<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 March 31, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission File Number 0-14120
Advanta Corp.
(Exact name of registrant as specified in its charter)
Delaware 23-1462070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code)
(215) 657-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings during
the preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Outstanding at May 2, 2000
Common Stock, $.01 par value 10,060,888 shares
Class B Outstanding at May 2, 2000
Common Stock, $.01 par value 17,220,692 shares
<PAGE> 2
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Income Statements 4
Consolidated Condensed Statements of Changes in
Stockholders' Equity 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
PART II OTHER INFORMATION 35
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
($ IN THOUSANDS) MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash $ 58,202 $ 29,301
Federal funds sold 192,357 144,938
Restricted interest-bearing deposits 48,128 93,688
Investments available for sale 903,046 748,881
Loan and lease receivables, net:
Held for sale 650,682 711,303
Other 881,060 738,321
----------- -----------
Total loan and lease receivables, net 1,531,742 1,449,624
Retained interest-only strip 102,717 115,641
Contractual mortgage servicing rights 103,821 92,636
Subordinated trust assets 442,646 400,148
Premises and equipment (at cost, less accumulated
depreciation of $59,390 in 2000 and $54,613 in 1999) 91,711 89,869
Other assets 581,190 524,936
----------- -----------
TOTAL ASSETS $ 4,055,560 $ 3,689,662
----------- -----------
LIABILITIES
Deposits:
Noninterest-bearing $ 4,839 $ 5,768
Interest-bearing 2,128,713 1,506,591
----------- -----------
Total deposits 2,133,552 1,512,359
Long-term debt 714,701 788,508
Other borrowings 207,974 409,601
Other liabilities 294,516 289,563
----------- -----------
TOTAL LIABILITIES 3,350,743 3,000,031
----------- -----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of Advanta 100,000 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding - 1,010
shares in 2000 and 1999 1,010 1,010
Class A voting common stock, $.01 par value:
Authorized - 214,500,000 shares; Issued - 10,060,883
shares in 2000, and 10,465,883 shares in 1999 101 105
Class B non-voting common stock, $.01 par value;
Authorized - 230,000,000 shares; Issued - 17,746,753
shares in 2000, and 18,256,029 in 1999 177 182
Additional paid-in capital 221,745 232,585
Deferred compensation (13,582) (16,597)
Unearned ESOP shares (12,028) (12,132)
Accumulated other comprehensive loss (11,560) (10,794)
Retained earnings 436,919 421,741
Less: Treasury stock at cost, 0 Class A and 527,168
Class B common shares in 2000 and 405,000 Class A and
972,768 Class B common shares in 1999 (17,965) (26,469)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 604,817 589,631
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,055,560 $ 3,689,662
----------- -----------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE> 4
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
(UNAUDITED)
REVENUES:
<S> <C> <C>
Interest income $ 82,154 $ 65,314
Securitization income 32,255 34,769
Servicing revenues 37,687 27,238
Other revenues, net 30,741 32,436
-------- --------
Total revenues 182,837 159,757
-------- --------
EXPENSES:
Operating expenses 93,709 86,433
Interest expense 47,755 43,277
Provision for credit losses 11,399 10,148
Minority interest in income of
consolidated subsidiary 2,220 2,220
Unusual charges 0 6,713
-------- --------
Total expenses 155,083 148,791
-------- --------
Income before income taxes 27,754 10,966
Income tax expense 10,685 4,193
-------- --------
NET INCOME $ 17,069 $ 6,773
-------- --------
Basic earnings per share
Class A $ .67 $ .24
Class B $ .69 $ .26
Combined $ .68 $ .25
-------- --------
Diluted earnings per share
Class A $ .65 $ .24
Class B $ .67 $ .26
Combined $ .67 $ .25
-------- --------
Basic weighted average shares outstanding
Class A 9,088 9,280
Class B 15,697 13,807
Combined 24,785 23,087
-------- --------
Diluted weighted average shares outstanding
Class A 9,143 9,282
Class B 16,241 13,896
Combined 25,384 23,178
-------- --------
Cash dividends declared
Class A $ .063 $ .063
Class B .076 .076
-------- --------
</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 STOCK COMMON PAID-IN
INCOME STOCK STOCK STOCK CAPITAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $1,010 $0 $104 $163 $229,304
Net income $ 49,818
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $5,763 (10,703)
--------
Comprehensive income $ 39,115
========
Conversion of Class B
Preferred Stock 14 (14)
Preferred and common
cash dividends declared
Exercise of stock options 20
Issuance of stock:
Benefit plans 1 9 10,579
Amortization of deferred
compensation
Termination benefit-
Benefit plans (4) (7,421)
Stock buyback
ESOP shares committed to be
released 117
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $1,010 $0 $105 $182 $232,585
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 17,069
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $412 (766)
--------
Comprehensive income $ 16,303
========
Preferred and common cash
dividends declared
Exercise of stock options 39
Issuance of stock:
Benefit plans 1 1,688
Amortization of deferred
compensation
Termination benefit-
Benefit plans (2) (4,121)
Retirement of treasury stock (4) (4) (8,496)
ESOP shares committed to be
released 50
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $1,010 $0 $101 $177 $221,745
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $(29,764) $ (91) $382,092 $(22,514) $560,304
Net income 49,818 49,818
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $5,763 (10,703) (10,703)
Comprehensive income
Conversion of Class B
Preferred Stock 0
Preferred and common
cash dividends declared (10,169) (10,169)
Exercise of stock options 20
Issuance of stock:
Benefit plans (10,589) 0
Amortization of deferred
compensation 3,781 3,781
Termination benefit-
Benefit plans 7,425 0
Stock buyback (3,955) (3,955)
ESOP shares committed to be
released 418 535
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $(28,729) $(10,794) $421,741 $(26,469) $589,631
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 17,069 17,069
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $412 (766) (766)
Comprehensive income
Preferred and common
cash dividends declared (1,891) (1,891)
Exercise of stock options 39
Issuance of stock:
Benefit plans (1,689) 0
Amortization of deferred
compensation 581 581
Termination benefit-
Benefit plans 4,123 0
Retirement of treasury stock 8,504 0
ESOP shares committed to be
released 104 154
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $(25,610) $(11,560) $436,919 $(17,965) $604,817
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
6
<PAGE> 7
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
($ IN THOUSANDS) MARCH 31,
------------------------------
2000 1999
----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 17,069 $ 6,773
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity securities gains (10,914) (17,854)
Noncash charges associated with exit of auto
finance business 0 16,900
Depreciation and amortization 4,895 4,815
Provision for credit losses, excluding auto 11,399 5,248
Investment in subordinated trust assets, net (42,498) (32,484)
Proceeds from sale of trading investments 0 185,042
Origination of loans and leases held for sale (673,216) (744,514)
Proceeds from sales of loans and leases held for sale 733,837 876,733
Change in other assets and other liabilities (46,506) 32,584
Change in retained interest-only strip and contractual
mortgage servicing rights, excluding auto charge 1,739 3,817
----------- -----------
Net cash (used in) provided by operating activities (4,195) 337,060
----------- -----------
INVESTING ACTIVITIES
Change in federal funds sold and interest-
bearing deposits (1,859) 165,850
Purchase of investments available for sale (318,082) (843,338)
Proceeds from sales of investments available for sale 144,957 71,526
Proceeds from maturing investments available for sale 28,779 138,887
Principal collected on Advanta Mortgage loans and
leases not held for sale 37,113 30,418
Origination of Advanta Mortgage loans and leases
not held for sale (173,656) (82,590)
Change in business credit card receivables and other loans
not held for sale (21,414) (12,860)
Purchases of premises and equipment, net (6,649) (12,179)
----------- -----------
Net cash used in investing activities (310,811) (544,286)
----------- -----------
FINANCING ACTIVITIES
Change in demand and savings deposits (4,849) 84,001
Proceeds from sales of time deposits 1,234,399 314,889
Payments for maturing time deposits (608,357) (146,740)
Change in repurchase agreements and FHLB advances (124,191) 58,125
Proceeds from issuance of long-term debt 62,365 22,905
Payments on redemption of long-term debt (136,172) (106,723)
Change in other borrowings (77,436) (8,291)
Stock buyback 0 (3,955)
Proceeds from issuance of stock 39 20
Cash dividends paid (1,891) (2,938)
----------- -----------
Net cash provided by financing activities 343,907 211,293
----------- -----------
Net increase in cash 28,901 4,067
Cash at beginning of period 29,301 16,267
----------- -----------
Cash at end of period $ 58,202 $ 20,334
----------- -----------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
7
<PAGE> 8
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
MARCH 31, 2000
(UNAUDITED)
NOTE 1) BASIS OF PRESENTATION
The consolidated condensed financial statements included herein have been
prepared by Advanta Corp. (collectively with its subsidiaries, "Advanta")
pursuant to the rules and regulations of the Securities and Exchange Commission.
