<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, 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 August 4, 2000
Common Stock, $.01 par value 10,062,544 shares
Class B Outstanding at August 4, 2000
Common Stock, $.01 par value 17,177,540 shares
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Income Statements 4
Consolidated Condensed Statements of Changes in Stockholders' Equity 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
PART II - OTHER INFORMATION 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 6. Exhibits and Reports on Form 8-K 43
</TABLE>
2
<PAGE> 3
ITEM 1.FINANCIAL STATEMENTS
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
($ IN THOUSANDS) JUNE 30, DECEMBER 31,
2000 1999
-----------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $ 82,079 $ 29,301
Federal funds sold 131,623 144,938
Restricted interest-bearing deposits 45,459 93,688
Investments available for sale 932,569 748,881
Loan and lease receivables, net:
Held for sale 1,030,044 711,303
Other 632,580 738,321
----------- -----------
Total loan and lease receivables, net 1,662,624 1,449,624
Retained interests in securitizations 353,099 515,789
Contractual mortgage servicing rights 85,272 92,636
Premises and equipment (at cost, less accumulated
depreciation of $64,404 in 2000 and $54,613 in 1999) 96,760 89,869
Other assets 612,997 524,936
-----------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,002,482 $ 3,689,662
-----------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 4,104 $ 5,768
Interest-bearing 2,308,587 1,506,591
----------- -----------
Total deposits 2,312,691 1,512,359
Long-term debt 765,576 788,508
Other borrowings 118,339 409,601
Other liabilities 294,104 289,563
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,490,710 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 - 17,703,777
shares in 2000, and 18,256,029 in 1999 177 182
Additional paid-in capital 221,391 232,585
Deferred compensation (12,379) (16,597)
Unearned ESOP shares (11,923) (12,132)
Accumulated other comprehensive loss (10,995) (10,794)
Retained earnings 242,355 421,741
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 411,772 589,631
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,002,482 $ 3,689,662
-----------------------------------------------------------------------------------------
</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,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 86,524 $ 59,201 $ 168,678 $124,515
Securitization income (loss) (180,607) 41,116 (148,352) 75,885
Servicing revenues 42,531 30,049 80,218 57,287
Other revenues, net 24,351 25,184 55,092 57,620
----------------------------------------------------------------------------------------------
TOTAL REVENUES (27,201) 155,550 155,636 315,307
----------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 94,769 82,179 188,478 168,612
Interest expense 51,730 43,317 99,485 86,594
Provision for credit losses 27,460 7,407 38,859 17,555
Minority interest in income
of consolidated subsidiary 2,220 2,220 4,440 4,440
Unusual charges 0 0 0 6,713
----------------------------------------------------------------------------------------------
TOTAL EXPENSES 176,179 135,123 331,262 283,914
----------------------------------------------------------------------------------------------
Income (loss) before income
taxes (203,380) 20,427 (175,626) 31,393
Income tax expense (benefit) (10,685) 8,115 0 12,308
----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(192,695) $ 12,312 $(175,626) $ 19,085
----------------------------------------------------------------------------------------------
Basic earnings (loss) per share
Class A $ (7.65) $ .48 $ (7.05) $ .72
Class B (7.63) .50 (7.01) .76
Combined (7.64) .49 (7.03) .74
----------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
Class A $ (7.65) $ .48 $ (7.05) $ .72
Class B (7.63) .49 (7.01) .75
Combined (7.64) .49 (7.03) .74
----------------------------------------------------------------------------------------------
Basic weighted average shares
outstanding (000's)
Class A 9,097 8,976 9,093 9,127
Class B 16,135 14,187 15,916 13,998
Combined 25,232 23,163 25,009 23,125
----------------------------------------------------------------------------------------------
Diluted weighted average shares
outstanding (000's)
Class A 9,097 9,009 9,093 9,151
Class B 16,135 14,364 15,916 14,131
Combined 25,232 23,373 25,009 23,282
----------------------------------------------------------------------------------------------
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 (LOSS) STOCK 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 (loss) $ 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 loss $(175,626)
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation) of
investments, net of tax
benefit (expense) of $108 (201)
---------
Comprehensive income (loss) $(175,827)
=========
Preferred and common cash
dividends declared
Exercise of stock options 152
Issuance of stock:
Benefit plans 2 2,182
Amortization of deferred
compensation
Termination benefit-
Benefit plans (3) (5,108)
Retirement of treasury stock (4) (4) (8,496)
ESOP shares committed to be
released 76
------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 $1,010 $ 0 $ 101 $177 $221,391
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES 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 (loss)
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 loss (175,626) (175,626)
Other comprehensive income (loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax benefit
(expense) of $108 (201) (201)
Comprehensive income (loss)
Preferred and common cash
dividends declared (3,760) (3,760)
Exercise of stock options 152
Issuance of stock:
Benefit plans (2,184) 0
Amortization of deferred
compensation 1,292 1,292
Termination benefit-
Benefit plans 5,111 0
Retirement of treasury stock 8,504 0
ESOP shares committed to be
released 208 284
----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 $ (24,302) $ (10,995) $242,355 $(17,965) $ 411,772
----------------------------------------------------------------------------------------------------------------------
</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,
-----------------------------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (175,626) $ 19,085
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Investment securities gains (9,866) (27,672)
Noncash charges associated with exit of auto
finance business 0 16,900
Depreciation and amortization 10,159 9,216
Provision for credit losses, excluding auto 38,859 12,655
Proceeds from sale of trading investments 0 185,042
Origination of loans and leases held for sale (1,428,493) (1,586,481)
Proceeds from sales of loans and leases held for sale 1,318,984 1,695,407
Change in other assets and other liabilities (61,710) (6,708)
Change in retained interest in securitizations and
contractual mortgage servicing rights, excluding auto charge 170,054 (10,220)
-----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (137,639) 307,224
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Change in federal funds sold and interest-
bearing deposits 61,544 119,874
Purchase of investments available for sale (864,523) (953,487)
Proceeds from sales of investments available for sale 496,269 478,538
Proceeds from maturing investments available for sale 194,206 51,716
Principal collected on Advanta Mortgage loans and
leases not held for sale 74,859 50,773
Origination of Advanta Mortgage loans and leases
not held for sale (163,708) (86,411)
Change in business credit card receivables and other
loans not held for sale (73,864) 18,518
Purchases of premises and equipment, net (16,896) (13,011)
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (292,113) (333,490)
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in demand and savings deposits (21,398) 104,271
Proceeds from sales of time deposits 1,113,062 338,073
Payments for maturing time deposits (291,332) (262,006)
Change in repurchase agreements and FHLB advances (324,191) 0
Proceeds from issuance of long-term debt 130,416 45,194
Payments on redemption of long-term debt (153,348) (163,385)
Change in other borrowings 32,929 (23,857)
Stock buyback 0 (3,955)
Proceeds from issuance of stock 152 80
Cash dividends paid (3,760) (5,520)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 482,530 28,895
-----------------------------------------------------------------------------------------------------------
Net increase in cash 52,778 2,629
Cash at beginning of period 29,301 16,267
-----------------------------------------------------------------------------------------------------------
Cash at end of period $ 82,079 $ 18,896
-----------------------------------------------------------------------------------------------------------
</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, 2000
(UNAUDITED)
NOTE 1) BASIS OF PRESENTATION
Advanta Corp. (collectively with its subsidiaries, "Advanta") has prepared the
consolidated condensed financial statements included herein 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 normal recurring adjustments and the valuation adjustments discussed in
Note 2) 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 (loss) 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 REGULATORY DEVELOPMENTS
In June 2000, Advanta announced that its banking subsidiaries, Advanta National
Bank and Advanta Bank Corp., reached agreements with their respective bank
regulatory agencies, primarily relating to the banks' subprime lending
operations. The agreements outline a series of steps to modify processes and
formalize and document certain practices and procedures for the banks' subprime
lending operations. The agreements also establish temporary asset growth limits
at Advanta National Bank and deposit growth limits at Advanta Bank Corp., impose
restrictions on taking brokered deposits at Advanta National Bank, and require
that Advanta National Bank's capital ratios be maintained at approximately the
level at March 31, 2000 by September 30, 2000. The agreements also provide that
the Company change its charge-off policy for delinquent mortgages to 180 days
and modify its accounting processes and methodology for its allowance for loan
losses and valuation of residual assets.
In July 2000, Advanta announced that Advanta National Bank signed an agreement
with the Office of the Comptroller of the Currency regarding the carrying value
of Advanta National Bank's retained interests in mortgage securitizations and
allowance for mortgage loan losses. For Advanta National Bank's June 30, 2000
Call Report, the agreement provided that the retained interests be calculated
based on an 18% discount rate on the interest-only strip and subordinated trust
assets, a 15% discount rate on the contractual mortgage servicing rights, a
prepayment rate that represents the average prepayment experience for the six
months ended February 29, 2000 and cumulative loss rates as a percentage of
original principal balance of 6% on closed end mortgage loans and 8% for HELOC
(open end) mortgage loans. The agreement provided
8
<PAGE> 9
that based on these assumptions, the carrying value of Advanta National Bank's
contractual mortgage servicing rights be reduced by $13 million and the carrying
value of Advanta National Bank's subordinated trust assets and retained
interest-only strip be reduced by a total amount of $201 million. The agreement
further provided that Advanta National Bank's allowance for loan losses be
increased by $22 million. The agreement contains provisions regarding the use of
similar discount rate and credit loss assumptions for the calculation of the
carrying value of the residual assets in future periods.
