under a product that is no longer being offered and for which no
future revenues or benefits will be received. In the first quarter of 1998, the
Company recorded a charge of $22.8 million associated with this commitment, and
an $8.3 million charge associated with the write-down of assets associated with
this program. The Company expects to pay a substantial portion of these costs
over the next 27 months. The actions required to complete this plan include the
settlement of contractual commitments and the payment of customer benefits.
In connection with the Fleet Transaction/Tender Offer and the other
exited business and product offerings, the Company also incurred $11.5 million
of related professional fees and $1.5 million of other expenses related to these
plans.
34
<PAGE> 35
Asset impairment/disposal
In connection with the Company's plans to reduce corporate expenses and exit
certain business and product offerings in the first quarter of 1998, the Company
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. The Company has substantially completed the disposal of
these assets.
ASSET/LIABILITY MANAGEMENT
The Company manages its financial condition with a focus on maintaining
disciplined management of market risks and prudent levels of leverage and
liquidity.
MARKET RISK SENSITIVITY
The Company has measured its interest rate risk using a rising rate
scenario and a declining rate scenario. Net interest income is estimated using a
third party software model that uses standard income modeling techniques. The
Company estimates that its net interest income over a twelve month period would
approximately increase or decrease by 0.3%, respectively, if interest rates were
to rise or fall by 200 basis points. Both increasing and decreasing rate
scenarios assume an instantaneous shift in rates and measure the corresponding
change in expected net interest income over one year.
The above estimates of net interest income sensitivity alone do not
provide a comprehensive view of the Company's exposure to interest rate risk.
The quantitative risk information is limited by the parameters and assumptions
utilized in generating the results. Such analyses are useful only when viewed
within the context of the parameters and assumptions used. The above rate
scenarios in no way reflect management's expectation regarding the future
direction of interest rates, and they depict only two possibilities out of a
large set of possible scenarios.
In addition to interest rate risk, the Company has other financial
instruments, namely capitalized servicing rights and interest-only strips, 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, the Company believes it is more
relevant to disclose the fair value sensitivity of these instruments based on
changes in prepayment rate assumptions rather than based on changes in interest
rates.
The Company'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 the Company expects them to continue to do so in the future.
The Company has estimated the impact on the fair
35
<PAGE> 36
value of these assets assuming a change in prepayments of 2.7% CPR for fixed
rate loans and 3.6% CPR for variable rate loans. The Company has estimated that
these changes in prepayment assumptions could result in a $29 million change in
the combined fair value of these assets. These estimates do not factor in the
impact of changes in the interest rate environment associated with the changes
in the prepayment rates. Changes in interest rates also generally affect the
level of new loan origination. Prepayment assumptions are not the only
assumptions in the fair value calculation for these assets, but they are the
most influential. Other key assumptions are not directly impacted by market
forces as defined earlier. The above prepayment scenario does not reflect
management's expectation regarding the future direction of prepayments, and
depicts only one possibility out of a large set of possible scenarios.
DERIVATIVES ACTIVITIES
The following table summarizes by notional amounts the Company's
derivative instruments as of June 30, 1999 and December 31, 1998 ($ in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
JUNE 30,
JUNE 30, DEC. 31, 1999 ASSET/
1999 1998 (LIABILITY)
---- ---- -----------
<S> <C> <C> <C>
Interest rate swaps $3,224,745 $2,997,912 $12,814
Interest rate options:
Caps written 368,237 268,633 (997)
Caps purchased 368,237 268,633 997
Put options purchased 194,000 0 386
Forward contracts 265,000 499,000 (547)
---------- ---------- --------
$4,420,219 $4,034,178 $12,653
========== ========== ========
</TABLE>
The notional amounts of derivatives do not represent amounts exchanged
by the counterparties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the 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 the Company from losses
in a rising interest rate environment, but allow for the appreciation of
underlying assets should interest rates fall. The Company regularly securitizes
and sells receivables. The Company 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 the Company would pay or receive to terminate the
agreement at the reporting date, taking into account
36
<PAGE> 37
current interest and foreign exchange rates and the current creditworthiness of
the counterparty.