Advanta has condensed or omitted certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles pursuant to such rules and
regulations. In the opinion of management, the statements include all
adjustments (which include only normal recurring adjustments) required for a
fair statement of financial position, results of operations and cash flows for
the interim periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in
Advanta's latest annual report on Form 10-K. The results of operations 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 securitization income 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
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137,
cannot be applied retroactively and will be adopted as required January 1, 2001.
Advanta anticipates that the adoption of SFAS No. 133 will not have a material
effect on the results of operations; however, Advanta continues to monitor
potential changes and implementation guidance to this new accounting standard.
8
<PAGE> 9
NOTE 3) INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Treasury & other U.S. $316,417 $311,346 $145,112 $140,444
Government securities
State and municipal securities 2,875 2,808 3,473 3,388
Collateralized mortgage obligations 436,637 428,273 456,288 448,068
Mortgage-backed securities 100,987 96,702 98,190 94,556
Equity securities(1) 63,717 63,717 60,892 60,892
Other 197 200 1,531 1,533
-------- -------- -------- --------
Total investments available for sale $920,830 $903,046 $765,486 $748,881
======== ======== ======== ========
</TABLE>
(1) Includes investments of the venture capital unit, Advanta Partners. The
amount shown as amortized cost represents carrying value for these investments.
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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
Advanta Mortgage loans $ 1,107,400 $ 1,050,478
Business credit cards 300,427 275,095
Leases 128,514 132,802
Other loans 19,521 21,930
----------- -----------
Gross loan and lease receivables 1,555,862 1,480,305
----------- -----------
Add: Deferred origination costs,
net of deferred fees, and
unamortized purchase premiums 23,090 11,166
Less: Allowance for credit losses
Advanta Mortgage loans (21,824) (21,743)
Business credit cards (18,752) (14,663)
Leases (4,303) (3,110)
Other loans (2,331) (2,331)
----------- -----------
Total allowance for credit losses (47,210) (41,847)
----------- -----------
Net loan and lease receivables $ 1,531,742 $ 1,449,624
=========== ===========
</TABLE>
Securitized receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ----------
<S> <C> <C>
Advanta Mortgage loans $7,357,374 $7,333,058
Business credit cards 925,783 765,019
Leases 692,744 662,841
---------- ----------
Total $8,975,901 $8,760,918
========== ==========
</TABLE>
Advanta Mortgage loans include home equity loans, home equity lines of credit
and auto loans, and exclude mortgage loans which were never owned by Advanta,
but which Advanta
9
<PAGE> 10
services for a fee ("subservicing"). Subservicing receivables were $13.1
billion at March 31, 2000, and $11.9 billion at December 31, 1999.
NOTE 5) ALLOWANCE FOR CREDIT LOSSES
The following table presents activity in the allowance for credit losses for the
periods presented:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Beginning balance $ 41,847 $ 33,437
Provision for credit losses 11,399 42,647
Allowance on receivables sold 0 (6,690)
Gross charge-offs:
Advanta Mortgage loans (2,866) (15,132)
Business credit cards (3,877) (11,341)
Leases (868) (4,429)
Other loans (0) (2,404)
-------- --------
Total gross charge-offs (7,611) (33,306)
Recoveries:
Advanta Mortgage loans 824 3,011
Business credit cards 346 1,238
Leases 405 1,503
Other loans 0 7
-------- --------
Total recoveries 1,575 5,759
Net charge-offs (6,036) (27,547)
Ending Balance $ 47,210 $ 41,847
======== ========
</TABLE>
NOTE 6) RETAINED INTEREST-ONLY STRIP, CONTRACTUAL MORTGAGE SERVICING RIGHTS AND
SUBORDINATED TRUST ASSETS
The following table presents activity in the retained interest-only ("IO") strip
and contractual mortgage servicing rights ("CMSR") related to Advanta Mortgage
loan securitizations:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Beginning balance IO Strip $ 115,641 $ 209,096
Beginning balance CMSR $ 92,636 $ 74,425
IO activity:
Retained IO on sales, net 3,677 50,462
Interest income 6,289 19,354
Cash received and used to acquire
subordinated trust assets (19,462) (111,600)
Cash released to Advanta (1,548) (25,760)
Fair value adjustments (4,618) (20,731)
Fair value adjustment related to
auto exit 0 (7,828)
Other 2,738 2,648
CMSR activity:
Servicing rights retained 13,068 54,124
Amortization, net (6,501) (39,134)
Valuation provision 4,618 3,221
Ending Balance IO Strip $ 102,717 $ 115,641
Ending Balance CMSR $ 103,821 $ 92,636
========= =========
</TABLE>
10
<PAGE> 11
The following table presents activity in subordinated trust assets related to
Advanta Mortgage loan securitizations:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Beginning balance $ 400,148 $ 291,942
Initial collateral deposits 8,517 45,717
Subordinated trust assets acquired
with excess cash flows 19,462 111,600
Interest income 11,220 27,227
Valuation adjustment related to
auto loans 0 (4,172)
Valuation adjustment related to
mortgage loans 8,172 (11,269)
Excess cash flows released to
Advanta (34,901) (60,481)
Net change associated with off-
balance sheet warehouse
facilities 30,028 (416)
--------- ---------
Ending balance $ 442,646 $ 400,148
========= =========
</TABLE>
NOTE 7) SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
OTHER ASSETS 2000 1999
-------- --------
<S> <C> <C>
Servicing advances $117,210 $105,302
Current and deferred income taxes, net 74,976 89,788
Accrued interest receivable 37,352 32,410
Other real estate (A) 8,036 9,560
Goodwill 3,254 3,323
Other 340,362 284,553
-------- --------
Total other assets $581,190 $524,936
======== ========
</TABLE>
(A) Carried at the lower of cost or fair market value less selling costs.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
OTHER LIABILITIES 2000 1999
-------- --------
<S> <C> <C>
Accounts payable and accrued expenses $ 77,540 $ 98,423
Accrued interest payable 48,495 36,554
Other 168,481 154,586
-------- --------
Total other liabilities $294,516 $289,563
======== ========
</TABLE>
11
<PAGE> 12
NOTE 8) LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of over one
year. The composition of long-term debt was as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
SENIOR DEBT
<S> <C> <C>
12 month senior notes (8.39%-10.08%) $104,554 $ 86,647
18 month senior notes (7.42%-10.26%) 8,436 8,344
24 month senior notes (7.14%-10.44%) 60,890 50,571
30 month senior notes (7.23%-10.26%) 13,092 13,852
48 month senior notes (5.97%-10.57%) 8,520 8,427
60 month senior notes (6.02%-10.44%) 29,546 28,863
Value notes, fixed (7.00%-7.85%) 7,779 7,779
Medium-term notes, fixed (6.81%-7.50%) 385,100 490,650
Medium-term notes, floating 30,500 47,400
Medium-term bank notes, fixed (6.45%-7.12%) 7,349 7,347
Other senior notes (6.91%-11.34%) 57,991 37,670
-------- --------
Total senior debt 713,757 787,550
Subordinated notes (8.76%-11.34%) 944 958
-------- --------
Total long-term debt $714,701 $788,508
======== ========
</TABLE>
Advanta has priced its floating rate medium-term notes based on a spread over
LIBOR. At March 31, 2000, the rates on these notes varied from 6.47% to 6.63%.
At March 31, 2000 and December 31, 1999, Advanta used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR based
variable rate.
NOTE 9) OTHER BORROWINGS
The composition of other borrowings was as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
FHLB advances $200,000 $220,000
Securities sold under repurchase agreements 0 104,191
Other borrowings 7,256 8,975
Warehouse facility 718 76,435
-------- --------
Total $207,974 $409,601
======== ========
</TABLE>
NOTE 10) CAPITAL STOCK
In the three months ended March 31, 2000, Advanta retired 405,000 shares of
Class A Treasury stock and 445,600 shares of Class B Treasury stock.
12
<PAGE> 13
NOTE 11) SEGMENT INFORMATION
During the first quarter of 2000, Advanta made changes to the methods used to
allocate centrally incurred interest and operating expenses to the reportable
segments in order to better reflect the use of the related assets or personnel
by the segments. These changes included the allocation of certain expenses based
on consumption rather than based on average managed assets, and a change in the
classification of certain employee groups. Prior period segment results have
been restated to reflect the current allocation methods.