NOTE 3) 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 and
SFAS No. 138, 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.
NOTE 4) INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury & other U.S.
Government securities $ 570,684 $ 566,167 $ 145,112 $ 140,444
State and municipal securities 5,001 5,015 3,473 3,388
Collateralized mortgage obligations 178,030 170,766 456,288 448,068
Mortgage-backed securities 97,900 92,747 98,190 94,556
Equity securities(1) 73,637 73,637 60,892 60,892
Other 24,232 24,237 1,531 1,533
---------------------------------------------------------------------------------------
Total investments
available for sale $ 949,484 $ 932,569 $ 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.
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<PAGE> 10
NOTE 5) 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, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Advanta Mortgage loans $ 1,081,838 $ 1,050,478
Business credit cards 503,169 275,095
Leases 95,811 132,802
Other loans 21,689 21,930
--------------------------------------------------------------------------------
Gross loan and lease receivables 1,702,507 1,480,305
--------------------------------------------------------------------------------
Add: Deferred origination costs,
net of deferred fees, and
unamortized purchase premiums 23,709 11,166
Less: Allowance for credit losses
Advanta Mortgage loans (38,035) (21,743)
Business credit cards (20,132) (14,663)
Leases (3,094) (3,110)
Other loans (2,331) (2,331)
--------------------------------------------------------------------------------
Total allowance for credit losses (63,592) (41,847)
--------------------------------------------------------------------------------
Net loan and lease receivables $ 1,662,624 $ 1,449,624
--------------------------------------------------------------------------------
</TABLE>
At June 30, 2000, $127.5 million of on-balance sheet business credit card
receivables were pledged as collateral for a warehouse facility borrowing.
Securitized receivables consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------------------------------------------
<S> <C> <C>
Advanta Mortgage loans $7,356,839 $7,333,058
Business credit cards 925,563 765,019
Leases 724,454 662,841
--------------------------------------------------------
Total $9,006,856 $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 services for a fee ("subservicing"). Subservicing receivables
were $13.6 billion at June 30, 2000, and $11.9 billion at December 31, 1999.
NOTE 6) ALLOWANCE FOR CREDIT LOSSES
The following table presents activity in the allowance for credit losses for the
periods presented:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, DECEMBER 31,
2000 1999
-------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 41,847 $ 33,437
Provision for credit losses 38,859 42,647
Allowance on receivables sold 0 (6,690)
Gross charge-offs:
Advanta Mortgage loans (9,350) (15,132)
Business credit cards (7,942) (11,341)
Leases (4,023) (4,429)
Other loans (0) (2,404)
-------------------------------------------------------------
Total gross charge-offs (21,315) (33,306)
Recoveries:
Advanta Mortgage loans 2,134 3,011
Business credit cards 741 1,238
Leases 1,326 1,503
Other loans 0 7
-------------------------------------------------------------
Total recoveries 4,201 5,759
-------------------------------------------------------------
Net charge-offs (17,114) (27,547)
-------------------------------------------------------------
Ending Balance $ 63,592 $ 41,847
=============================================================
</TABLE>
10
<PAGE> 11
The provision for credit losses in the three months ended June 30, 2000 includes
an increase in the credit loss assumption made in response to Advanta's current
bank regulatory examination process, including the implementation of the
agreements with the bank regulators that were signed during the second quarter
and in July 2000 (see Note 2), and changes during the quarter in the current
market, and the political and regulatory environment for subprime lending.
NOTE 7) RETAINED INTERESTS IN SECURITIZATIONS AND CONTRACTUAL MORTGAGE SERVICING
RIGHTS
Retained interests in securitizations include the retained interest-only ("IO")
strip and subordinated trust assets related to Advanta Mortgage loan
securitizations. The following table presents activity in the retained IO strip
and contractual mortgage servicing rights ("CMSR") related to Advanta Mortgage
loan securitizations:
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 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 24,589 50,462
Interest income 16,486 19,354
Cash received and used to acquire
subordinated trust assets (36,800) (111,600)
Cash released to Advanta (3,363) (25,760)
Fair value adjustments (217,190) (20,731)
Fair value adjustment related to
auto exit 0 (7,828)
Reclassification of IO valuation reserves
to subordinated trust assets 97,171 0
Other 3,466 2,648
CMSR activity:
Servicing rights retained 23,063 54,124
Amortization, net (13,416) (39,134)
Valuation provision (17,011) 3,221
Ending Balance IO Strip $ 0 $ 115,641
Ending Balance CMSR $ 85,272 $ 92,636
================================================================================
</TABLE>
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,
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $ 400,148 $ 291,942
Initial collateral deposits 32,406 45,717
Subordinated trust assets acquired
with excess cash flows 53,055 111,600
Interest income 22,980 27,227
Excess cash flows released to Advanta (66,346) (60,481)
Valuation adjustment related to mortgage loans 8,172 (11,269)
Valuation adjustment related to auto loans 0 (4,172)
Reclassification of IO valuation reserves to
subordinated trust assets (97,171) 0
Net change associated with off-
balance sheet warehouse facilities (145) (416)
--------------------------------------------------------------------------------
Ending balance $ 353,099 $ 400,148
================================================================================
</TABLE>
Valuation adjustments recorded to the IO strip, CMSR and subordinated trust
assets in the three months ended June 30, 2000 resulted from an increase in
discount rate and
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<PAGE> 12
credit loss assumption used in the valuation of these assets. These changes were
made in response to Advanta's current bank regulatory examination process,
including the implementation of the agreements with the bank regulators that
were signed during the second quarter and in July 2000 (see Note 2), and changes
during the quarter in the current market, and the political and regulatory
environment for subprime lending. As a result of such adjustments, the reserve
for anticipated charge-offs for certain securitizations exceeded the IO strip
carrying value, and such excess has been reclassified as a reduction of the
related subordinated trust asset.
NOTE 8) SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
OTHER ASSETS 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Servicing advances $125,069 $105,302
Current and deferred income taxes, net 88,003 89,788
Accrued interest receivable 38,928 32,410
Other real estate (A) 6,722 9,560
Goodwill 3,192 3,323
Other 351,083 284,553
--------------------------------------------------------------------------------
Total other assets $612,997 $524,936
================================================================================
</TABLE>
(A) Carried at the lower of cost or fair market value less selling costs.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
OTHER LIABILITIES 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable and accrued expenses $ 64,176 $ 98,423
Accrued interest payable 63,883 36,554
Other 166,045 154,586
--------------------------------------------------------------------------------
Total other liabilities $294,104 $289,563
================================================================================
</TABLE>
NOTE 9) 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>
JUNE 30, DECEMBER 31,
SENIOR DEBT 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
12 month senior notes (8.53%-10.66%) $ 124,218 $ 86,647
18 month senior notes (8.48%-10.75%) 9,039 8,344
24 month senior notes (7.47%-11.11%) 70,018 50,571
30 month senior notes (7.23%-11.15%) 13,287 13,852
48 month senior notes (6.36%-11.20%) 8,398 8,427
60 month senior notes (6.02%-11.24%) 30,375 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%) 7,351 7,347
Other senior notes (7.70%-11.34%) 78,773 37,670
--------------------------------------------------------------------------------
Total senior debt 764,838 787,550
Subordinated notes (9.08%-11.34%) 738 958
--------------------------------------------------------------------------------
Total long-term debt $ 765,576 $ 788,508
================================================================================
</TABLE>
Advanta has priced its floating rate medium-term notes based on a spread over
LIBOR. At June 30, 2000, the rates on these notes varied from 6.63% to 7.09%. At
June 30, 2000 and December 31, 1999, Advanta used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR based
variable rate.
12
<PAGE> 13
NOTE 10) OTHER BORROWINGS
The composition of other borrowings was as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Warehouse facility $112,200 $ 76,435
FHLB advances 0 220,000
Securities sold under repurchase agreements 0 104,191
Other borrowings 6,139 8,975
--------------------------------------------------------------------------------
Total $118,339 $409,601
================================================================================
</TABLE>
NOTE 11) 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.
NOTE 12) 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.
The results for the Advanta Mortgage segment in the three and six months ended
June 30, 2000 include the valuation adjustments related to retained interests in
securitizations and contractual mortgage servicing rights, and the increase in
on-balance sheet reserves made in response to Advanta's current bank regulatory
examination process, including the implementation of the agreements with the
bank regulators that were signed during the second quarter and in July 2000 (see
Note 2), and changes during the quarter in the current market, and the political
and regulatory environment for subprime lending.