The Company's credit exposure to derivatives, with the exception of
caps written, is represented by contracts with a positive fair value without
giving consideration to the value of any collateral exchanged. For caps written,
credit exposure does not exist since the counterparty has performed its
obligation to pay the Company a premium payment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, for both
long-term and short-term needs, through active management of both assets and
liabilities. During the six months ended June 30, 1999, the Company, through its
subsidiaries, securitized or sold approximately $1.3 billion of Advanta Mortgage
loans, $201 million of leases and $24 million of net business card receivables.
The Company 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 June 30, 1999, the Company had approximately $.2 billion
of federal funds sold, $0.7 billion of loan and lease receivables held for sale,
and $1.3 billion of investments available for sale which could be sold to
generate additional liquidity.
After paying down approximately $146 million in long-term debt in the
first six months of 1999, the Company had unrestricted cash, cash equivalents
and marketable securities of approximately $437 million at the parent company
level and $934 million at Advanta National Bank ("ANB") and Advanta Bank Corp.
("ABC" together with ANB, the "Banks") on June 30, 1999. Equity, including
capital securities, was approximately $667 million at June 30, 1999. The parent
company's assets include advances to wholly-owned non-bank subsidiaries to fund
$194 million in loans, $30 million in retained interest-only strips and
contractual mortgage servicing rights, $191 million in subordinated trust
assets, and $25 million of equity securities accounted for at fair value as of
June 30, 1999. Total parent company advances to non-bank subsidiaries of $440
million have decreased by $171 million in comparison to advances at December 31,
1998.
The Company's funding strategy relies on cash, cash equivalents and
investments as well as deposit gathering activity at the Banks and
securitizations. The Company 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 June 30, 1999, ANB's and ABC's total deposits were
$1.7 billion and $232 million, respectively. Total deposits increased
approximately $154 million and $26 million for ANB and ABC, respectively, from
December 31, 1998. This deposit growth reflects the Company's strategy to
increase funding at the Banks and, over time, decrease the degree of reliance on
securitizations structured as sales.
At June 30, 1999, Advanta Mortgage Corp. USA ("AMCUSA"), its
subsidiaries and the Banks have a secured revolving credit facility of $750
million, with a committed portion of $375 million, and a $250 million commercial
paper conduit facility. AMCUSA and ANB have an additional uncommitted secured
revolving credit facility of $250 million at June 30, 1999. During 1998, ABC
entered into a commercial paper facility secured by business credit card
receivables for $200 million, and in the first quarter of 1999, ABC entered into
a $200 million increase to an
37
<PAGE> 38
established commercial paper facility secured by lease contracts and lease
residuals. At June 30, 1999, the Company had available approximately $1.4
billion in unused warehouse lines and commercial paper conduit facilities. In
addition, notwithstanding the Company's current liquidity, efforts continue to
develop new sources of funding, both through previously untapped customer
segments and through development of new financing structures.
At June 30, 1999, ANB's and ABC's combined total capital ratios (combined
Tier I and Tier II capital) were 14.17% and 13.92%, respectively. At December
31, 1998, ANB's and ABC's combined total capital ratios (combined Tier I and
Tier II capital) were 12.12% and 14.13%, respectively. 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. The Company 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 the Company are not properly equipped to identify and
recognize the Year 2000, the Company's IT systems and non-IT systems could fail
or create erroneous results. This could cause the Company to experience a
temporary inability to process transactions, originate loans or leases, service
the loans of third parties and engage in other normal business activities. Under
these circumstances, the Year 2000 Issue could have a material adverse effect on
the Company's products, services, operations and financial results.
In connection with the Year 2000 Issue, the Company has organized a
separate Year 2000 Project Office (the "Project Office") managed by a team led
by a senior information technology manager to assess whether the computer
systems and applications used by the Company are Year 2000 compliant and to
implement appropriate responses in the event any of such systems and
applications are not compliant. The Project Office has developed standards for
its work based on the work of leading authorities in the field. The Project
Office reports to the Company's Year 2000 Steering Committee which consists of
the Company's Chief Information Officer, the head of each of the Company's
business units, the General Counsel and other key members of corporate senior
management. In addition, the Company's Internal Audit Department has assigned a
senior information technology auditor to monitor all Year 2000 Issues and
developments for the Audit Committee of the Company's Board of Directors.
Independent consultants have assisted in the verification and validation
processes to assure the reliability of the Company's risk and cost estimates.
The Company 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
38
<PAGE> 39
Corporation ("FDIC"). The Company's compliance program consists of the
following phases:
AWARENESS Define the scope of the Year 2000 problem. Establish
a Year 2000 project team. Develop an overall strategy
to address the Year 2000 problem. Identify all IT and
non-IT systems that may be affected by the Year 2000
Issue.