<TABLE>
<CAPTION>
ADVANTA ADVANTA
THREE MONTHS ENDED ADVANTA BUSINESS LEASING
MARCH 31, MORTGAGE CARDS SERVICES OTHER(1) TOTAL
----------- ----------- ----------- ----------- -----------
2000
<S> <C> <C> <C> <C> <C>
Noninterest revenues $ 60,074 $ 31,122 $ (552) $ 10,039 $ 100,683
Interest revenue 47,732 15,884 4,039 14,499 82,154
Interest expense 24,575 6,101 3,001 14,078 47,755
Net income (loss) 9,509 8,572 (6,233) 5,221 17,069
Average managed
receivables $ 8,423,766 $ 1,120,635 $ 805,404 $ 20,752 $10,370,557
----------- ----------- ----------- ----------- -----------
1999
Noninterest revenues $ 60,010 $ 16,518 $ 11,381 $ 6,534 $ 94,443
Interest revenue 40,572 5,178 1,986 17,578 65,314
Interest expense 21,906 2,306 2,320 16,745 43,277
Net income (loss) 6,870 3,346 761 (4,204) 6,773
Average managed
receivables $ 8,312,465 $ 822,852 $ 663,874 $ 17,820 $ 9,817,011
----------- ----------- ----------- ----------- -----------
</TABLE>
(1) Other includes insurance operations, investment activities not
attributable to the reportable segments, and costs associated with exiting
the auto finance business in 1999.
NOTE 12) NET INTEREST INCOME
The following table presents the components of net interest income:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
2000 1999
-------- --------
Interest income:
<S> <C> <C>
Loans and leases $ 49,386 $ 30,059
Investments 26,479 24,137
Interest component of previously
discounted cash flows 6,289 11,118
-------- --------
Total interest income 82,154 65,314
Interest expense:
Deposits 27,157 26,482
Debt and other borrowings 20,598 16,795
-------- --------
Total interest expense 47,755 43,277
-------- --------
Net interest income 34,399 22,037
Less: Provision for credit losses (11,399) (10,148)
-------- --------
Net interest after
provision for credit losses $ 23,000 $ 11,889
======== ========
</TABLE>
13
<PAGE> 14
NOTE 13) INCOME TAX EXPENSE
Income tax expense is based on the estimated annual effective tax rate of 38.5%
for the three months ended March 31, 2000, compared to a 38% tax rate for the
comparable 1999 period.
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------- -------
Current:
<S> <C> <C>
Federal $ 724 $ 5,000
State 1,180 1,766
------- -------
Total current 1,904 6,766
------- -------
Deferred:
Federal 8,727 (936)
State 54 (1,637)
------- -------
Total deferred 8,781 (2,573)
------- -------
Total tax expense $10,685 $ 4,193
======= =======
</TABLE>
The reconciliation of the statutory federal income tax to the consolidated tax
expense is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Statutory federal income tax $ 9,714 $ 3,838
State income taxes 802 84
Compensation limitation 35 44
Non taxable investment income (113) (160)
Other 247 387
-------- --------
Consolidated tax expense $ 10,685 $ 4,193
======== ========
</TABLE>
NOTE 14) UNUSUAL CHARGES
In accordance with the terms of the contribution agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between Advanta and Fleet
Financial Group, Inc. ("Fleet"), Advanta and certain of its subsidiaries and
Fleet and certain of its subsidiaries each contributed certain assets and
liabilities of their respective consumer credit card businesses to Fleet Credit
Card LLC ("Fleet LLC") in exchange for an ownership interest in Fleet LLC (the
"Consumer Credit Card Transaction").
Concurrently with the Consumer Credit Card Transaction, Advanta purchased
7,882,750 shares of its Class A Common Stock and 12,482,850 of its Class B
Common Stock, each at $40 per share net, and 1,078,930 of its depositary shares
each representing one one-hundredth interest in a share of 6 3/4% Convertible
Class B Preferred Stock, Series 1995 Stock Appreciated Income Linked Securities
at $32.80 per share net, through an issuer tender offer (the "Tender Offer")
which was completed on February 20, 1998.
In connection with the Consumer Credit Card Transaction, Advanta made major
organizational changes during the first quarter of 1998 to reduce corporate
expenses incurred in the past: (a) to support the business contributed to Fleet
LLC in the Consumer Credit Card Transaction; and (b) associated with the
business and products no longer being offered or not directly associated with
its mortgage, business credit card and leasing units. In addition, in the first
quarter of 1999, Advanta implemented a plan to exit the auto finance business
and to implement cost reduction initiatives throughout the organization
including the consolidation of support functions. Costs associated with
14
<PAGE> 15
these changes were included in unusual charges on the consolidated income
statements. The following table presents activity in the accrual related to
these costs:
<TABLE>
<CAPTION>
CHARGED
12/31/99 TO 3/31/00
ACCRUAL ACCRUAL ACCRUAL
BALANCE IN 2000 BALANCE
------- ------- -------
<S> <C> <C> <C>
Employee costs associated with staff reductions $ 822 $ 822 $ 0
Employee costs associated with Consumer Credit Card
Transaction/Tender Offer 3,008 3,008 0
Expenses associated with exited businesses/products 20,648 1,712 18,936
======= ======= =======
Total $24,478 $ 5,542 $18,936
======= ======= =======
</TABLE>
Employee costs associated with staff reductions
In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with cost reduction initiatives and the
consolidation of support functions. There were 121 employees severed who were
entitled to benefits. This staff reduction was substantially complete by June
30, 1999.
Employee costs associated with Consumer Credit Card Transaction/Tender Offer
In connection with the organizational changes in 1998, Advanta incurred
approximately $26.8 million of severance and related costs classified as
employee costs associated with the Consumer Credit Card 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 Consumer Credit Card
Transaction/Tender Offer.
In connection with these organizational changes, 255 employees who ceased to be
employed by Advanta were entitled to benefits, of which 190 employees were
directly associated with the business contributed to Fleet LLC and 65 employees
were associated with the workforce reduction.
Additionally, during the first quarter of 1998, Advanta incurred approximately
$35.5 million of other compensation charges. This amount includes $21.3 million
attributable to payments under change of control plans and $14.2 million
associated with the execution of the Tender Offer.
Exited businesses/products
In the first quarter of 1999, Advanta implemented a plan to cease the
origination of auto loans and recorded a $3.4 million charge for costs
associated with exited businesses/products. The charges included severance and
outplacement costs for 22 employees in the auto origination group, and
professional fees associated with exited businesses/products not directly
associated with our mortgage, business credit card and leasing units. Advanta
completed the closing of the auto loan origination center and termination of
related employees during the second quarter of 1999. Advanta expects to pay a
substantial portion of the remaining costs during the year ended December 31,
2000.
During the first quarter of 1998, Advanta implemented a plan to exit certain
businesses and product offerings not directly associated with its mortgage,
business credit card and leasing units. In connection with this plan,
contractual vendor commitments of
15
<PAGE> 16
approximately $10.0 million associated with discontinued development and other
activities were accrued. Advanta has substantially completed the settlement of
these contractual commitments.
Advanta also has contractual commitments to certain customers, and non-related
financial institutions that are providing benefits to those customers, under a
product that will no longer be offered and for which no future revenues or
benefits will be received. In 1998, Advanta recorded a charge of $22.8 million
associated with this commitment, and an $8.3 million charge associated with the
write-down of assets associated with this program. In the fourth quarter of
1999, an additional charge of $10.0 million was recorded based on a change in
the estimate of total expected costs for exited businesses. Advanta expects to
pay a substantial portion of these costs over the next 33 months. The actions
required to complete this plan include the settlement of contractual commitments
and the payment of customer benefits.
In connection with the Consumer Credit Card Transaction/Tender Offer and the
other exited business and product offerings in 1998, Advanta also incurred $11.5
million of related professional fees and $1.5 million of other expenses related
to these plans.
16
<PAGE> 17
NOTE 15) EARNINGS PER SHARE
The following table shows the calculation of basic earnings per share and
diluted earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Net income $ 17,069 $ 6,773
less: Preferred A dividends (141) (141)
less: Preferred B dividends 0 (887)
-------- --------
Income available to common
shareholders $ 16,928 $ 5,745
Less: Class A dividends declared (519) (654)
Less: Class B dividends declared (1,231) (1,256)
-------- --------
Undistributed earnings $ 15,178 $ 3,835
Basic shares
Class A 9,088 9,280
Class B 15,697 13,807
Combined (1) 24,785 23,087
Options A 1 2
Options B 247 89
Restricted shares Class A 54 0
Restricted shares Class B 297 0
Diluted shares
Class A 9,143 9,282
Class B 16,241 13,896
Combined (1) 25,384 23,178
Basic earnings per share
Class A $ .67 $ .24
Class B .69 .26
Combined (1) .68 .25
Diluted earnings per share
Class A $ .65 $ .24
Class B .67 .26
Combined (1) .67 .25
-------- --------
</TABLE>
(1) Combined represents a weighted average of Class A and Class B earnings
per share.