<TABLE>
<CAPTION>
ADVANTA ADVANTA
THREE MONTHS ENDED ADVANTA BUSINESS LEASING
JUNE 30, MORTGAGE CARDS SERVICES OTHER(1) TOTAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Noninterest revenues $ (157,304) $ 39,261 $ 2,991 $ 1,327 $ (113,725)
Interest revenue 48,844 19,136 3,599 14,945 86,524
Interest expense 27,063 7,545 3,108 14,014 51,730
Pretax income (loss) (221,300) 24,056 (6,744) 608 (203,380)
Average managed receivables $ 8,481,098 $1,319,434 $ 802,661 $19,939 $ 10,623,132
-------------------------------------------------------------------------------------------------------------
1999
Noninterest revenues $ 54,278 $ 19,808 $ 11,153 $11,110 $ 96,349
Interest revenue 30,534 7,785 2,494 18,388 59,201
Interest expense 20,354 2,904 1,846 18,213 43,317
Pretax income 3,796 8,051 2,532 6,048 20,427
Average managed receivables $ 8,408,275 $ 866,732 $ 692,356 $17,019 $ 9,984,382
-------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
ADVANTA ADVANTA
SIX MONTHS ENDED ADVANTA BUSINESS LEASING
JUNE 30, MORTGAGE CARDS SERVICES OTHER(1) TOTAL
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Noninterest revenues $ (97,230) $ 70,383 $ 2,439 $ 11,366 $ (13,042)
Interest revenue 96,576 35,020 7,638 29,444 168,678
Interest expense 51,638 13,646 6,109 28,092 99,485
Pretax income (loss) (205,838) 37,995 (16,879) 9,096 (175,626)
Average managed receivables $ 8,452,433 $1,220,035 $ 804,033 $ 20,346 $ 10,496,847
----------------------------------------------------------------------------------------------------------------
1999
Noninterest revenues $ 114,288 $ 36,326 $ 22,534 $ 17,644 $ 190,792
Interest revenue 71,106 12,963 4,480 35,966 124,515
Interest expense 42,260 5,210 4,166 34,958 86,594
Pretax income (loss) 14,920 13,469 3,764 (760) 31,393
Average managed receivables $ 8,360,634 $ 844,913 $ 678,195 $ 17,418 $ 9,901,160
----------------------------------------------------------------------------------------------------------------
</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 13) NET INTEREST INCOME
The following table presents the components of net interest income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $ 46,966 $ 27,169 $ 96,353 $ 57,228
Investments 29,361 28,235 55,839 52,372
Interest component of previously
discounted cash flows 10,197 3,797 16,486 14,915
-------------------------------------------------------------------------------------------------
Total interest income 86,524 59,201 168,678 124,515
-------------------------------------------------------------------------------------------------
Interest expense:
Deposits 35,176 27,112 62,333 53,594
Debt and other borrowings 16,554 16,205 37,152 33,000
-------------------------------------------------------------------------------------------------
Total interest expense 51,730 43,317 99,485 86,594
-------------------------------------------------------------------------------------------------
Net interest income 34,794 15,884 69,193 37,921
Less: Provision for credit losses (27,460) (7,407) (38,859) (17,555)
-------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses $ 7,334 $ 8,477 $ 30,334 $ 20,366
=================================================================================================
</TABLE>
14
<PAGE> 15
NOTE 14) INCOME TAX EXPENSE
Income tax expense (benefit) is based on the estimated annual effective tax rate
of 0% for the six months ended June 30, 2000, compared to a 40% tax rate for the
comparable 1999 period.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ 480 $5,000 $ 1,204 $ 10,000
State (939) 529 241 2,295
------------------------------------------------------------------------------------
Total current (459) 5,529 1,445 12,295
------------------------------------------------------------------------------------
Deferred:
Federal (8,727) 1,949 0 1,013
State (1,499) 637 (1,445) (1,000)
------------------------------------------------------------------------------------
Total deferred (10,226) 2,586 (1,445) 13
------------------------------------------------------------------------------------
Total tax expense (benefit) $(10,685) $8,115 $ 0 $ 12,308
====================================================================================
</TABLE>
The reconciliation of the statutory federal income tax to the consolidated tax
expense (benefit) is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income tax $(71,183) $ 7,149 $(61,469) $ 10,988
Valuation allowance 63,008 0 63,008 0
State income taxes (1,584) 758 (782) 842
Compensation limitation 35 44 70 88
Non taxable investment income (125) (156) (238) (316)
Other (836) 320 (589) 706
---------------------------------------------------------------------------------------
Consolidated tax expense
(benefit) $(10,685) $ 8,115 $ 0 $ 12,308
=======================================================================================
</TABLE>
The net deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Gross deferred tax liabilities $ (105,241) $ (102,248)
Gross deferred tax assets 345,039 277,593
Valuation allowance (146,008) (83,000)
--------------------------------------------------------------------------------
Net deferred tax asset $ 93,790 $ 92,345
================================================================================
</TABLE>
A summary of deferred tax assets and (liabilities) follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred loan fees and costs $ (5,451) $ (6,149)
Allowance for loan losses 23,169 22,273
Net operating loss carryforwards 182,358 182,437
Securitization income (loss) 25,640 (41,547)
Leasing income (loss) (13,339) (19,009)
Deferred compensation 6,375 9,054
Noncash unusual charges 12,319 18,321
Other 8,727 9,965
Valuation allowance (146,008) (83,000)
--------------------------------------------------------------------------------
Net deferred tax asset $ 93,790 $ 92,345
================================================================================
</TABLE>
15
<PAGE> 16
As a result of the carrying value adjustments discussed in Note 2, Advanta
reported a pretax loss for the three and six months ended June 30, 2000. A
valuation allowance has been provided against the resulting deferred tax asset
given Advanta's pre-existing net operating loss carryforwards and the
uncertainty of the realizability of the incremental deferred tax asset. In
establishing the valuation allowance, management considered (1) the level of
expected future taxable income, (2) existing and projected book/tax differences,
(3) tax planning strategies available, and (4) the general and industry specific
economic outlook. Based on this analysis, management believes the net deferred
tax asset will be realized.
The net deferred federal tax asset is presented with current federal income
taxes for financial reporting purposes, and is included in other assets.
NOTE 15) 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 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>
12/31/99 CHARGED TO 6/30/00
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 2,766 17,882
-------------------------------------------------------------------------------------------
Total $24,478 $ 6,596 $17,882
===========================================================================================
</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.
16
<PAGE> 17
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 Advanta's 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 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 30 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.
17
<PAGE> 18
NOTE 16) EARNINGS (LOSS) PER SHARE
The following table presents the calculation of basic earnings (loss) per share
and diluted earnings (loss) per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(192,695) $ 12,312 $(175,626) $ 19,085
Less: Preferred A dividends 0 0 (141) (141)
Less: Preferred B dividends (2) N/A (887) N/A (1,774)
-----------------------------------------------------------------------------------------------
Income (loss) available to common
shareholders $(192,695) $ 11,425 $(175,767) $ 17,170
Less: Class A dividends declared (573) (568) (1,092) (1,222)
Less: Class B dividends declared (1,296) (1,126) (2,527) (2,383)
-----------------------------------------------------------------------------------------------
Undistributed earnings (loss) $(194,564) $ 9,731 $(179,386) $ 13,565
Basic shares (000's)
Class A 9,097 8,976 9,093 9,127
Class B 16,135 14,187 15,916 13,998
Combined (1) 25,232 23,163 25,009 23,125
Options Class A 0 1 0 1
Options Class B 0 177 0 133
Restricted shares Class A 0 32 0 23
Restricted shares Class B 0 0 0 0
Diluted shares (000's)
Class A 9,097 9,009 9,093 9,151
Class B 16,135 14,364 15,916 14,131
Combined (1) 25,232 23,373 25,009 23,282
Basic earnings (loss) per share
Class A $ (7.65) $ .48 $ (7.05) $ .72
Class B (7.63) .50 (7.01) .76
Combined (1) (7.64) .49 (7.03) .74
Diluted earnings (loss) per share
Class A $ (7.65) $ .48 $ (7.05) $ .72
Class B (7.63) .49 (7.01) .75
Combined (1) (7.64) .49 (7.03) .74
Antidilutive shares (000's)
Preferred Class B (2) N/A 14 N/A 14
Options Class A 2 1 2 0
Options Class B 2,652 1,597 2,710 1,678
Restricted shares Class A 99 68 99 41
Restricted shares Class B 1,051 1,125 1,266 1,278
-----------------------------------------------------------------------------------------------
</TABLE>
(1) Combined represents a weighted average of Class A and Class B shares and
earnings (loss) per share.
(2) Each share of Class B convertible preferred stock was mandatorily converted
into one share of Class B Common Stock effective September 15, 1999.
18
<PAGE> 19
NOTE 17) 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.
19
<PAGE> 20
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 three months ended June 30, 2000, we reported a net loss of $192.7
million or $7.64 per combined diluted common share, compared to net income of
$12.3 million or $0.49 per combined diluted common share for the three months
ended June 30, 1999. The results for the three months ended June 30, 2000
included charges which were made in response to our regulatory review process,
including the implementation of the agreements with our regulators that were
signed during the second quarter and in July 2000 discussed below, the current
market, and the political and regulatory environment for subprime mortgage
lenders. Net loss for the three months ended June 30, 2000 included a reduction
in the valuation of Advanta National Bank's retained interests in mortgage
securitizations of $214.0 million and an increase in the Advanta National Bank's
on-balance sheet allowance for credit losses related to mortgage loans of $22.0
million. Pro forma net income for the three months ended June 30, 2000,
reflecting income from Advanta Mortgage that is essentially the same as a
portfolio lender, and excluding the reduction in the valuation of the retained
interests and the increase in the on-balance sheet reserve, was $16.6 million or
$0.65 per combined diluted common share.
