-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QjC+1W4ogqnRMl6q2MnfBADykvTQaMO8N+H8tNdM1maopMItHprZFCHQF1cRZ7kR Oyq/pZ8kBTfF5Js4AYG6mQ== 0000893220-00-000629.txt : 20000512 0000893220-00-000629.hdr.sgml : 20000512 ACCESSION NUMBER: 0000893220-00-000629 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14120 FILM NUMBER: 626733 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19477 BUSINESS PHONE: 2154445051 MAIL ADDRESS: STREET 1: C/O WELSH & MCKEAN ROADS STREET 2: P.O. BOX 844 CITY: SPRING HOUSE STATE: PA ZIP: 19477-0844 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-Q 1 ADVANTA CORP. FORM 10-Q 1 Form 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2000 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission File Number 0-14120 Advanta Corp. (Exact name of registrant as specified in its charter) Delaware 23-1462070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477 (Address of Principal Executive Offices) (Zip Code) (215) 657-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Outstanding at May 2, 2000 Common Stock, $.01 par value 10,060,888 shares Class B Outstanding at May 2, 2000 Common Stock, $.01 par value 17,220,692 shares 2 TABLE OF CONTENTS PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Income Statements 4 Consolidated Condensed Statements of Changes in Stockholders' Equity 5-6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II OTHER INFORMATION 35 2 3 ITEM 1. FINANCIAL STATEMENTS ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
($ IN THOUSANDS) MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------- ASSETS (UNAUDITED) Cash $ 58,202 $ 29,301 Federal funds sold 192,357 144,938 Restricted interest-bearing deposits 48,128 93,688 Investments available for sale 903,046 748,881 Loan and lease receivables, net: Held for sale 650,682 711,303 Other 881,060 738,321 ----------- ----------- Total loan and lease receivables, net 1,531,742 1,449,624 Retained interest-only strip 102,717 115,641 Contractual mortgage servicing rights 103,821 92,636 Subordinated trust assets 442,646 400,148 Premises and equipment (at cost, less accumulated depreciation of $59,390 in 2000 and $54,613 in 1999) 91,711 89,869 Other assets 581,190 524,936 ----------- ----------- TOTAL ASSETS $ 4,055,560 $ 3,689,662 ----------- ----------- LIABILITIES Deposits: Noninterest-bearing $ 4,839 $ 5,768 Interest-bearing 2,128,713 1,506,591 ----------- ----------- Total deposits 2,133,552 1,512,359 Long-term debt 714,701 788,508 Other borrowings 207,974 409,601 Other liabilities 294,516 289,563 ----------- ----------- TOTAL LIABILITIES 3,350,743 3,000,031 ----------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of Advanta 100,000 100,000 STOCKHOLDERS' EQUITY Class A preferred stock, $1,000 par value: Authorized, issued and outstanding - 1,010 shares in 2000 and 1999 1,010 1,010 Class A voting common stock, $.01 par value: Authorized - 214,500,000 shares; Issued - 10,060,883 shares in 2000, and 10,465,883 shares in 1999 101 105 Class B non-voting common stock, $.01 par value; Authorized - 230,000,000 shares; Issued - 17,746,753 shares in 2000, and 18,256,029 in 1999 177 182 Additional paid-in capital 221,745 232,585 Deferred compensation (13,582) (16,597) Unearned ESOP shares (12,028) (12,132) Accumulated other comprehensive loss (11,560) (10,794) Retained earnings 436,919 421,741 Less: Treasury stock at cost, 0 Class A and 527,168 Class B common shares in 2000 and 405,000 Class A and 972,768 Class B common shares in 1999 (17,965) (26,469) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 604,817 589,631 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,055,560 $ 3,689,662 ----------- -----------