There were 14,211 shares of Advanta's Class B convertible preferred stock
outstanding which were not included in the computation of diluted earnings per
share for the three months ended March 31, 1999, because they were antidilutive
for that period. Each share of Class B convertible preferred stock was
mandatorily converted into one share of Class B Common Stock effective September
15, 1999.
In the three months ended March 31, 2000, there were 1.2 million restricted
shares of Class B Common Stock outstanding and 1.5 million options to purchase
shares of Class B Common Stock outstanding that were not included in the
computation of diluted earnings per share because they were antidilutive for
that period. In the three months ended March 31, 1999, there were 1.4 million
restricted shares of Class B Common Stock outstanding and 1.8 million options to
purchase shares of Class B Common Stock outstanding that were not included in
the computation of diluted earnings per share because they were antidilutive for
that period.
17
<PAGE> 18
NOTE 16) CONTINGENCIES
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's
allegations, which Advanta denies, center around Fleet's assertions that Advanta
has failed to complete certain post-closing adjustments to the value of the
assets and liabilities Advanta contributed to Fleet LLC in connection with the
Consumer Credit Card Transaction. Fleet seeks damages of approximately $141
million. Advanta has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that Advanta contributed $1.8
million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities Advanta has already assumed. Advanta also
has filed a countercomplaint against Fleet for approximately $101 million in
damages Advanta believes have been caused by certain actions of Fleet following
the closing of the Consumer Credit Card Transaction. Formal discovery has begun
and is ongoing. The court has scheduled trial in this matter to begin in
September 2001. Management expects that the ultimate resolution of this
litigation will not have a material adverse effect on the financial position or
future operating results of Advanta.
Advanta and its subsidiaries are involved in other legal proceedings, claims and
litigation, including those arising in the ordinary course of business.
Management believes that the aggregate liabilities, if any, resulting from those
actions will not have a material adverse effect on the consolidated financial
position or results of operations of Advanta. However, as the ultimate
resolution of these proceedings is influenced by factors outside of Advanta's
control, it is reasonably possible that Advanta's estimated liability under
these proceedings may change.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In this form 10-Q, "Advanta", "we", "us", and "our" refer to Advanta Corp. and
its subsidiaries, unless the context otherwise requires.
OVERVIEW
For the quarter ended March 31, 2000, we reported net income of $17.1 million or
$.67 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. The
earnings for the three months ended March 31, 2000 include a non-operating gain
of $6.7 million, after tax, on investments held by Advanta Partners, our private
equity investment affiliate, and a $5.8 million charge, net of tax, for a
reduction in the valuation of retained interests in leasing securitizations.
The earnings for the three months ended March 31, 1999 include charges, after
tax, of $14.5 million that are principally related to our exit from the auto
finance business and severance and outplacement associated with cost cutting
initiatives implemented in the first quarter of 1999. In addition, we recognized
non-operating gains of $11.1 million, after tax, in the three months ended March
31, 1999 in connection with an investment held by Advanta Partners.
Net income (loss) for the three months ended March 31, 2000 was $9.5 million for
Advanta Mortgage, $8.6 million for Advanta Business Cards and ($6.2) million for
Advanta Leasing Services. Net income for the three months ended March 31, 1999
was $6.9 million for Advanta Mortgage, $3.3 million for Advanta Business Cards,
and $0.8 for Advanta Leasing Services.
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. These forward-looking statements can be identified by the
use of forward-looking phrases such as "will likely result," "may," "are
expected to," "is anticipated," "estimate," "projected," "intends to" or other
similar words. The most significant among these risks and uncertainties are: (1)
our managed net interest margin; (2) competitive pressures; (3) factors that
affect the level of delinquencies and charge-offs, including a deterioration of
general economic conditions; (4) the rate of prepayments; (5) interest rate
fluctuations; (6) the level of expenses; (7) managed and subserviced receivables
volume; (8) the timing of the securitizations of our receivables; (9) the level
of insurance policy renewals; (10) the effects of government regulation; (11)
relationships with significant vendors, business partners and customers; (12)
the amount and cost of financing available to us; and (13) the ratings on the
debt of Advanta Corp. and its subsidiaries. Additional risks that may affect our
future performance are set forth elsewhere in this Quarterly Report on Form
10-Q, in our Annual Report on Form 10-K for the year ended December 31, 1999 and
in our other filings with the Securities and Exchange Commission.
ADVANTA MORTGAGE
OVERVIEW
Advanta Mortgage makes nonconforming home equity loans directly to consumers and
through brokers. This business unit originates and services first and second
lien mortgage loans, including home equity lines of credit, through subsidiaries
of Advanta. In addition to servicing and managing the loans it originates,
Advanta Mortgage contracts with third parties to service their nonconforming
home equity loans on a subservicing basis.
19
<PAGE> 20
Net income for Advanta Mortgage was $9.5 million for the quarter ended March 31,
2000, compared to net income of $6.9 million for the same period of 1999. The
increase in net income is due to higher yields on originations and an increase
in servicing revenues from growth in the subservicing portfolio.
SECURITIZATION INCOME
Advanta Mortgage recognized gains of $26.5 million from the securitization and
sale of $484 million of loans in the three months ended March 31, 2000, and
recognized gains of $36.6 million from the securitization and sale of $634
million of loans in the three months ended March 31, 1999. Gains on the sale of
receivables, which represent 5.5% of the loans sold in the three months ended
March 31, 2000, are comparable as a percentage of loans sold to the 5.8%
recognized in the three months ended March 31, 1999.
PORTFOLIO LENDER ANALYSIS
In the fourth quarter of 1998, we began to report income for Advanta Mortgage
that is essentially equal to that of a portfolio lender, rather than the
front-ended income typically reported through gain on sale accounting. Since
gain on sale accounting is required under generally accepted accounting
principles for securitizations structured as sales, we intend to accomplish this
by increasing our use of on-balance sheet funding and decreasing our degree of
reliance on securitizations structured as sales over time. In this regard, we
began to analyze and evaluate Advanta Mortgage's financial results from a
portfolio lender's perspective as well as under generally accepted accounting
principles. The following tables present Advanta Mortgage's reported results
adjusted to approximate the results of a portfolio lender for the three months
ended March 31, 2000 and 1999 ($ in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
Advanta
Advanta Mortgage
Mortgage as a
As Pro forma Portfolio
Reported Adjustments Lender
--------- ----------- ---------
REVENUES:
<S> <C> <C> <C>
Interest income $ 47,732 $ 177,904 $ 225,636
Securitization income 26,476 (26,476) 0
Servicing revenues 32,119 (12,238) 19,881
Other revenues, net 1,479 0 1,479
--------- --------- ---------
Total revenues 107,806 139,190 246,996
EXPENSES:
Operating expenses 63,848 1,809 65,657
Interest expense 24,575 115,787 140,362
Provision for credit losses 2,123 21,594 23,717
Minority interest in income
of consolidated subsidiary 1,798 0 1,798
--------- --------- ---------
Total expenses 92,344 139,190 231,534
--------- --------- ---------
Income before income taxes 15,462 0 15,462
Income tax expense 5,953 0 5,953
--------- --------- ---------
Net income $ 9,509 $ 0 $ 9,509
========= ========= =========
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
Advanta
Advanta Mortgage
Mortgage as a
As Pro forma Portfolio
Reported Adjustments Lender
------------ ------------ ------------
REVENUES:
<S> <C> <C> <C>
Interest income $ 40,572 $ 165,649 $ 206,221
Securitization income 36,560 (36,560) 0
Servicing revenues 22,320 (7,482) 14,838
Other revenues, net 1,130 0 1,130
------------ ------------ ------------
Total revenues 100,582 121,607 222,189
EXPENSES:
Operating expenses 62,962 1,798 64,760
Interest expense 21,906 111,030 132,936
Provision for credit losses 2,703 8,779 11,482
Minority interest in income
of consolidated subsidiary 1,887 0 1,887
------------ ------------ ------------
Total expenses 89,458 121,607 211,065
------------ ------------ ------------
Income before income taxes 11,124 0 11,124
Income tax expense 4,254 0 4,254
------------ ------------ ------------
Net income $ 6,870 $ 0 $ 6,870
============ ============ ============
</TABLE>
With respect to the pro forma portfolio lender results, individual line items
are stated as if the securitized mortgages were still owned by Advanta and
remained on the balance sheet. The pro forma adjustments (1) eliminate the gain
on sale, including the servicing component, (2) reflect interest income,
interest expense and operating expenses as if the sales had not occurred, and
(3) eliminate the impact of valuation adjustments reflected in the reported
results. The pro forma adjustment to provision for credit losses represents the
amount by which the provision would have increased from that reported had the
securitized Advanta Mortgage loans remained on the balance sheet and the
provision for credit losses on the securitized 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.