ASSESSMENT Assess the size and complexity of the Year 2000
Issue. Evaluate whether IT and non-IT systems are
Year 2000 compliant. Identify and prioritize
"mission-critical" systems.
RENOVATION Remediate or replace systems that are not Year 2000
compliant.
VALIDATION Test of systems to validate that they are Year 2000
compliant.
CONTINGENCY 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.
The Company has completed the Awareness, Assessment and Validation
phases, and has substantially completed the Renovation, Contingency Planning and
Implementation phases of its Year 2000 compliance program with respect to its
internal and external mission-critical systems as of June 30, 1999. Each of the
Company's business units has evaluated its systems, applications and vendor
lists, including identifying and prioritizing "mission-critical" systems, and
has implemented project plans to modify existing computer programs, convert to
new programs or replace systems to the extent necessary to address the Year 2000
Issue. On an ongoing basis, the Company is also providing customer awareness
training for customer-centered employees that will equip them to respond to
customer inquiries about the Company's Year 2000 readiness. The Company had
completed testing of its internal mission-critical systems and the development
of contingency plans as of the end of 1998. In addition, all non-mission
critical applications are being addressed, and the Company has substantially
completed the Renovation and Implementation phases as of June 30, 1999.
The Company has identified its significant business relationships,
including without limitation vendors, customers and asset management and funding
counterparties, to assess the potential impact on the Company's operations if
those third parties and/or their products or systems fail to become Year 2000
compliant in a timely manner. The Company has mailed questionnaires to third
parties with which it maintains a significant business relationship to help
identify which of those third parties and/or their products or systems will not
be Year 2000 compliant. In addition, the Company regularly reviews Internet
websites to monitor and assess the level of Year 2000 compliance of vendors,
suppliers and other third parties. Evaluation of questionnaire 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 evaluated for
39
<PAGE> 40
remediation, replacement or retirement, and action plans are in process. To
date, the Company is not aware of any material third party business
relationship, product or system with a Year 2000 problem that management
believes would have a material adverse effect on the Company. However, there can
be no assurance that the systems and products used by outside service providers
or other third parties upon which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The Company's Year 2000 compliance program also includes the
development of contingency plans for each of the Company's business units in the
event that remediation or replacement plans are not successfully implemented.
The contingency plans are designed to protect its business and operations from
business interruptions related to the Year 2000 Issue and, by way of example,
may include back-up procedures or the identification of alternative suppliers,
where practical. Each of the Company's business units has developed, and has
validated, its contingency plans. These plans are reviewed regularly and
updated. Many of the functions performed by the products and systems used by the
Company, which operate automatically, can be performed manually. Consequently,
in the event these products or systems experience isolated failures as a result
of the Year 2000 problem, the disruption caused by such isolated failures should
not have a material adverse effect on the Company. There can be no assurances,
however, that any of the Company's contingency plans will be sufficient to
anticipate or address all of the problems or issues that may arise.
The Company established a two-year budget for 1998 and 1999 of
approximately $20.9 million, including capital expenditures, to address the Year
2000 Issue. This budget includes approximately $5.3 million to cover the costs
associated with diverted personnel. Of the total budget, the Company has
allocated approximately $9.5 million for contingencies. Based on current
information, the Company believes that the budget will be sufficient to cover
its expenditures associated with the Year 2000 Issue. As of June 30, 1999,
exclusive of costs associated with diverted personnel, the Company has spent
approximately $7.0 million in operating expenses and approximately $1.0 million
in capital expenditures. Funding for the project is being provided out of
operating revenues. The Company notes that GAAP generally requires that the
costs of becoming Year 2000 compliant, including without limitation modifying
computer software or converting to new programs, be charged to expense as they
are incurred. Therefore, except for the cost of replacement systems or other
items that have a future use, the Company will expense the cost of the Year 2000
project as incurred. The Company has deferred development on selected business
systems due to Year 2000 priorities. These deferrals are not expected to have a
material effect on the financial condition and results of operations of the
Company.
The Company believes that the Year 2000 Issue will not pose significant
operational problems for it and will not have a material adverse effect on its
future financial condition, liquidity or results of operations during 1999 and
in future periods. The projected costs and expenditures and project completion
dates are based on management's best estimates, are subject to the performance
of third parties over which the Company has no control and may be updated from
time to time as additional information becomes available.