For the six months ended June 30, 2000, we reported a net loss of $175.6 million
or $7.03 per combined diluted common share. In addition to the items discussed
above that affected results for the three months ended June 30, 2000, the
results for the six months ended June 30, 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, after tax, for a
reduction in the valuation of retained interests in leasing securitizations.
The net income of $12.3 million for the three months ended June 30, 1999
included a reduction in the retained interest-only strip of approximately $6.1
million, after tax, associated with more conservative fair value assumptions,
and non-operating gains of approximately $5.6 million, after tax, predominately
associated with the sale of an investment held by Advanta Partners. For the six
months ended June 30, 1999, we reported net income of $19.1 million or $0.74 per
combined diluted common share. In addition to the items discussed above that
affected earnings for the three months 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 were 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. We 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.
Pretax income (loss) by reportable segment for the three months ended June 30,
2000 was ($221.3) million for Advanta Mortgage, $24.1 million for Advanta
Business Cards and ($6.7) million for Advanta Leasing Services. Pretax income by
reportable segment for the three months ended June 30, 1999 was $3.8 million for
Advanta Mortgage, $8.1 million for Advanta Business Cards, and $2.5 million for
Advanta Leasing Services.
In June 2000, we announced that our banking subsidiaries, Advanta National Bank
and Advanta Bank Corp., reached agreements with their respective bank regulatory
agencies, primarily relating to the banks' subprime lending operations. The
agreements outline a series of steps to modify processes and formalize and
document certain practices and procedures for the banks' subprime lending
operations. The agreements also establish temporary asset growth limits at
Advanta National Bank and deposit growth limits at Advanta Bank Corp., impose
restrictions on taking brokered deposits at Advanta National Bank, and require
that Advanta National Bank's capital ratios be maintained at approximately the
level at March 31, 2000 by September 30, 2000. The agreements also
20
<PAGE> 21
provide that the Company change its charge-off policy for delinquent mortgages
to 180 days and modify its accounting processes and methodology for its
allowance for loan losses and valuation of residual assets.
In July 2000, we announced that Advanta National Bank signed an agreement with
the Office of the Comptroller of the Currency regarding the carrying value of
Advanta National Bank's retained interests in mortgage securitizations and
allowance for mortgage loan losses. For Advanta National Bank's June 30, 2000
Call Report, the agreement provided that the retained interests be calculated
based on an 18% discount rate on the interest-only strip and subordinated trust
assets, a 15% discount rate on the contractual mortgage servicing rights, a
prepayment rate that represents the average prepayment experience for the six
months ended February 29, 2000 and cumulative loss rates as a percentage of
original principal balance of 6% on closed end mortgage loans and 8% for HELOC
(open end) mortgage loans. The agreement provided that based on these
assumptions, the carrying value of Advanta National Bank's contractual mortgage
servicing rights be reduced by $13 million and the carrying value of Advanta
National Bank's subordinated trust assets and retained interest-only strip be
reduced by a total amount of $201 million. The agreement further provided that
Advanta National Bank's allowance for loan losses be increased by $22 million.
The agreement contains provisions regarding the use of similar discount rate and
credit loss assumptions for the calculation of the carrying value of the
residual assets in future periods.
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,
including restrictions and limitations imposed by banking laws, regulators,
examinations, and the agreements between our bank subsidiaries and their
respective regulators; (11) the level of conservatism and volatility associated
with the assumptions underlying the valuation of retained interests in
securitizations; (12) relationships with significant vendors, business partners
and customers; (13) the amount and cost of financing available to us; (14) the
ratings on the debt of Advanta Corp. and its subsidiaries; (15) the ability to
attract and retain key personnel and customers; and (16) the results of our
previously announced evaluation of strategic alternatives. 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.
CHANGES IN VALUATION ESTIMATES
For the three months ended June 30, 2000, Advanta Mortgage securitization income
included a $214.0 million charge due to an increase in the discount rate and
credit loss assumption used in the valuation of Advanta National Bank's retained
interests in mortgage securitizations, including the retained interest-only
strip, subordinated trust assets and contractual mortgage servicing rights. In
addition, we increased Advanta National Bank's on-balance sheet allowance for
credit losses on mortgage loans by $22.0 million. During the three months ended
June 30, 2000, the subprime lending industry was going through tremendous change
due to regulatory and legislative initiatives, changes in market participants
caused by the failure of some participants and new entrants into the market, and
publicized concerns regarding the business model of certain subprime lenders.
The change in the valuation assumptions was made in response to our current
regulatory examination process, including the implementation of the agreements
with our regulators that were signed during the second quarter and in July 2000,
and changes during the quarter in the current market, and the political and
regulatory environment for subprime lending.
21
<PAGE> 22
Although the mortgage loan portfolio is currently performing in line with
management's expectations, the change in the valuation assumptions was made in
light of the more conservative regulatory view and changes during the quarter in
the current market and the political and regulatory environment for subprime
lending. The following summarizes the fair value assumptions used in the
valuation of our retained interests at June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Assumed constant prepayment rates:
Fixed rate loans 22% 25%
Variable rate loans 35 39
Lines of credit 29 30
Assumed loss rate (annualized) 1.88% 1.38%
</TABLE>
The weighted average discount rate used in the estimation of the fair value of
the retained interest-only strip and subordinated trust assets was 18% at June
30, 2000, and was approximately 13% at March 31, 2000 and approximately 12% at
December 31, 1999. For the three months ended June 30, 2000, cash collections
received by the securitization trusts on retained interests related to
securitizations aggregated approximately $21.3 million or approximately 28%
(annualized) of the adjusted carrying value of the retained interests on an
annualized basis.
The annualized loss rate on the managed mortgage loan portfolio experienced in
the three months ended June 30, 2000 was 1.28% using a charge-off methodology
consistent with the prior quarter. At June 30, 2000, the on-balance sheet
allowance for loan losses for Advanta National Bank's mortgage loans represented
8.7% of total outstanding loans held for investment at June 30, 2000 and
approximately 85 months of charge-off coverage based on historic charge-offs,
compared to 2.6% of loans held for investment and approximately 22 months of
coverage based on historic charge-offs at year end 1999. The estimated
liabilities for anticipated charge-offs on off-balance sheet loans, netted
against the retained interest-only strip and subordinated trust assets,
represented 9.2% of Advanta National Bank's outstanding off-balance sheet loans
at June 30, 2000 and approximately 70 months of charge-off coverage based on
historic charge-offs, compared to 5.2% of loans and approximately 50 months
coverage based on historic charge-offs at year end 1999.
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.
The pretax loss of $221.3 million for Advanta Mortgage for the three months
ended June 30, 2000 was due to the reduction in the valuation of the retained
interests in mortgage securitizations and the increase in on-balance sheet
reserves discussed previously. Pro forma pretax income for Advanta Mortgage on a
portfolio lender basis for the quarter ended June 30, 2000, excluding the
reduction in the valuation of the retained interests and the increase in the
on-balance sheet reserve, was $9.2 million, as compared to pro forma pretax
income on a portfolio lender basis of $13.8 million for the same period of 1999.
The decrease in pro forma pretax income is due to lower mortgage origination
volumes that resulted primarily from the implementation
22
<PAGE> 23
of the regulatory agreements. This was partially offset by an increase in
servicing revenues from growth in the subservicing portfolio, and higher yields
on direct originations.
SECURITIZATION INCOME (LOSS)
Before consideration of the valuation items discussed above, Advanta Mortgage
recognized gains of $38.2 million from the securitization and sale of $477
million of loans in the three months ended June 30, 2000, and recognized gains
of $38.4 million from the securitization and sale of $707 million of loans in
the three months ended June 30, 1999. Advanta Mortgage recognized gains of $64.6
million from the securitization and sale of $961 million of loans for the six
months ended June 30, 2000 and recognized gains of $75.0 million from the
securitization and sale of $1.3 billion of loans in the six months ended June
30, 1999. Gains on the sale of receivables represented 8.0% of the loans sold in
the three months ended June 30, 2000, as compared to 5.4% of the loans sold in
the same period of 1999. The gains recognized in the six months ended June 30,
2000 represented 6.7% of loans sold, as compared to 5.6% of loans sold in the
same period of 1999. The increases in the gains recognized are due to changes in
the mix of loans sold. Sales of home equity lines of credit and directly
originated mortgage loans, which generally have higher yields relative to other
mortgage loans, represented a greater proportion of total loan sales in the
periods ended June 30, 2000, as compared to the periods ended June 30, 1999.