21
<PAGE> 22
ORIGINATIONS
Originations for Advanta Mortgage were as follows ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE
MARCH 31, INCREASE
2000 1999 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Direct $ 380,040 $ 403,204 (6)%
Indirect:
Broker 183,254 174,087 5
Conduit 0 117,286 (100)
Corporate Finance 1,454 16,773 (91)
---------- ----------
Subtotal Indirect 184,708 308,146 (40)
Auto 0 5,103 (100)
---------- ----------
Total $ 564,748 $ 716,453 (21)%
========== ==========
</TABLE>
We continue to shift the composition of the managed mortgage portfolio toward a
higher proportion of direct and broker originations, which tend to have higher
yields and are typically more profitable than loans originated through conduit
or corporate finance channels. The dollar volume of originations from direct to
consumer channels represented 67% of total originations for the three months
ended March 31, 2000 as compared to 57% in the same period of 1999. At March 31,
2000, 45% of the managed mortgage portfolio consisted of loans originated
directly from consumers. This compares to 42% at December 31, 1999 and 35% at
March 31, 1999.
The decrease in the dollar volume of direct originations for the three months
ended March 31, 2000 as compared to the same period of 1999 is due to the
decrease in the average loan size and our focus on profitable loan growth over
volume. The number of loans directly originated for the three months ended March
31, 2000 increased 5% over the number of loans directly originated in the same
period of 1999. The decrease in indirect originations for the three months ended
March 31, 2000 as compared to the same period of 1999 resulted from our decision
in 1999 to curtail the purchase of pools of loans through the conduit and
corporate finance channels. Consistent with the strategy of focusing on
profitable loan growth over volume, the decision was based on unfavorable market
pricing and management's commitment to purchasing loans only when the loans
exceed certain profitability characteristics. There were no auto loans
originated in 2000 due to our exit from the auto finance business in the first
quarter of 1999.
Advanta Mortgage originated more second lien home equity loans and home equity
lines of credit as a percentage of total originations during the three months
ended March 31, 2000 than it originated during the same period of 1999. This was
primarily due to rising market interest rates that created increased demand for
these types of loans. Second lien home equity loans and home equity lines of
credit represented 38% of the dollar value of originations for the three months
ended March 31, 2000, compared to 18% for the three months ended March 31, 1999.
Home equity lines of credit represented 12% of the managed mortgage loan
portfolio at March 31, 2000, as compared to 10% at December 31, 1999, and 6% at
March 31, 1999.
SERVICING REVENUES
Servicing revenues were $32.1 million for the three months ended March 31, 2000,
as compared to $22.3 million for the same period in 1999. The increase in
servicing revenues is due to an increase in average serviced receivables of $3.9
billion as compared to the same period of 1999. Advanta Mortgage's subservicing
portfolio was $13.1 billion at March 31, 2000 as compared to $11.9 billion at
December 31, 1999 and
22
<PAGE> 23
$8.9 billion at March 31, 1999. The increase in the subservicing portfolio
resulted primarily from growth in existing clients' portfolios.
ADVANTA BUSINESS CARDS
OVERVIEW
Advanta Business Cards offers MasterCard business credit cards to small
businesses using targeted direct mail and the Internet. Net income for Advanta
Business Cards was $8.6 million for the three months ended March 31, 2000 as
compared to $3.3 million for the three months ended March 31, 1999. The increase
in net income in 2000 resulted from increased volume of managed receivables,
increases in portfolio yields and increased interchange income. These increased
revenues were partially offset by an increase in operating expenses due to
increased marketing and account origination activities.
SECURITIZATION INCOME
Advanta Business Cards recognized securitization income of $13.2 million for the
three months ended March 31, 2000 and $6.2 million for the three months ended
March 31, 1999. Advanta Business Cards sells receivables to existing
securitization trusts on a continuous basis to replenish the investors'
interests in trust receivables that have been repaid by the card holders. The
increase in securitization income in 2000 was due to increased yields on the
securitized receivables and increased volume of securitized receivables.
ORIGINATIONS
Originations for Advanta Business Cards were $748 million for the three months
ended March 31, 2000 as compared to $400 million for the three months ended
March 31, 1999. Advanta Business Cards originated 106 thousand business credit
card accounts for the three months ended March 31, 2000 as compared to 21
thousand originated for the three months ended March 31, 1999. The increase in
business credit card originations as compared to 1999 resulted from the
successful application of our information based strategy to expand the universe
of potential business credit card customers.
ADVANTA LEASING SERVICES
OVERVIEW
Advanta Leasing Services offers flexible lease financing programs on
small-ticket equipment to small businesses. Net loss for Advanta Leasing
Services was $6.2 million for the three months ended March 31, 2000 as compared
to net income of $761 thousand for the three months ended March 31, 1999. The
decrease in net income in 2000 was primarily attributable to a $9.5 million
pretax reduction in the valuation of retained interests in leasing
securitizations. Excluding the $9.5 million charge, net loss for the three
months ended March 31, 2000 was $391 thousand. The decrease in net income also
resulted from a decrease in gains recognized on the sale of lease receivables
and an increase in the provision for credit losses, partially offset by
increased net interest income from on-balance sheet receivables.
SECURITIZATION INCOME
Advanta Leasing Services recognized $2.0 million in gains on the sale of $107
million of leases for the three months ended March 31, 2000, as compared to $4.4
million in gains on the sale of $96 million of leases for the three months ended
March 31, 1999. As a percentage of receivables sold, these gains represented
1.9% in 2000 and 4.6% in 1999. The decrease in gain as a percentage of loans
sold resulted from a reduction in net interest
23
<PAGE> 24
income spread on securitized receivables. The sales were through a combination
of commercial paper conduit programs and a public lease securitization.
For the three months ended March 31, 2000, securitization income also included a
$9.5 million pretax charge associated with increasing the credit loss assumption
used in the valuation of retained interests in leasing securitizations. There
were no similar charges in the three months ended March 31, 1999.
ORIGINATIONS
Originations for Advanta Leasing Services were as follows ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE
MARCH 31, INCREASE
2000 1999 (DECREASE)
--------- ---------
<S> <C> <C> <C>
Vendor $ 43,788 $ 45,494 (4)%
Broker 30,599 60,515 (49)
Other 34,695 3,827 807
--------- ---------
$ 109,082 $ 109,836 (1)
========= =========
</TABLE>
Total lease originations for the three months ended March 31, 2000 were
relatively consistent with the same period of the prior year. The decrease in
broker originations was consistent with our strategy to reduce broker
originations with lower profitability characteristics. The increase in other
originations represents a private label program for a national direct marketer
of leases.
ADVANTA CORP.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments, excluding the interest component
of previously discounted cash flows, increased by $21.7 million for the three
months ended March 31, 2000 as compared to the three months ended March 31,
1999. Interest expense increased by $4.5 million for the three months ended
March 31, 2000 as compared to the three months ended March 31, 1999. The
increase in interest income was due to an increase in yields on receivables as
well as an increase in average on-balance sheet receivables. The increase in
interest expense was due to an increase in the cost of funds. Our cost of funds
increased to 6.41% for the three months ended March 31, 2000 from 5.80% for the
three months ended March 31, 1999. The increase in the cost of funds in 2000 was
primarily attributable to rising market interest rates.
The following table provides an analysis of owned interest income and expense
data, average balance sheet data, net interest spread, and net interest margin.
Net interest spread represents the difference between the yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Net interest margin represents the difference between the yield on
interest-earning assets and the average rate paid to fund interest-earning
assets. Average owned loan and lease receivables and the related interest
revenues include certain loan fees and costs.