40
<PAGE> 41
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 30, 1998, purported shareholders of the Company who are represented by a
group of law firms filed a putative class action complaint against the Company
and several of its current and former officers and directors in the United
States District Court for the Eastern District of Pennsylvania. A second,
similar complaint was filed in the same court a few days later by a different
group of law firms. Both complaints allege that the Company made
misrepresentations in certain of its public filings and statements in violation
of the Securities Exchange Act of 1934. The complaints seek damages of an
unspecified amount. On July 10, 1998, the complaints, which had previously been
consolidated, were dismissed by the Court for failing to state a claim. The
plaintiffs determined not to attempt to amend their complaints. Rather, they
appealed the District Court's decision to the United States Courts of Appeals
for the Third Circuit, which court, on June 17, 1999, affirmed the District
Court.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit
against the Company and certain of its subsidiaries in Delaware Chancery Court.
Fleet's allegations, which the Company denies, center around Fleet's assertions
that the Company has failed to complete certain post-closing adjustments to the
value of the assets and liabilities the Company contributed to the LLC in
connection with the Fleet Transaction. Fleet seeks damages of approximately $141
million. The Company has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that the Company contributed
$1.8 million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities the Company has already assumed. The Company
also has filed a countercomplaint against Fleet for approximately $101 million
in damages the Company believes have been caused by certain actions of Fleet
following closing of the Fleet Transaction. Management expects that the ultimate
resolution of this litigation will not have a material adverse effect on the
financial position or future operating results of the Company.
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. The
Company's preliminary investigation suggests that if a change in interest rate
took place, as alleged by Uphaus, that change occurred after the contribution of
the Company'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 the Company 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 May 3, 1999, was filed by
the Company setting forth the financial highlights of the
Company's results of operations for the three months ended
March 31, 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)
August 13, 1999 By /s/Philip M. Browne
-------------------
Senior Vice President and
Chief Financial Officer
August 13, 1999 By /s/James L. Shreero
-------------------
Vice President and
Chief Accounting Officer
43
<PAGE> 44
EXHIBIT INDEX
EXHIBIT DESCRIPTION
12 Consolidated Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
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 Six Months Ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998(A)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $12,312 $ 9,471 $ 19,085 $428,257
Federal and state
income taxes 8,115 4,006 12,308 (17,452)
Earnings before income taxes 20,427 13,477 31,393 410,805
Fixed charges:
Interest 43,317 36,226 86,594 103,770
One-third of all rentals 814 588 1,593 1,423
Preferred stock dividend
of subsidiary trust 2,248 2,248 4,495 4,495
Total fixed charges 46,379 39,062 92,682 109,688
Earnings before income taxes
and fixed charges 66,806 52,539 124,075 520,493
Ratio of earnings to fixed
charges (B) 1.44x 1.35x 1.34x 4.75x
</TABLE>
(A) Earnings before income taxes in 1998 include a $541.3 million gain on the
transfer of 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.
45
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 18896
<INT-BEARING-DEPOSITS> 56654
<FED-FUNDS-SOLD> 170900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1280653
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1164805
<ALLOWANCE> 31963
<TOTAL-ASSETS> 3783531
<DEPOSITS> 1930128
<SHORT-TERM> 420431
<LIABILITIES-OTHER> 261960
<LONG-TERM> 503969
0
1010
<COMMON> 268
<OTHER-SE> 565765
<TOTAL-LIABILITIES-AND-EQUITY> 3783531
<INTEREST-LOAN> 57228
<INTEREST-INVEST> 52372
<INTEREST-OTHER> 14915
<INTEREST-TOTAL> 124515
<INTEREST-DEPOSIT> 53595
<INTEREST-EXPENSE> 86594
<INTEREST-INCOME-NET> 37921
<LOAN-LOSSES> 17555
<SECURITIES-GAINS> 27672
<EXPENSE-OTHER> 179765
<INCOME-PRETAX> 31393
<INCOME-PRE-EXTRAORDINARY> 19085
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19085
<EPS-BASIC> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 1.78
<LOANS-NON> 53611
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 33437
<CHARGE-OFFS> 14738
<RECOVERIES> 2399
<ALLOWANCE-CLOSE> 31963
<ALLOWANCE-DOMESTIC> 31963
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