PORTFOLIO LENDER ANALYSIS
In the fourth quarter of 1998, we began to report pro forma income for Advanta
Mortgage that is essentially equal to that of a portfolio lender, rather than
the front-ended income typically reported through gain on sale accounting. Gain
on sale accounting is required under generally accepted accounting principles
for securitizations structured as sales. In this regard, we began to analyze and
evaluate Advanta Mortgage's financial results from a portfolio lender's
perspective as well as under generally accepted accounting principles. The
following tables present Advanta Mortgage's reported results, adjusted to
approximate the results, excluding valuation adjustments made during the
quarter, of a portfolio lender for the three and six months ended June 30, 2000
and 1999 ($ in thousands).
23
<PAGE> 24
PORTFOLIO LENDER ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------- -----------------------------------------
Advanta
Mortgage as
Pro a Portfolio Advanta
Forma & Lender Pro Mortgage
Advanta Other Before Advanta Forma as a
Mortgage Adjust- Valuation Mortgage Adjust- Portfolio
As Reported ments Adjustments As Reported ments Lender
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 48,844 $ 185,174 $234,018 $30,534 $ 175,799 $206,333
Securitization income (loss) (196,037) 196,037 0 28,416 (28,416) 0
Servicing revenues 36,220 (14,306) 21,914 25,001 (8,846) 16,155
Other revenues, net 2,513 0 2,513 861 0 861
----------------------------------------------------------------------------------------------------------------------------
Total revenues (108,460) 366,905 258,445 84,812 138,537 223,349
----------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 62,616 1,869 64,485 56,433 1,883 58,316
Interest expense 27,063 131,926 158,989 20,354 114,970 135,324
Provision for credit losses 21,385 2,575 23,960 2,364 11,684 14,048
Minority interest in income
of consolidated subsidiary 1,776 0 1,776 1,865 0 1,865
----------------------------------------------------------------------------------------------------------------------------
Total expenses 112,840 136,370 249,210 81,016 128,537 209,553
----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (221,300) 230,535 9,235 3,796 10,000 13,796
Income tax expense (benefit) (5,953) 9,508 3,555 1,585 3,950 5,535
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(215,347) $ 221,027 $ 5,680 $ 2,211 $ 6,050 $ 8,261
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------ -----------------------------------------
Advanta
Mortgage as
Pro a Portfolio Advanta
Forma & Lender Pro Mortgage
Advanta Other Before Advanta Forma as a
Mortgage Adjust- Valuation Mortgage Adjust Portfolio
As Reported ments Adjustments As Reported -ments Lender
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 96,576 $ 363,078 $459,654 $ 71,106 $ 341,448 $412,554
Securitization income (loss) (169,561) 169,561 0 64,976 (64,976) 0
Servicing revenues 68,339 (26,544) 41,795 47,321 (16,328) 30,993
Other revenues, net 3,992 0 3,992 1,991 0 1,991
----------------------------------------------------------------------------------------------------------------------------
Total revenues (654) 506,095 505,441 185,394 260,144 445,538
----------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 126,464 3,678 130,142 119,395 3,681 123,076
Interest expense 51,638 247,713 299,351 42,260 226,000 268,260
Provision for credit losses 23,508 24,169 47,677 5,067 20,463 25,530
Minority interest in income
of consolidated subsidiary 3,574 0 3,574 3,752 0 3,752
----------------------------------------------------------------------------------------------------------------------------
Total expenses 205,184 275,560 480,744 170,474 250,144 420,618
----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (205,838) 230,535 24,697 14,920 10,000 24,920
Income tax expense (benefit) 0 9,508 9,508 5,839 3,950 9,789
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(205,838) $ 221,027 $ 15,189 $ 9,081 $ 6,050 $ 15,131
============================================================================================================================
</TABLE>
24
<PAGE> 25
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, excluding the effect of the change in methodology related
to the 180 day charge-off policy. The provision for credit losses is also
adjusted to exclude the increase recorded in connection with the regulatory
agreements. The actual provision for credit losses of a portfolio lender could
differ from the charge-offs depending upon the age and composition of the
portfolio and the timing of charge-offs. Carrying value adjustments to retained
interests in securitizations, including contractual mortgage servicing rights,
and loan loss reserves are excluded from the pro forma results above. Income
tax expense amounts for the three and six month periods ended June 30, 2000 are
adjusted to a normalized rate of 38.5%.
ORIGINATIONS
Originations for Advanta Mortgage were as follows ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED PERCENTAGE
JUNE 30, PERCENTAGE JUNE 30, INCREASE
2000 1999 DECREASE 2000 1999 (DECREASE)
-------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct $301,393 $407,880 (26)% $ 681,433 $ 811,084 (16)%
Indirect:
Broker 198,277 199,889 (1) 381,531 373,976 2
Other Indirect 3,238 119,920 (97) 4,692 253,979 (98)
-------- -------- ---------- ----------
Subtotal Indirect 201,515 319,809 (37) 386,223 627,955 (38)
Auto 0 0 0 0 5,103 (100)
-------- -------- ---------- ----------
Total $502,908 $727,689 (31) $1,067,656 $1,444,142 (26)
======== ======== ========== ==========
</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 other
indirect channels. The dollar volume of originations from direct to consumer
channels represented 60% of total originations for the three months ended June
30, 2000 as compared to 56% for the three months ended June 30, 1999 and 64% for
the six months ended June 30, 2000 as compared to 56% for the six months ended
June 30, 1999. At June 30, 2000, 47% of the managed mortgage portfolio consisted
of loans originated directly from consumers. This compares to 42% at December
31, 1999 and 37% at June 30, 1999.
The decrease in the dollar volume of direct originations for the three and six
months ended June 30, 2000 as compared to the same periods of 1999 is due to the
impact of the implementation of the regulatory agreements in the second quarter
of 2000, as well as a decrease in the average loan size and our focus on
profitable loan growth over volume. The decrease in indirect originations for
the three and six months ended June 30, 2000 as compared to the same periods of
1999 resulted from our decision in 1999 to curtail the purchase of pools of
loans through the other indirect 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 and six
months ended
25
<PAGE> 26
June 30, 2000 than it originated during the same periods of 1999. This was
primarily due to rising market interest rates that created increased demand for
these types of loans. However, we began to experience a reversal of that trend
and had increased first lien originations in the second quarter of 2000 as
compared to the first quarter of 2000. Second lien home equity loans and home
equity lines of credit represented 34% of the dollar value of originations for
the three months ended June 30, 2000, as compared to 38% in the three months
ended March 31, 2000 and 21% for the three months ended June 30, 1999. Second
lien home equity loans and home equity lines of credit represented 36% of the
dollar value of originations for the six months ended June 30, 2000, as compared
to 20% for the six months ended June 30, 1999. Home equity lines of credit
represented 13% of the managed mortgage loan portfolio at June 30, 2000, as
compared to 10% at December 31, 1999, and 7% at June 30, 1999.
SERVICING REVENUES
Servicing revenues were $36.2 million for the three months ended June 30, 2000,
as compared to $25.0 million for the same period in 1999. For the six months
ended June 30, 2000, servicing revenues were $68.3 million, as compared to $47.3
million for the six months ended June 30, 1999. The increase in servicing
revenues is due to an increase in average serviced receivables of $4.0 billion
and $3.9 billion for the three and six months ended June 30, 2000, respectively,
as compared to the same periods of 1999. Advanta Mortgage's subservicing
portfolio was $13.6 billion at June 30, 2000, as compared to $11.9 billion at
December 31, 1999 and $9.4 billion at June 30, 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. Pretax income for
Advanta Business Cards was $24.1 million for the three months ended June 30,
2000 as compared to $8.1 million for the same period in 1999. Pretax income for
the six months ended June 30, 2000 was $38.0 million as compared to $13.5
million for the same period in 1999. The increase in pretax income in both
periods 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 $18.0 million in the
three months ended June 30, 2000 and $31.2 million in the six months ended June
30, 2000. This compares to $7.8 million of securitization income recognized in
the three months ended June 30, 1999 and $13.9 million of securitization income
recognized in the six months ended June 30, 1999. Advanta Business Cards sells
receivables to existing securitization trusts on a continuous basis to replenish
the investors' interests in trust receivables that have been repaid by the card
holders. The increase in securitization income in both periods was due to
increased yields on the securitized receivables and increased volume of
securitized receivables.
26
<PAGE> 27
ORIGINATIONS
Originations for Advanta Business Cards were as follows ($ in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, PERCENTAGE JUNE 30, PERCENTAGE
2000 1999 INCREASE 2000 1999 INCREASE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dollar volume $900,381 $471,239 91% $1,647,968 $871,667 89%
Number of accounts 95,230 30,728 210 201,641 52,128 287
</TABLE>
The increase in business credit card originations over the comparable periods in
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. Pretax loss for Advanta Leasing
Services was $6.7 million for the three months ended June 30, 2000 as compared
to pretax income of $2.5 million for the three months ended June 30, 1999. The
pretax loss in the three months ended June 30, 2000 as compared to the income
from the same period of 1999 was primarily attributable to lower margins and
higher losses associated with some unprofitable segments of broker originations
from prior periods.
Pretax loss for the six months ended June 30, 2000 was $16.9 million as compared
to pretax income of $3.8 million for the comparable period in 1999. In addition
to the variances discussed above relating to the three months ended June 30,
2000 and 1999, the decrease in pretax income in the six months ended June 30,
2000 was attributable to a $9.5 million pretax reduction in the valuation of
retained interests in leasing securitizations in the three months ended March
31, 2000.