24
<PAGE> 25
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ON-BALANCE SHEET
Mortgage loans $ 1,109,657 $29,283 10.61% $ 921,289 $20,834 9.17%
Business credit cards 346,231 15,686 18.22 144,642 5,116 14.34
Leases 137,603 4,125 11.99 105,321 2,102 7.98
Auto loans 3,383 244 28.98 44,302 1,712 15.67
Other loans 20,752 243 4.71 17,820 548 12.46
---------- ------- --------- -------
Total receivables(2) 1,617,626 49,581 12.32 1,233,374 30,312 9.96
Subordinated trust
assets 409,460 11,220 10.96 293,137 5,532 7.55
Investments(2) 961,136 15,279 6.35 1,394,865 18,389 5.28
---------- ------- ---------- -------
Total interest-earning
assets $ 2,988,222 $76,080 10.21% $2,921,376 $54,233 7.48%
Interest-bearing
liabilities $ 2,920,683 $46,649 6.41% $2,928,571 $42,030 5.80%
Net interest spread 3.80% 1.68%
Net interest margin 3.96% 1.69%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,236,664 $7,192,855
Business credit cards
securitized 774,404 678,210
Leases securitized 667,801 558,553
Auto loans securitized 74,062 154,019
---------- ----------
Total average
securitized receivables $ 8,752,931 $8,583,637
=========== ==========
Total average managed
receivables $10,370,557 $9,817,011
=========== ==========
Managed net interest
margin (3) 4.49% 3.64%
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and leases.
(2) Interest and average rate for tax-exempt securities, loans and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin represents a combination of owned
interest-earning assets/owned interest-bearing liabilities and securitized
mortgage and business credit card assets/liabilities.
25
<PAGE> 26
OTHER REVENUES
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------- -------
<S> <C> <C>
Equity securities gains $10,914 $17,854
Business credit card interchange income 12,602 6,230
Leasing other revenues 4,063 4,670
Other mortgage banking income 1,111 706
Insurance revenues, net and other 2,051 2,976
------- -------
Total other revenues, net $30,741 $32,436
======= =======
</TABLE>
Equity securities gains represent changes in the fair value and realized gains
on Advanta Partners investments. Equity securities gains for the three months
ended March 31, 2000 include a $9.4 million gain on the sale of an investment.
Equity securities gains for the three months ended March 31, 1999 include an $18
million gain on an investment in a company that was merged with another entity
in exchange for that entity's stock in the first quarter of 1999. The stock
received had a value significantly higher than Advanta Partners' basis in its
investment.
Business credit card interchange income increased by $6.4 million for the three
months ended March 31, 2000 as compared to the same period of 1999. The increase
in 2000 was due to an increase in average managed business credit card
receivables, as well as an increase in interchange rates.
OPERATING EXPENSES
($ in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------- -------
<S> <C> <C>
Salaries and employee benefits $29,568 $33,836
Marketing 22,724 14,125
Equipment expense 5,683 5,152
Credit and collection expense 5,408 5,153
Professional fees 5,255 6,560
External processing 4,513 3,335
Amortization of business credit card
deferred origination costs, net 4,271 1,157
Occupancy expense 4,173 4,111
Telephone expense 3,036 2,838
Postage 1,529 1,505
Credit card fraud losses 277 252
Other 7,272 8,409
------- -------
Total operating expenses $93,709 $86,433
======= =======
At quarter end (in thousands):
Number of accounts managed 775 625
Number of employees 2,807 2,540
For the quarter:
Operating expenses
as a percentage of average
managed receivables(1) 3.45% 3.47%
------- -------
</TABLE>
(1) Excludes amortization of business credit card deferred origination costs,
net.
26
<PAGE> 27
Operating expenses as a percentage of average managed receivables for the three
months ended March 31, 2000 were relatively consistent with the same period of
1999. Marketing expenses have increased by $8.6 million for the three months
ended March 31, 2000 as compared to the same period of 1999. This increase is
primarily due to increased marketing and account origination activities in
Advanta Business Cards. In addition, there was an increase in advertising
associated with the Advanta Retail Note Program, through which we offer
unsecured debt of Advanta Corp. to retail investors. The $3.1 million increase
in the amortization of business credit card deferred origination costs, net, and
the $1.2 million increase in external processing expense is due to the growth in
managed business credit card receivables. The $1.3 million decrease in
professional fees is due to a decrease in consulting and outsourcing costs.
PROVISION FOR CREDIT LOSSES
For the three months ended March 31, 2000 the provision for credit losses
increased to $11.4 million from $10.1 million for the same period in 1999. The
provision for the three months ended March 31, 1999 included a $4.6 million
provision related to our exit from the auto finance business. Excluding the
provision related to the auto exit in 1999, the increase in the provision in
2000 was $5.9 million. The majority of this increase was in the provision for
credit losses relating to Advanta Business Cards, which increased by $5.4
million for the three months ended March 31, 2000 as compared to the same period
of 1999. The increase in Advanta Business Cards' provision relates to a $202
million increase in average on-balance sheet business credit card receivables.
In addition, the leasing provision increased by $1.0 million due to a $32
million increase in average on-balance sheet lease receivables and an increase
in delinquencies on owned receivables.
ASSET QUALITY
Nonperforming assets include: Advanta Mortgage loans, business credit cards and
leases past due 90 days or more; real estate owned; and bankrupt, decedent and
fraudulent business credit cards. We charge losses on nonperforming Advanta
Mortgage loans against the allowance generally at the earlier of foreclosure or
when they have become twelve months delinquent. Losses on lease receivables are
generally charged against the allowance when 121 days contractually delinquent.
Our charge-off policy, as it relates to business credit card accounts, is to
charge-off a receivable, if not paid, at 180 days contractually delinquent.
Business credit card accounts suspected of being fraudulent are charged-off
after a 90-day investigative period, unless the investigation shows no evidence
of fraud. The carrying value for real estate owned is based on fair value, net
of costs of disposition, and is reflected in other assets.
Advanta Mortgage continues to emphasize profitability enhancement over loan
growth, and to emphasize the direct to consumer channels over indirect channels
for originations. This has resulted in a significant reduction in the rate of
portfolio growth relative to prior periods. The decline in the growth rate has
reduced the proportion of new, unseasoned loans in the portfolio. This
"seasoning" effect results in higher reported delinquencies and charge-offs
consistent with an aging portfolio. The increase in reported delinquency and
charge-off rates is primarily attributable to seasoning of the mortgage loan
portfolio.
27
<PAGE> 28
Delinquency and charge-off rates on business credit cards have improved in the
three months ended March 31, 2000 as compared to the same period of the prior
year. Charge-off rates on leases have increased in the three months ended March
31, 2000 as compared to the same period in the prior year. This increase is due
to the performance of a certain segment of the leasing portfolio. We expect the
impact of this segment of the lease portfolio to moderate by the end of the
year.
The following tables provide a summary of nonperforming assets, delinquencies
and charge-offs, as of and for the year-to-date periods indicated ($ in
thousands).