See Notes to Consolidated Condensed Financial Statements 3 4 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31, 2000 1999 -------- -------- (UNAUDITED) REVENUES: Interest income $ 82,154 $ 65,314 Securitization income 32,255 34,769 Servicing revenues 37,687 27,238 Other revenues, net 30,741 32,436 -------- -------- Total revenues 182,837 159,757 -------- -------- EXPENSES: Operating expenses 93,709 86,433 Interest expense 47,755 43,277 Provision for credit losses 11,399 10,148 Minority interest in income of consolidated subsidiary 2,220 2,220 Unusual charges 0 6,713 -------- -------- Total expenses 155,083 148,791 -------- -------- Income before income taxes 27,754 10,966 Income tax expense 10,685 4,193 -------- -------- NET INCOME $ 17,069 $ 6,773 -------- -------- Basic earnings per share Class A $ .67 $ .24 Class B $ .69 $ .26 Combined $ .68 $ .25 -------- -------- Diluted earnings per share Class A $ .65 $ .24 Class B $ .67 $ .26 Combined $ .67 $ .25 -------- -------- Basic weighted average shares outstanding Class A 9,088 9,280 Class B 15,697 13,807 Combined 24,785 23,087 -------- -------- Diluted weighted average shares outstanding Class A 9,143 9,282 Class B 16,241 13,896 Combined 25,384 23,178 -------- -------- Cash dividends declared Class A $ .063 $ .063 Class B .076 .076 -------- --------
See Notes to Consolidated Condensed Financial Statements 4 5 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) ($ IN THOUSANDS)
CLASS A CLASS B CLASS A CLASS B ADDITIONAL COMPREHENSIVE PREFERRED PREFERRED COMMON STOCK COMMON PAID-IN INCOME STOCK STOCK STOCK CAPITAL - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $1,010 $0 $104 $163 $229,304 Net income $ 49,818 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $5,763 (10,703) -------- Comprehensive income $ 39,115 ======== Conversion of Class B Preferred Stock 14 (14) Preferred and common cash dividends declared Exercise of stock options 20 Issuance of stock: Benefit plans 1 9 10,579 Amortization of deferred compensation Termination benefit- Benefit plans (4) (7,421) Stock buyback ESOP shares committed to be released 117 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 $1,010 $0 $105 $182 $232,585 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 17,069 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $412 (766) -------- Comprehensive income $ 16,303 ======== Preferred and common cash dividends declared Exercise of stock options 39 Issuance of stock: Benefit plans 1 1,688 Amortization of deferred compensation Termination benefit- Benefit plans (2) (4,121) Retirement of treasury stock (4) (4) (8,496) ESOP shares committed to be released 50 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2000 $1,010 $0 $101 $177 $221,745 - -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements 5 6 ($ IN THOUSANDS)
DEFERRED ACCUMULATED COMPENSATION OTHER TOTAL & UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1998 $(29,764) $ (91) $382,092 $(22,514) $560,304 Net income 49,818 49,818 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $5,763 (10,703) (10,703) Comprehensive income Conversion of Class B Preferred Stock 0 Preferred and common cash dividends declared (10,169) (10,169) Exercise of stock options 20 Issuance of stock: Benefit plans (10,589) 0 Amortization of deferred compensation 3,781 3,781 Termination benefit- Benefit plans 7,425 0 Stock buyback (3,955) (3,955) ESOP shares committed to be released 418 535 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1999 $(28,729) $(10,794) $421,741 $(26,469) $589,631 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 17,069 17,069 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $412 (766) (766) Comprehensive income Preferred and common cash dividends declared (1,891) (1,891) Exercise of stock options 39 Issuance of stock: Benefit plans (1,689) 0 Amortization of deferred compensation 581 581 Termination benefit- Benefit plans 4,123 0 Retirement of treasury stock 8,504 0 ESOP shares committed to be released 104 154 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT MARCH 31, 2000 $(25,610) $(11,560) $436,919 $(17,965) $604,817 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements 6 7 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED ($ IN THOUSANDS) MARCH 31, ------------------------------ 2000 1999 ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net income $ 17,069 $ 6,773 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity securities gains (10,914) (17,854) Noncash charges associated with exit of auto finance business 0 16,900 Depreciation and amortization 4,895 4,815 Provision for credit losses, excluding auto 11,399 5,248 Investment in subordinated trust assets, net (42,498) (32,484) Proceeds from sale of trading investments 0 185,042 Origination of loans and leases held for sale (673,216) (744,514) Proceeds from sales of loans and leases held for sale 733,837 876,733 Change in other assets and other liabilities (46,506) 32,584 Change in retained interest-only strip and contractual mortgage servicing rights, excluding auto charge 1,739 3,817 ----------- ----------- Net cash (used in) provided by operating activities (4,195) 337,060 ----------- ----------- INVESTING ACTIVITIES Change in federal funds sold and interest- bearing deposits (1,859) 165,850 Purchase of investments available for sale (318,082) (843,338) Proceeds from sales of investments available for sale 144,957 71,526 Proceeds from maturing investments available for sale 28,779 138,887 Principal collected on Advanta Mortgage loans and leases not held for sale 37,113 30,418 Origination of Advanta Mortgage loans and leases not held for sale (173,656) (82,590) Change in business credit card receivables and other loans not held for sale (21,414) (12,860) Purchases of premises and equipment, net (6,649) (12,179) ----------- ----------- Net cash used in investing activities (310,811) (544,286) ----------- ----------- FINANCING ACTIVITIES Change in demand and savings deposits (4,849) 84,001 Proceeds from sales of time deposits 1,234,399 314,889 Payments for maturing time deposits (608,357) (146,740) Change in repurchase agreements and FHLB advances (124,191) 58,125 Proceeds from issuance of long-term debt 62,365 22,905 Payments on redemption of long-term debt (136,172) (106,723) Change in other borrowings (77,436) (8,291) Stock buyback 0 (3,955) Proceeds from issuance of stock 39 20 Cash dividends paid (1,891) (2,938) ----------- ----------- Net cash provided by financing activities 343,907 211,293 ----------- ----------- Net increase in cash 28,901 4,067 Cash at beginning of period 29,301 16,267 ----------- ----------- Cash at end of period $ 58,202 $ 20,334 ----------- -----------
See Notes to Consolidated Condensed Financial Statements 7 8 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) MARCH 31, 2000 (UNAUDITED) NOTE 1) BASIS OF PRESENTATION The consolidated condensed financial statements included herein have been prepared by Advanta Corp. (collectively with its subsidiaries, "Advanta") pursuant to the rules and regulations of the Securities and Exchange Commission. Advanta has condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include only normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto included in Advanta's latest annual report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for securitization income and the retained interest-only strips, contractual mortgage servicing rights, the allowance for credit losses and income taxes, among others. Actual results could differ from those estimates. Certain prior period balances have been reclassified to conform to the current period presentation. NOTE 2) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137, cannot be applied retroactively and will be adopted as required January 1, 2001. Advanta anticipates that the adoption of SFAS No. 133 will not have a material effect on the results of operations; however, Advanta continues to monitor potential changes and implementation guidance to this new accounting standard. 8 9 NOTE 3) INVESTMENTS AVAILABLE FOR SALE Investments available for sale consisted of the following:
MARCH 31, 2000 DECEMBER 31, 1999 AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE -------- -------- -------- -------- U.S. Treasury & other U.S. $316,417 $311,346 $145,112 $140,444 Government securities State and municipal securities 2,875 2,808 3,473 3,388 Collateralized mortgage obligations 436,637 428,273 456,288 448,068 Mortgage-backed securities 100,987 96,702 98,190 94,556 Equity securities(1) 63,717 63,717 60,892 60,892 Other 197 200 1,531 1,533 -------- -------- -------- -------- Total investments available for sale $920,830 $903,046 $765,486 $748,881 ======== ======== ======== ========
(1) Includes investments of the venture capital unit, Advanta Partners. The amount shown as amortized cost represents carrying value for these investments. NOTE 4) LOAN AND LEASE RECEIVABLES Loan and lease receivables on the balance sheet, including those held for sale, consisted of the following:
MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------- Advanta Mortgage loans $ 1,107,400 $ 1,050,478 Business credit cards 300,427 275,095 Leases 128,514 132,802 Other loans 19,521 21,930 ----------- ----------- Gross loan and lease receivables 1,555,862 1,480,305 ----------- ----------- Add: Deferred origination costs, net of deferred fees, and unamortized purchase premiums 23,090 11,166 Less: Allowance for credit losses Advanta Mortgage loans (21,824) (21,743) Business credit cards (18,752) (14,663) Leases (4,303) (3,110) Other loans (2,331) (2,331) ----------- ----------- Total allowance for credit losses (47,210) (41,847) ----------- ----------- Net loan and lease receivables $ 1,531,742 $ 1,449,624 =========== ===========
Securitized receivables consist of the following:
MARCH 31, DECEMBER 31, 2000 1999 ---------- ---------- Advanta Mortgage loans $7,357,374 $7,333,058 Business credit cards 925,783 765,019 Leases 692,744 662,841 ---------- ---------- Total $8,975,901 $8,760,918 ========== ==========
Advanta Mortgage loans include home equity loans, home equity lines of credit and auto loans, and exclude mortgage loans which were never owned by Advanta, but which Advanta 9 10 services for a fee ("subservicing"). Subservicing receivables were $13.1 billion at March 31, 2000, and $11.9 billion at December 31, 1999. NOTE 5) ALLOWANCE FOR CREDIT LOSSES The following table presents activity in the allowance for credit losses for the periods presented:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 2000 1999 -------- -------- Beginning balance $ 41,847 $ 33,437 Provision for credit losses 11,399 42,647 Allowance on receivables sold 0 (6,690) Gross charge-offs: Advanta Mortgage loans (2,866) (15,132) Business credit cards (3,877) (11,341) Leases (868) (4,429) Other loans (0) (2,404) -------- -------- Total gross charge-offs (7,611) (33,306) Recoveries: Advanta Mortgage loans 824 3,011 Business credit cards 346 1,238 Leases 405 1,503 Other loans 0 7 -------- -------- Total recoveries 1,575 5,759 Net charge-offs (6,036) (27,547) Ending Balance $ 47,210 $ 41,847 ======== ========
NOTE 6) RETAINED INTEREST-ONLY STRIP, CONTRACTUAL MORTGAGE SERVICING RIGHTS AND SUBORDINATED TRUST ASSETS The following table presents activity in the retained interest-only ("IO") strip and contractual mortgage servicing rights ("CMSR") related to Advanta Mortgage loan securitizations:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 2000 1999 --------- --------- Beginning balance IO Strip $ 115,641 $ 209,096 Beginning balance CMSR $ 92,636 $ 74,425 IO activity: Retained IO on sales, net 3,677 50,462 Interest income 6,289 19,354 Cash received and used to acquire subordinated trust assets (19,462) (111,600) Cash released to Advanta (1,548) (25,760) Fair value adjustments (4,618) (20,731) Fair value adjustment related to auto exit 0 (7,828) Other 2,738 2,648 CMSR activity: Servicing rights retained 13,068 54,124 Amortization, net (6,501) (39,134) Valuation provision 4,618 3,221 Ending Balance IO Strip $ 102,717 $ 115,641 Ending Balance CMSR $ 103,821 $ 92,636 ========= =========
10 11 The following table presents activity in subordinated trust assets related to Advanta Mortgage loan securitizations:
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 2000 1999 --------- --------- Beginning balance $ 400,148 $ 291,942 Initial collateral deposits 8,517 45,717 Subordinated trust assets acquired with excess cash flows 19,462 111,600 Interest income 11,220 27,227 Valuation adjustment related to auto loans 0 (4,172) Valuation adjustment related to mortgage loans 8,172 (11,269) Excess cash flows released to Advanta (34,901) (60,481) Net change associated with off- balance sheet warehouse facilities 30,028 (416) --------- --------- Ending balance $ 442,646 $ 400,148 ========= =========
NOTE 7) SELECTED BALANCE SHEET INFORMATION
MARCH 31, DECEMBER 31, OTHER ASSETS 2000 1999 -------- -------- Servicing advances $117,210 $105,302 Current and deferred income taxes, net 74,976 89,788 Accrued interest receivable 37,352 32,410 Other real estate (A) 8,036 9,560 Goodwill 3,254 3,323 Other 340,362 284,553 -------- -------- Total other assets $581,190 $524,936 ======== ========
(A) Carried at the lower of cost or fair market value less selling costs.