SECURITIZATION INCOME
Advanta Leasing Services recognized $2.8 million in gains on the sale of $127
million of leases for the three months ended June 30, 2000, as compared to $4.9
million in gains on the sale of $106 million of leases for the three months
ended June 30, 1999. As a percentage of receivables sold, the gains during the
three months ended June 30, 2000 represented 2.2%, while the gains during the
three months ended June 30, 1999 represented 4.6%. In the six months ended June
30, 2000, Advanta Leasing Services recognized $4.8 million in gains on the sale
of $234 million of leases, as compared to $9.3 million in gains on the sale of
$201 million of leases in the same period of 1999. As a percentage of
receivables sold, these gains represented 2.1% in 2000 and 4.6% in 1999. The
decrease in gain as a percentage of loans sold in both periods resulted from a
reduction in net interest income spread on securitized receivables. The sales
were through a combination of commercial paper conduit programs and a public
lease securitization.
Securitization income also included a $3.8 million charge in the three months
ended June 30, 2000 and a $9.5 million pretax charge in the three months ended
March 31, 2000, associated with the changes in valuation assumptions related to
retained interests in leasing securitizations. There were no similar charges in
the six months ended June 30, 1999.
27
<PAGE> 28
ORIGINATIONS
Originations for Advanta Leasing Services were as follows ($ in thousands):
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
THREE MONTHS ENDED INCREASE SIX MONTHS ENDED INCREASE
JUNE 30, (DECREASE) JUNE 30, (DECREASE)
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Vendor $ 44,141 $ 54,625 (19)% $ 87,929 $100,119 (12)%
Broker 17,397 54,812 (68) 47,996 115,328 (58)
Other 26,899 3,947 582 61,594 7,773 692
-----------------------------------------------------------------------------------------------------
Total $ 88,437 $113,384 (22) $197,519 $223,220 (12)
=====================================================================================================
</TABLE>
The decreases in vendor and broker originations were consistent with our focus
on profitable loan growth over volume. The increases in other originations
result from a private label service agreement with 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 on the retained interest only strip,
increased by $20.9 million for the three months ended June 30, 2000 as compared
to the same period in 1999, and increased $42.6 million for the six months ended
June 30, 2000 as compared to the same period in 1999. During the three months
ended June 30, 2000, interest expense increased by $8.4 million as compared to
the same period in 1999, and increased $12.9 million for the six months ended
June 30, 2000 as compared to the same period in 1999. The increase in interest
income in both periods was due to an increase in yields on receivables as well
as an increase in average on-balance sheet receivables. The increase in interest
expense in both periods was due to an increase in the cost of funds. Our cost of
funds increased to 6.75% for the three months ended June 30, 2000 from 5.75% in
the same period in 1999, and increased to 6.58% in the six months ended June 30,
2000 from 5.78% in the same period in 1999. The increase in the cost of funds in
2000 was primarily attributable to rising market interest rates.
The following table provides an analysis of owned interest income and expense
data, average balance sheet data, net interest spread, and net interest margin.
Net interest spread represents the difference between the yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Net interest margin represents the difference between the yield on
interest-earning assets and the average rate paid to fund interest-earning
assets. Average owned loan and lease receivables and the related interest
revenues include certain loan fees and costs.
28
<PAGE> 29
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
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 $ 997,294 $ 24,195 9.76% $ 729,335 $ 16,238 8.93%
Business credit cards 401,630 18,894 18.92 181,510 7,735 17.09
Leases 102,692 3,585 13.96 109,608 2,618 9.55
Auto loans 8,036 315 15.75 9,938 283 11.44
Other loans 19,939 153 3.09 17,019 544 12.83
----------- ---------- ---------- ----------
Total receivables(2) 1,529,591 47,142 12.39 1,047,410 27,418 10.50
Subordinated trust
assets 429,949 11,760 10.94 312,497 6,537 8.37
Investments(2) 1,074,411 17,631 6.55 1,573,299 21,633 5.49
----------- ---------- ---------- ----------
Total interest-earning
assets $ 3,033,951 $ 76,533 10.12% $2,933,206 $ 55,588 7.58%
Interest-bearing
liabilities $ 3,009,002 $ 50,590 6.75% $2,929,081 $ 42,024 5.75%
Net interest spread 3.37% 1.83%
Net interest margin 3.44% 1.85%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,416,699 $7,538,380
Business credit cards
securitized 917,804 685,222
Leases securitized 699,969 582,748
Auto loans securitized 59,069 130,622
----------- ----------
Total average
securitized receivables $ 9,093,541 $8,936,972
=========== ==========
Total average managed
receivables $10,623,132 $9,984,382
=========== ==========
Managed net interest
margin (3) 4.23% 3.51%
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and leases.
(2) Interest and average rate for tax-exempt securities, loans and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin represents a combination of owned
interest-earning assets/owned interest-bearing liabilities and securitized
mortgage and business credit card assets/liabilities.
29
<PAGE> 30
INTEREST RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
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 $ 1,053,476 $ 53,478 10.21% $ 824,781 $ 37,072 9.06%
Business credit cards 373,931 34,580 18.60 163,178 12,851 15.88
Leases 120,148 7,710 12.83 107,477 4,720 8.78
Auto loans 5,710 558 19.66 27,025 1,995 14.89
Other loans 20,346 396 3.92 17,418 1,092 12.64
----------- ---------- ---------- --------
Total receivables(2) 1,573,611 96,722 12.36 1,139,879 57,730 10.21
Subordinated trust
assets 419,705 22,980 10.95 302,871 12,069 7.97
Investments(2) 1,017,774 32,910 6.46 1,484,575 40,022 5.38
----------- ---------- ---------- --------
Total interest-earning
assets $ 3,011,090 $ 152,612 10.17% $2,927,325 $109,821 7.53%
Interest-bearing
liabilities $ 2,964,843 $ 97,239 6.58% $2,928,829 $ 84,055 5.78%
Net interest spread 3.59% 1.75%
Net interest margin 3.70% 1.78%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,326,682 $7,366,572
Business credit cards
securitized 846,104 681,735
Leases securitized 683,885 570,718
Auto loans securitized 66,565 142,256
----------- ----------
Total average
securitized receivables $ 8,923,236 $8,761,281
=========== ==========
Total average managed
receivables $10,496,847 $9,901,160
=========== ==========
Managed net interest
margin (3) 4.36% 3.57%
</TABLE>
(1) Includes assets held and available for sale and nonaccrual loans and leases.
(2) Interest and average rate for tax-exempt securities, loans and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin represents a combination of owned
interest-earning assets/owned interest-bearing liabilities and securitized
mortgage and business credit card assets/liabilities.
30
<PAGE> 31
OTHER REVENUES
<TABLE>
<CAPTION>
($ in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities
gains (losses) $ (1,048) $ 9,298 $ 9,866 $27,672
Business credit card
interchange income 15,397 8,134 27,999 14,364
Leasing other revenues 2,801 4,082 6,864 8,752
Insurance revenues, net and other 7,201 3,670 10,363 6,832
----------------------------------------------------------------------------------------
Total other revenues, net $ 24,351 $25,184 $55,092 $57,620
========================================================================================
</TABLE>
Investment securities gains (losses) include changes in the fair value and
realized gains on venture capital investments. Investment securities gains for
the six months ended June 30, 2000 include a $9.4 million gain on the sale of
an investment. Included in investment securities gains in the six months ended
June 30, 1999, is 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. In the second quarter of 1999,
Advanta Partners sold the majority of this stock, realizing an additional gain
of approximately $10 million. Partially offsetting this gain in the second
quarter of 1999 was the write-down of another equity investment of approximately
$0.8 million.
Business credit card interchange income increased by $7.3 million for the three
months ended June 30, 2000 and $13.6 million for the six months ended June 30,
2000, as compared to the same periods of 1999. The increase in both periods was
due to higher purchase volume related to the increase in average managed
business credit card accounts and receivables.
OPERATING EXPENSES
<TABLE>
<CAPTION>
($ in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $30,936 $29,101 $60,504 $62,937
Marketing expense 20,925 14,016 43,649 28,141
Equipment expense 6,267 5,362 11,950 10,515
External processing expense 5,353 3,554 9,866 6,889
Amortization of business
credit card deferred
origination costs, net 5,288 1,200 9,559 2,356
Professional fees 5,161 8,857 10,415 15,416
Occupancy expense 4,399 4,054 8,572 8,165
Credit and collection expense 4,177 3,756 9,585 8,909
Telephone expense 3,285 2,697 6,321 5,536
Postage expense 1,709 1,488 3,238 2,994
Credit card fraud losses 416 182 693 434
Other 6,853 7,912 14,126 16,320
--------------------------------------------------------------------------------
Total operating expenses $94,769 $82,179 $188,478 $168,612
================================================================================
At quarter end (in thousands):
Number of accounts managed 862 613 N/A N/A
Number of employees 2,900 2,417 N/A N/A
For the quarter:
Operating expenses
as a percentage of average
managed receivables(1) 3.37% 3.25% 3.41% 3.36%
--------------------------------------------------------------------------------
</TABLE>
(1) Excludes amortization of business credit card deferred origination costs,
net.