<TABLE>
<CAPTION>
MAR. 31, DEC. 31, MAR. 31,
CONSOLIDATED - MANAGED 2000 1999 1999
- ------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Nonperforming assets $515,862 $511,301 $471,819
Accruing loans past due 90 days or more 0 0 95
Impaired assets 515,862 511,301 471,914
Total loans 30 days or more delinquent 794,868 838,563 775,446
As a percentage of gross receivables:
Nonperforming assets 4.9% 5.0% 4.7%
Impaired assets 4.9 5.0 4.7
Total loans 30 days or more delinquent 7.6 8.2 7.8
Net charge-offs:
Amount $ 47,667 $155,452 $ 33,495
As a percentage of average gross
receivables (annualized) 1.8% 1.6% 1.4%
ADVANTA MORTGAGE LOANS - MANAGED
- ------------------------------------------
Nonperforming assets $475,153 $475,711 $435,435
Total loans 30 days or more delinquent 681,759 729,187 677,555
As a percentage of gross receivables:
Nonperforming assets 5.6% 5.7% 5.2%
Total loans 30 days or more delinquent 8.1 8.7 8.1
Net charge-offs - Mortgage Loans:
Amount $ 23,732 $ 64,303 $ 10,330
As a percentage of average gross
receivables (annualized) 1.1% 0.8% 0.5%
Net charge-offs - Auto Loans:
Amount $ 2,653 $ 18,855 $ 6,706
As a percentage of average gross
receivables (annualized) 13.7% 13.9% 13.5%
BUSINESS CREDIT CARDS - MANAGED
- ------------------------------------------
Nonperforming assets $ 26,393 $ 23,498 $ 25,923
Total loans 30 days or more delinquent 42,198 38,437 38,533
As a percentage of gross receivables:
Nonperforming assets 2.2% 2.3% 3.1%
Total loans 30 days or more delinquent 3.4 3.7 4.6
Net charge-offs - Business Credit Cards:
Amount $ 12,379 $ 44,309 $ 11,535
As a percentage of average gross
receivables (annualized) 4.4% 5.0% 5.6%
LEASES - MANAGED
- ------------------------------------------
Nonperforming assets $ 13,864 $ 11,472 $ 10,165
Total loans 30 days or more delinquent 69,996 69,695 58,789
As a percentage of gross receivables:
Nonperforming assets 1.7% 1.4% 1.5%
Total loans 30 days or more delinquent 8.5 8.8 8.4
Net charge-offs - Leases:
Amount $ 8,903 $ 25,586 $ 4,925
As a percentage of average gross
receivables (annualized) 4.4% 3.6% 3.0%
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
MAR. 31, DEC. 31, MAR. 31,
CONSOLIDATED - OWNED 2000 1999 1999
- ----------------------------------------- -------- ------- -------
<S> <C> <C> <C>
Allowance for credit losses $ 47,210 $41,847 $37,898
Nonperforming assets 49,268 45,620 57,647
Accruing loans past due 90 days or more 0 0 95
Impaired assets 49,268 45,620 57,742
Total loans 30 days or more delinquent 70,934 62,850 80,159
As a percentage of gross receivables:
Allowance for credit losses 3.0% 2.8% 3.3%
Nonperforming assets 3.2 3.1 5.1
Impaired assets 3.2 3.1 5.1
Total loans 30 days or more delinquent 4.6 4.3 7.0
Net charge-offs:
Amount $ 6,036 $27,547 $ 5,688
As a percentage of average gross
receivables (annualized) 1.5% 2.4% 1.8%
ADVANTA MORTGAGE LOANS - OWNED
- -----------------------------------------
Allowance for credit losses $ 21,824 $21,743 $23,378
Nonperforming assets 37,019 36,709 47,752
Total loans 30 days or more delinquent 49,531 45,263 64,176
As a percentage of gross receivables:
Allowance for credit losses 2.0% 2.1% 2.7%
Nonperforming assets 3.3 3.5 5.6
Total loans 30 days or more delinquent 4.5 4.3 7.5
Net charge-offs - Mortgage Loans:
Amount $ 2,138 $ 8,389 $ 1,551
As a percentage of average gross
receivables (annualized) 0.8% 1.1% 0.7%
Net charge-offs - Auto Loans:
Amount $ (96) $ 3,732 $ 1,600
As a percentage of average gross
receivables (annualized) (11.4%) 25.6% 14.4%
BUSINESS CREDIT CARDS - OWNED
- -----------------------------------------
Allowance for credit losses $ 18,752 $14,663 $ 6,998
Nonperforming assets 7,155 6,408 6,381
Total loans 30 days or more delinquent 11,123 10,347 7,286
As a percentage of gross receivables:
Allowance for credit losses 6.2% 5.3% 4.9%
Nonperforming assets 2.4 2.3 4.4
Total loans 30 days or more delinquent 3.7 3.8 5.1
Net charge-offs - Business Credit Cards:
Amount $ 3,531 $10,103 $ 2,025
As a percentage of average gross
receivables (annualized) 4.1% 4.8% 5.6%
LEASES - OWNED
- -----------------------------------------
Allowance for credit losses $ 4,303 $ 3,110 $ 2,795
Nonperforming assets 4,642 1,883 3,218
Total loans 30 days or more delinquent 9,365 5,996 8,128
As a percentage of gross receivables:
Allowance for credit losses 3.4% 2.3% 2.2%
Nonperforming assets 3.6 1.4 2.4
Total loans 30 days or more delinquent 7.3 4.5 6.3
Net charge-offs - Leases:
Amount $ 463 $ 2,926 $ 512
As a percentage of average gross
receivables (annualized) 1.3% 2.7% 1.9%
</TABLE>
29
<PAGE> 30
UNUSUAL CHARGES
Employee costs associated with staff reductions
In the first quarter of 1999, we recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with cost reduction initiatives and the
consolidation of support functions. There were 121 employees severed who were
entitled to benefits. This staff reduction was substantially complete by June
30, 1999. The final payment outstanding related to these severance costs was
paid in the three months ended March 31, 2000.
Employee costs associated with Consumer Credit Card Transaction/Tender
Offer
In 1998, we accelerated vesting of 43.15% of outstanding options that were not
vested at the time of the closing of the Consumer Credit Card Transaction. In
connection with the Tender Offer (see Note 14 to the Consolidated Condensed
Financial Statements), present and former directors and employees who held
exercisable options to purchase Class A and Class B Common Stock tendered these
options in lieu of first exercising the options and tendering the underlying
stock. We used approximately $850 million, before taking into account the
exercise price of options, to repurchase the shares in the Tender Offer. In
addition, we also amended the terms of options granted to employees who became
employees of Fleet LLC or whose employment with us was otherwise terminated in
connection with the Consumer Credit Card Transaction (the "Affected Employees")
to extend the post-employment exercise period. Although there was a charge to
earnings associated with this amendment, there was no net impact to capital as a
result of this amendment. We also canceled options issued to certain members of
the Board of Directors and replaced the canceled options with stock appreciation
rights.
In March 1997, the Compensation Committee of the Board of Directors approved the
Advanta Senior Management Change of Control Severance Plan which provides
benefits to senior management employees in the event of a change of control of
Advanta if, within one year of the date of a change of control, there has been
either an actual or constructive termination of the senior management employee.
In February 1998, pursuant to our agreement with Fleet, the Compensation
Committee approved an amendment to the management severance plan that allows the
Office of the Chairman, in its sole discretion, to extend the level of benefits
that would otherwise be allowed in the event of a change of control to Affected
Employees. The Board of Directors also authorized the Chairman of the Board, in
his sole discretion, to pay bonuses to certain key employees in recognition of
their efforts on behalf of Advanta in the strategic alternatives process. In
accordance with our agreement with Fleet, Fleet LLC agreed to assume Advanta's
management severance plan and 50% of the bonus payments with respect to those
Affected Employees who became employees of Fleet LLC in connection with the
Consumer Credit Card Transaction. In May 1997, the Board of Directors adopted
the Office of the Chairman Supplemental Compensation Program which entitled the
members of the Office of the Chairman to receive benefits in the event of a
change of control or other similar transaction. In October 1997, we announced
that the Chief Executive Officer of Advanta Corp. and the Chief Executive
Officer of the consumer credit card business unit were leaving Advanta in
connection with the Consumer Credit Card Transaction. These benefits were all
contingent upon the consummation of the Consumer Credit Card Transaction and
were recognized upon the closing of the transaction.
30
<PAGE> 31
In connection with our evaluation of strategic alternatives and the Consumer
Credit Card Transaction, we adopted special retention programs. Under these
programs, certain employees were entitled to receive special payments based on
their targeted bonuses and contingent upon their continued employment with
Advanta or a successor entity. The first payments under the special retention
programs were made in March 1998. Further, in March 1998, we identified
employees that would be terminated in connection with the Consumer Credit Card
Transaction as part of the corporate restructuring to reduce corporate expenses.
During the first quarter of 1998, the Board of Directors approved the corporate
restructuring and affected employees were informed of the termination benefits
they would receive. Substantially all of these employees ceased employment with
Advanta before April 30, 1998.
We recorded a $62.3 million pretax charge to earnings in connection with the
foregoing plans, plan amendments and workforce reduction activities in 1998. The
final payment outstanding related to these employee costs was paid in the three
months ended March 31, 2000.
Expense Associated with Exited Businesses/Products
In the first quarter of 1999, we implemented a plan to cease the origination of
auto loans and recorded a $3.4 million charge for costs associated with exited
businesses/products. The charges included severance and outplacement costs for
22 employees in the auto origination group, and professional fees associated
with exited businesses/products not directly associated with our mortgage,
business credit card and leasing units. We completed the closing of the auto
loan origination center and termination of related employees during the second
quarter of 1999. We expect to pay a substantial portion of the remaining costs
during the year ended December 31, 2000.
In connection with our efforts to reduce expenses associated with business and
product offerings which are not directly associated with our mortgage, business
credit card and leasing units, management approved exit and disposition plans
during the first quarter of 1998 related to certain businesses and products
previously offered. We recorded charges in the quarter ended March 31, 1998
related to costs to be incurred by us in executing these plans, including
contractual obligations to customers for which no future revenue will be
received, and contractual vendor obligations for services from which no future
benefit will be derived. The charges also include termination benefits to
employees associated with the businesses and products identified in the exit
plan. Related to the exit plan, certain assets were identified for disposal and
written down to estimated realizable value. In addition, we recognized
investment banking, professional and consulting fees that were contingent upon
completion of the Consumer Credit Card Transaction as well as other professional
and consulting fees associated with our corporate restructuring. During the
quarter ended March 31, 1998, we recorded a $54.1 million pretax charge to
earnings in connection with these exit plans. In 1999, an additional charge of
$10.0 million was recorded associated with exited products based on a change in
the estimate of total expected costs. We expect to pay a substantial portion of
these costs over the next 33 months. The actions required to complete these
plans include the settlement of contractual commitments and the payment of
customer benefits.