31
<PAGE> 32
Operating expenses as a percentage of average managed receivables for the three
months and six months ended June 30, 2000 were slightly higher than the same
periods of 1999. Marketing expenses have increased by $6.9 million for the three
months ended June 30, 2000 as compared to the same period of 1999, and increased
by $15.5 million for the six months ended June 30, 2000 as compared to the same
period of 1999. These increases are primarily due to increased marketing and
account origination activities in Advanta Business Cards. In addition, there was
an increase in marketing expenses associated with the Advanta Retail Note
Program, through which we offer unsecured debt of Advanta Corp. to retail
investors.
In the three months ended June 30, 2000, there was a $4.1 million increase in
the amortization of business credit card deferred origination costs, net, and a
$1.8 million increase in external processing expense compared to the same
periods of 1999. In the six months ended June 30, 2000 there was a $7.2 million
increase in the amortization of business credit card deferred origination costs,
net, and a $3.0 million increase in external processing expense compared to the
same periods of 1999. These increases in deferred origination cost amortization
and external processing expenses are due to the growth in managed business
credit card receivables. For the three months ended June 30, 2000 there was a
$3.7 million decrease in professional fees, as compared to the same period of
1999. In the six months ended June 30, 2000 there was a $5.0 million decrease in
professional fees, as compared to the same period of 1999. These decreases were
due to a decrease in consulting and outsourcing costs, including consulting
costs associated with the year 2000 computer issue.
PROVISION FOR CREDIT LOSSES
For the three months ended June 30, 2000, the provision for credit losses was
$27.5 million compared to $7.4 million for the same period in 1999. For the six
months ended June 30, 2000, the provision for credit losses increased to $38.9
million from $17.6 million for the same period in 1999. The provision for the
six months ended June 30, 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 the six months ended June 30,
2000 was $25.9 million. The majority of the increases in both the three and six
month periods were in the provision for credit losses relating to Advanta
Mortgage, which increased by $19.0 million in the three months ended June 30,
2000 and $18.4 million for the six months ended June 30, 2000, as compared to
the same periods of 1999. The increase in the provision relating to Advanta
Mortgage loans represents an increase in the credit loss assumption made in
response to our current regulatory examination process, including the
implementation of the agreements with our regulators that were signed during the
second quarter and in July 2000, and changes during the quarter in the current
market, and the political and regulatory environment for subprime lending. The
provision relating to Advanta Business Cards increased by $6.4 million for the
six months ended June 30, 2000 as compared to the same period of 1999. The
increase in Advanta Business Cards' provision relates to a $211 million increase
in average on-balance sheet business credit card 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 180 days delinquent. This policy was implemented in the
three months ended June 30, 2000. The previous policy was the earlier of
foreclosure or 12 months delinquent. Losses on lease receivables are generally
charged against the allowance when 121 days contractually delinquent. During the
three months ended June 30, 2000 the timing of the delinquency measurement of
lease receivables was changed from mid-month to month end. See the following
tables for charge-off rates using the new and prior methodologies for both
mortgage loans and leases. Our charge-off policy, as it relates to business
credit card accounts, is to charge-off a receivable, if not paid,
32
<PAGE> 33
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. We had lower mortgage originations during the three months
ended June 30, 2000 due to the implementation of the regulatory agreements, as
well as our focus on profitable loan growth over volume. These factors have
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.
Delinquency and charge-off rates on business credit cards have improved in the
six months ended June 30, 2000 as compared to the same period of the prior year.
Charge-off rates on leases have increased in the six months ended June 30, 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, under the new and prior methodologies, as of and for the
year-to-date periods indicated ($ in thousands).
33
<PAGE> 34
<TABLE>
<CAPTION>
JUNE 30, DEC. 31, JUNE 30,
CONSOLIDATED - MANAGED 2000 1999 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets $ 473,948 $ 511,301 $ 486,124
Total loans 30 days or more delinquent 801,120 838,563 814,103
As a percentage of gross receivables:
Nonperforming assets
New methodology (A) 4.4%
Prior methodology 4.7 5.0% 4.8%
Total loans 30 days or more delinquent
New methodology (A) 7.5
Prior methodology 7.8 8.2 8.1
Net charge-offs:
Amount $ 130,466 $ 155,452 $ 69,931
As a percentage of average gross
receivables (annualized)
New methodology (A) 2.5%
Prior methodology 1.9 1.6% 1.4%
ADVANTA MORTGAGE LOANS - MANAGED
Nonperforming assets $ 431,153 $ 475,711 $ 450,359
Total loans 30 days or more delinquent 679,359 729,187 725,596
As a percentage of gross receivables:
Nonperforming assets
New methodology (A) 5.1%
Prior methodology 5.5 5.7% 5.4%
Total loans 30 days or more delinquent
New methodology (A) 8.1
Prior methodology 8.4 8.7 8.6
Net charge-offs - Mortgage Loans:
Amount $ 81,218 $ 64,303 $ 24,206
As a percentage of average gross
receivables (annualized)
New methodology (A) 1.9%
Prior methodology 1.2 0.8% 0.6%
Net charge-offs - Auto Loans:
Amount $ 3,862 $ 18,855 $ 12,325
As a percentage of average gross
receivables (annualized) 10.7% 13.9% 14.6%
BUSINESS CREDIT CARDS - MANAGED
Nonperforming assets $ 31,199 $ 23,498 $ 23,437
Total loans 30 days or more delinquent 52,828 38,437 33,126
As a percentage of gross receivables:
Nonperforming assets 2.2% 2.3% 2.6%
Total loans 30 days or more delinquent 3.7 3.7 3.7
Net charge-offs - Business Credit Cards:
Amount $ 25,043 $ 44,309 $ 22,844
As a percentage of average gross
receivables (annualized) 4.1% 5.0% 5.4%
LEASES - MANAGED
Nonperforming assets $ 11,069 $ 11,472 $ 12,006
Total loans 30 days or more delinquent 68,168 69,695 54,568
As a percentage of gross receivables:
Nonperforming assets
New methodology (A) 1.4%
Prior methodology 1.7 1.4% 1.6%
Total loans 30 days or more delinquent
New methodology (A) 8.3
Prior methodology 8.7 8.8 7.3
Net charge-offs - Leases:
Amount $ 20,343 $ 25,586 $ 10,525
As a percentage of average gross
receivables (annualized)
New methodology (A) 4.8%
Prior methodology 4.4 3.6% 3.1%
</TABLE>
(A) Beginning in the second quarter of 2000, charge-off and delinquency
statistics reflect the adoption of new charge-off policies for mortgage loans
and leases. Under the new policy, mortgage loans are generally charged-off at
the earlier of foreclosure or 180 days delinquent. The previous policy was the
earlier of foreclosure or 12 months delinquent. Leases are generally charged-off
at 121 days delinquent, however, under the new policy, the timing of the
delinquency measurement was changed from mid-month to month end in the second
quarter of 2000. Cumulative catch-up adjustments included in second quarter
charge-off amounts are not annualized when calculating the annualized charge-off
rate under the new methodology.
34
<PAGE> 35
<TABLE>
<CAPTION>
JUNE 30, DEC. 31, JUNE 30,
CONSOLIDATED - OWNED 2000 1999 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for credit losses $ 63,592 $ 41,847 $ 31,963
Nonperforming assets 51,465 45,620 53,611
Total loans 30 days or more delinquent 85,306 62,850 68,867
As a percentage of gross receivables:
Allowance for credit losses 3.7% 2.8% 2.8%
Nonperforming assets
New methodology (A) 3.0
Prior methodology 3.2 3.1 4.7
Total loans 30 days or more delinquent
New methodology (A) 5.0
Prior methodology 5.2 4.3 6.0
Net charge-offs:
Amount $ 17,114 $ 27,547 $ 12,339
As a percentage of average gross
receivables (annualized)
New methodology (A) 2.1%
Prior methodology 1.7 2.4% 2.2%
ADVANTA MORTGAGE LOANS - OWNED
Allowance for credit losses $ 38,035 $ 21,743 $ 14,955
Nonperforming assets 38,456 36,709 44,842
Total loans 30 days or more delinquent 59,518 45,263 54,114
As a percentage of gross receivables:
Allowance for credit losses 3.5% 2.1% 1.8%
Nonperforming assets
New methodology (A) 3.6
Prior methodology 3.8 3.5 5.4
Total loans 30 days or more delinquent
New methodology (A) 5.5
Prior methodology 5.8 4.3 6.5
Net charge-offs - Mortgage Loans:
Amount $ 7,360 $ 8,389 $ 3,744
As a percentage of average gross
receivables (annualized)
New methodology (A) 1.3%
Prior methodology 0.8 1.1% 0.9%
Net charge-offs - Auto Loans:
Amount $ (144) $ 3,732 $ 3,503
As a percentage of average gross
receivables (annualized) (5.0%) 25.6% 25.9%
BUSINESS CREDIT CARDS - OWNED
Allowance for credit losses $ 20,132 $ 14,663 $ 9,002
Nonperforming assets 11,041 6,408 5,625
Total loans 30 days or more delinquent 18,837 10,347 7,691
As a percentage of gross receivables:
Allowance for credit losses 4.0% 5.3% 5.2%
Nonperforming assets 2.2 2.3 3.2
Total loans 30 days or more delinquent 3.7 3.8 4.4
Net charge-offs - Business Credit Cards:
Amount $ 7,201 $ 10,103 $ 4,155
As a percentage of average gross
receivables (annualized) 3.9% 4.8% 5.1%
LEASES - OWNED
Allowance for credit losses $ 3,094 $ 3,110 $ 3,310
Nonperforming assets 1,441 1,883 2,822
Total loans 30 days or more delinquent 6,186 5,996 6,249
As a percentage of gross receivables:
Allowance for credit losses 3.2% 2.3% 2.6%
Nonperforming assets
New methodology (A) 1.5
Prior methodology 2.1 1.4 2.2
Total loans 30 days or more delinquent
New methodology(A) 6.5
Prior methodology 7.1 4.5 4.8
Net charge-offs - Leases:
Amount $ 2,697 $ 2,926 $ 906
As a percentage of average gross
receivables (annualized)
New methodology (A) 4.2%
Prior methodology 3.5 2.7% 1.7%
</TABLE>
35
<PAGE> 36
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 15 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.