ASSET/LIABILITY MANAGEMENT
We manage our financial condition with a focus on maintaining disciplined
management of market risks and prudent levels of leverage and liquidity.
31
<PAGE> 32
MARKET RISK SENSITIVITY
We measure our 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. We estimate that at March
31, 2000, our net interest income over a twelve-month period would increase or
decrease by approximately 5% if interest rates were to rise or fall by 200 basis
points. Both increasing and decreasing rate scenarios assume an instantaneous
shift in rates and measure the corresponding change in expected net interest
income over one year.
The above estimates of net interest income sensitivity alone do not provide a
comprehensive view of our exposure to interest rate risk. The quantitative risk
information is limited by the parameters and assumptions utilized in generating
the results. These 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, we are also subject to prepayment risk
related to other financial instruments, namely servicing rights and retained
interest-only strips. 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, 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, we believe 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.
Our servicing rights and interest-only strips are derived from both fixed and
variable rate loans, the majority of which are fixed. Fixed and variable rate
loans are currently prepaying at different rates, which is expected to continue
in the future. We have estimated the impact on the fair value of these assets
assuming a 2.3% change in constant prepayment rate for fixed rate loans and 3.4%
change in constant prepayment rate for variable rate loans. We have estimated
that these changes in prepayment assumptions could result in a $28 million
change in the combined fair value of these assets as of March 31, 2000. These
estimates do not factor in the impact of changes in the interest rate
environment associated with the changes in the prepayment rates. Changes in
interest rates generally affect the level of loan originations. Prepayment
assumptions are not the only assumptions in the fair value calculation for these
assets. Other key assumptions are not directly impacted by market forces as
defined earlier. The above prepayment scenarios do not reflect management's
expectation regarding the future direction of prepayments, and they depict only
two possibilities out of a large set of possible scenarios.
32
<PAGE> 33
DERIVATIVES ACTIVITIES
The following table summarizes by notional amounts our derivative instruments as
of March 31, 2000 and December 31, 1999 ($ in thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
MARCH 31,
MARCH 31, DECEMBER 31, 2000 ASSET/
2000 1999 (LIABILITY)
------------- ----------- -----------
<S> <C> <C> <C>
Interest rate swaps $ 2,562,421 $ 2,975,086 $ 32,749
Interest rate caps written 399,823 409,278 (4,028)
Interest rate caps purchased 399,823 409,278 4,028
Put options purchased 156,000 156,000 147
Forward contracts 327,000 565,000 (2,105)
------------- ----------- -----------
Total $ 3,845,067 $ 4,514,642 $ 30,791
============= ============= ===========
</TABLE>
The notional amounts of derivatives do not represent amounts exchanged by the
counterparties and, thus, are not a measure of our exposure through our use of
derivatives. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the derivative contracts.
The fair value of interest rate swaps, options and forward contracts is the
estimated amount that we would pay or receive to terminate the agreement at the
reporting date, taking into account current interest and foreign exchange rates
and the current creditworthiness of the counterparty.
Our 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 us a
premium payment.
LIQUIDITY AND CAPITAL RESOURCES
Our 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 three months ended March 31, 2000, we securitized or sold
approximately $484 million of Advanta Mortgage loans, $157 million of business
credit card receivables and $107 million of leases. We temporarily invested cash
generated from these transactions in short-term, high quality investments at
money market rates pending redeployment to pay down borrowings and to fund
future mortgage loan, business credit card and lease receivable growth. At March
31, 2000, we had $192 million of federal funds sold, $651 million of loan and
lease receivables held for sale, and $595 million of investments that could be
sold to generate additional liquidity. Equity, including capital securities, was
$705 million at March 31, 2000.
Our funding strategy relies on cash, cash equivalents and investments as well as
deposit gathering activity at Advanta National Bank and Advanta Bank Corp.
(together, the "banks"), unsecured debt of Advanta Corp., and securitizations.
Advanta and the banks use both retail and institutional on-balance sheet funding
sources. We have the ability to issue a variety of debt securities and, through
the banks, deposit products. As of March 31, 2000, Advanta National Bank's total
deposits were $1.7 billion and Advanta Bank Corp.'s total deposits were $474
million.
33
<PAGE> 34
After paying down $122 million in medium term notes in the three months ended
March 31, 2000, we had over $325 million of unrestricted cash, cash equivalents
and marketable securities at the parent company level at March 31, 2000. At
March 31, 2000, the parent company's assets include advances to wholly-owned
non-bank subsidiaries to fund $87 million in loans, $34 million in retained
interest-only strips and contractual mortgage servicing rights, $195 million in
subordinated trust assets, and $38 million of equity securities accounted for at
fair value.
At March 31, 2000, we had a $500 million committed warehouse financing facility
for mortgage loans. At March 31, 2000, we had additional uncommitted warehouse
financing facilities for mortgage loans of $550 million. At March 31, 2000, we
had $730 million of committed commercial paper facilities for business credit
card receivables and a $360 million committed commercial paper facility for
lease contracts and lease residuals. At March 31, 2000, we had available $1.1
billion in unused warehouse financing facilities and commercial paper conduit
facilities. We also offer unsecured debt of Advanta Corp. to retail investors
through the Advanta Retail Note Program. In addition, notwithstanding our
current liquidity, efforts continue to develop new sources of funding, both
through previously untapped customer segments and through development of new
financing structures.
At March 31, 2000, Advanta National Bank's combined total capital ratio
(combined Tier I and Tier II capital) was 15.18% and Advanta Bank Corp.'s
combined total capital ratio was 12.56%. At December 31, 1999, Advanta National
Bank's combined total capital ratio (combined Tier I and Tier II capital) was
14.86%, and Advanta Bank Corp.'s combined total capital ratio was 13.28%. In
each case, Advanta National Bank and Advanta Bank Corp. had capital levels that
met the definition of "well-capitalized" under the regulatory framework for
prompt corrective action. We intend to maintain capital ratios at both
institutions in order to be "well-capitalized" under current guidelines.
Recently an FDIC discussion draft proposal has been made public regarding
capital requirements for subprime lenders. Under the proposal, regulatory
capital required to be held for certain loan classes included in the
institution's portfolio could be increased. The ultimate resolution of this
proposal and its impact on financial results is uncertain at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth in "Item 2-Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Report on Form 10-Q. See "Asset/Liability Management-Market Risk
Sensitivity."
34
<PAGE> 35
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's
allegations, which Advanta denies, center around Fleet's assertions that Advanta
has failed to complete certain post-closing adjustments to the value of the
assets and liabilities Advanta contributed to Fleet LLC in connection with the
Consumer Credit Card Transaction. Fleet seeks damages of approximately $141
million. Advanta has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that Advanta contributed $1.8
million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities Advanta has already assumed. Advanta also
has filed a countercomplaint against Fleet for approximately $101 million in
damages Advanta believes have been caused by certain actions of Fleet following
the closing of the Consumer Credit Card Transaction. Formal discovery has begun
and is ongoing. The court has scheduled trial in this matter to begin in
September 2001. Management expects that the ultimate resolution of this
litigation will not have a material adverse effect on the financial position or
future operating results of Advanta.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are being filed with this report on Form
10-Q.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
12 Consolidated Computation of Ratio of Earnings to Fixed Charges.
27 Financial data schedule.
</TABLE>
(b) Reports on Form 8-K
(b)(1)A Current Report on Form 8-K, dated January 25, 2000, was filed by
Advanta setting forth the financial highlights of Advanta's results
of operations for the fiscal year ended December 31, 1999.
35
<PAGE> 36
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)
May 11, 2000 By /s/Philip M. Browne
----------------------------------
Senior Vice President and
Chief Financial Officer
May 11, 2000 By /s/James L. Shreero
----------------------------------
Vice President and
Chief Accounting Officer
36
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
Exhibit 12 Consolidated Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 Financial Data Schedule
</TABLE>
37
<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
March 31,
2000 1999
------- -------
<S> <C> <C>
Net earnings $17,069 $ 6,773
Federal and state
income taxes 10,685 4,193
Earnings before income taxes 27,754 10,966
Fixed charges:
Interest 47,755 43,277
One-third of all rentals 755 779
Preferred stock dividend
of subsidiary trust 2,248 2,248
Total fixed charges 50,758 46,304
Earnings before income taxes
and fixed charges 78,512 57,270
Ratio of earnings to fixed
charges (A) 1.55x 1.24x
</TABLE>
(A)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.
38
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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0
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