36
<PAGE> 37
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 30 months. The actions required to complete these
plans include the settlement of contractual commitments and the payment of
customer benefits.
37
<PAGE> 38
INCOME TAXES
As a result of the carrying value adjustments described previously, we reported
a pretax loss for the three and six months ended June 30, 2000. A valuation
allowance has been provided against the resulting deferred tax asset given our
pre-existing net operating loss carryforwards and the uncertainty of the
realizability of the incremental deferred tax asset. In establishing the
valuation allowance, management considered (1) the level of expected future
taxable income, (2) existing and projected book/tax differences, (3) tax
planning strategies available, and (4) the general and industry specific
economic outlook. Based on this analysis, management believes the net deferred
tax asset as of June 30, 2000 will be realized.
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.
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 June
30, 2000, our net interest income over a twelve-month period would increase or
decrease by approximately 6% 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.
38
<PAGE> 39
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 2.2% change in constant prepayment rate for fixed rate loans and 3.3%
change in constant prepayment rate for variable rate loans. We have estimated
that these changes in prepayment assumptions could result in a $27 million
change in the combined fair value of these assets as of June 30, 2000. These
estimates do not factor in the impact of changes in the interest rate
environment associated with the changes in the prepayment rates. Changes in
interest rates generally affect the level of loan originations. Prepayment
assumptions are not the only assumptions in the fair value calculation for these
assets. Other key assumptions are not directly impacted by market forces, as
defined earlier. The above prepayment scenarios do not reflect management's
expectation regarding the future direction of prepayments, and they depict only
two possibilities out of a large set of possible scenarios.
DERIVATIVES ACTIVITIES
The following table summarizes by notional amounts our derivative instruments as
of June 30, 2000 and December 31, 1999 ($ in thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
JUNE 30,
JUNE 30, DECEMBER 31, 2000 ASSET/
2000 1999 (LIABILITY)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swaps $ 2,412,439 $ 2,975,086 $ 29,134
Interest rate caps written 391,266 409,278 (3,453)
Interest rate caps purchased 391,266 409,278 3,453
Put options purchased 407,000 156,000 (880)
Forward contracts 398,000 565,000 (2,293)
--------------------------------------------------------------------------------
Total $ 3,999,971 $ 4,514,642 $ 25,961
================================================================================
</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 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.
39
<PAGE> 40
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 six months ended June 30, 2000, we securitized or sold approximately
$961 million of Advanta Mortgage loans, $157 million of business credit card
receivables and $234 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 June 30, 2000, we had
$132 million of federal funds sold, $1.0 billion of loan and lease receivables
held for sale, and $799 million of investments that could be sold to generate
additional liquidity. Equity, including capital securities, was $512 million at
June 30, 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 June 30, 2000, Advanta National Bank's total
deposits were $1.7 billion and Advanta Bank Corp.'s total deposits were $650
million. Our regulatory agreements establish temporary deposit growth limits at
Advanta Bank Corp. and impose restrictions on taking brokered deposits at
Advanta National Bank.
After paying down $122 million in medium term notes in the six months ended June
30, 2000, we had approximately $325 million of unrestricted cash, cash
equivalents and marketable securities at the parent company level at June 30,
2000. At June 30, 2000, the parent company's assets include advances to
wholly-owned non-bank subsidiaries to fund $82 million in loans, $195 million in
retained interest-only strips, subordinated trust assets and contractual
mortgage servicing rights, and $48 million of equity securities accounted for
at fair value.
At June 30, 2000, we had a $500 million committed warehouse financing facility
for mortgage loans. At June 30, 2000, we had additional uncommitted warehouse
financing facilities for mortgage loans of $550 million. At June 30, 2000, we
had $730 million of committed commercial paper facilities for business credit
card receivables and a $200 million uncommitted repurchase agreement facility
for business card receivables. At June 30, 2000, we had a $360 million committed
commercial paper facility for lease contracts and lease residuals. At June 30,
2000, we had available $1.4 billion in unused warehouse financing facilities and
commercial paper conduit facilities. During the quarter ended June 30, 2000, we
maintained all of our receivable funding facilities, with the exception of one,
which we terminated at our discretion due to infrequent use. In addition, the
$200 million repurchase agreement facility for business card receivables was
added during the second quarter of 2000.
We also offer unsecured debt of Advanta Corp. to retail investors through the
Advanta Retail Note Program. In July 2000, we added significant funding capacity
for our business card business as our $2 billion shelf registration statement to
issue publicly registered business card asset-backed securities became
effective. 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.
40
<PAGE> 41
At June 30, 2000, Advanta National Bank's combined total capital ratio
(combined Tier I and Tier II capital) was 10.40% and Advanta Bank Corp.'s
combined total capital ratio was 11.52%. 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 at levels a
bank is required to maintain to be classified as "well-capitalized" under the
regulatory framework for prompt corrective action. However, Advanta National
Bank does not meet the definition of "well-capitalized" because of the
existence of the agreement with the Office of the Comptroller of the Currency.
Our regulatory agreement with the Office of the Comptroller of the Currency
requires that Advanta National Bank achieve by September 30, 2000 and
thereafter maintain a ratio of 14% of Tier 1 capital to risk-weighted assets
and a ratio of 17% of Tier 1 capital to adjusted total assets. We intend to
meet this requirement through a combination of a reduction of Advanta National
Bank's assets, thereby reducing the total amount of required capital, and a
parent capital contribution of approximately $60 million. 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."
41
<PAGE> 42
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Advanta Corp.'s 2000 Annual Meeting of Stockholders was held
on June 7, 2000.
(b) Not required.
(c) The following proposals were submitted to a vote of
stockholders.
(i) The election of three directors to hold office until
the 2002 Annual Meeting of Stockholders.
NOMINEES VOTES FOR VOTES WITHHELD
Olaf Olafsson 8,422,620 758,372
William A. Rosoff 8,422,459 758,533
Michael Stolper 8,424,418 756,574
(ii) The approval of the Advanta Corp. 2000 Omnibus Stock
Incentive Plan.
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
5,692,986 2,314,854 38,012 1,135,140
42
<PAGE> 43
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 April 6, 2000, was
filed by Advanta incorporating by reference a Unanimous
Consent of the Executive Committee of the Board of
Directors dated April 6, 2000 as an exhibit to the
Registration Statement (No. 333-33136) on Form S-3.
(b)(2) A Current Report on Form 8-K, dated April 25, 2000, was
filed by Advanta setting forth the financial highlights
of Advanta's results of operations for the three months
ended March 31, 2000.
(b)(3) A Current Report on Form 8-K, dated May 17, 2000, was
filed announcing Advanta's intent to explore strategic
alternatives to unlock the unrecognized value of its
mortgage and leasing businesses.
(b)(4) A Current Report on Form 8-K, dated June 5, 2000, was
filed by Advanta announcing that its banking
subsidiaries, Advanta National Bank and Advanta Bank
Corp., have each reached agreements with their respective
bank regulatory agencies, primarily relating to the
banks' subprime lending operations.
(b)(5) A Current Report on Form 8-K, dated June 21, 2000, was
filed by Advanta stating that following an action by
Thomson Financial BankWatch on June 9, 2000, Advanta's
long-term debt securities have been rated non-investment
grade by all five of the nationally recognized
statistical rating organizations. Also, Advanta's annual
meeting of shareholders was held June 7, 2000 and the
shareholders approved the adoption of an omnibus stock
incentive plan and re-elected three directors.
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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 14, 2000 By /s/Philip M. Browne
--------------------------------
Senior Vice President and
Chief Financial Officer
August 14, 2000 By /s/James L. Shreero
--------------------------------
Vice President and
Chief Accounting Officer
44
<PAGE> 45
EXHIBIT INDEX
EXHIBIT DESCRIPTION
Exhibit 12 Consolidated Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
45