MARCH 31, DECEMBER 31, OTHER LIABILITIES 2000 1999 -------- -------- Accounts payable and accrued expenses $ 77,540 $ 98,423 Accrued interest payable 48,495 36,554 Other 168,481 154,586 -------- -------- Total other liabilities $294,516 $289,563 ======== ========
11 12 NOTE 8) LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of over one year. The composition of long-term debt was as follows:
MARCH 31, DECEMBER 31, 2000 1999 -------- -------- SENIOR DEBT 12 month senior notes (8.39%-10.08%) $104,554 $ 86,647 18 month senior notes (7.42%-10.26%) 8,436 8,344 24 month senior notes (7.14%-10.44%) 60,890 50,571 30 month senior notes (7.23%-10.26%) 13,092 13,852 48 month senior notes (5.97%-10.57%) 8,520 8,427 60 month senior notes (6.02%-10.44%) 29,546 28,863 Value notes, fixed (7.00%-7.85%) 7,779 7,779 Medium-term notes, fixed (6.81%-7.50%) 385,100 490,650 Medium-term notes, floating 30,500 47,400 Medium-term bank notes, fixed (6.45%-7.12%) 7,349 7,347 Other senior notes (6.91%-11.34%) 57,991 37,670 -------- -------- Total senior debt 713,757 787,550 Subordinated notes (8.76%-11.34%) 944 958 -------- -------- Total long-term debt $714,701 $788,508 ======== ========
Advanta has priced its floating rate medium-term notes based on a spread over LIBOR. At March 31, 2000, the rates on these notes varied from 6.47% to 6.63%. At March 31, 2000 and December 31, 1999, Advanta used derivative financial instruments to effectively convert certain fixed rate debt to a LIBOR based variable rate. NOTE 9) OTHER BORROWINGS The composition of other borrowings was as follows:
MARCH 31, DECEMBER 31, 2000 1999 -------- -------- FHLB advances $200,000 $220,000 Securities sold under repurchase agreements 0 104,191 Other borrowings 7,256 8,975 Warehouse facility 718 76,435 -------- -------- Total $207,974 $409,601 ======== ========
NOTE 10) CAPITAL STOCK In the three months ended March 31, 2000, Advanta retired 405,000 shares of Class A Treasury stock and 445,600 shares of Class B Treasury stock. 12 13 NOTE 11) SEGMENT INFORMATION During the first quarter of 2000, Advanta made changes to the methods used to allocate centrally incurred interest and operating expenses to the reportable segments in order to better reflect the use of the related assets or personnel by the segments. These changes included the allocation of certain expenses based on consumption rather than based on average managed assets, and a change in the classification of certain employee groups. Prior period segment results have been restated to reflect the current allocation methods.
ADVANTA ADVANTA THREE MONTHS ENDED ADVANTA BUSINESS LEASING MARCH 31, MORTGAGE CARDS SERVICES OTHER(1) TOTAL ----------- ----------- ----------- ----------- ----------- 2000 Noninterest revenues $ 60,074 $ 31,122 $ (552) $ 10,039 $ 100,683 Interest revenue 47,732 15,884 4,039 14,499 82,154 Interest expense 24,575 6,101 3,001 14,078 47,755 Net income (loss) 9,509 8,572 (6,233) 5,221 17,069 Average managed receivables $ 8,423,766 $ 1,120,635 $ 805,404 $ 20,752 $10,370,557 ----------- ----------- ----------- ----------- ----------- 1999 Noninterest revenues $ 60,010 $ 16,518 $ 11,381 $ 6,534 $ 94,443 Interest revenue 40,572 5,178 1,986 17,578 65,314 Interest expense 21,906 2,306 2,320 16,745 43,277 Net income (loss) 6,870 3,346 761 (4,204) 6,773 Average managed receivables $ 8,312,465 $ 822,852 $ 663,874 $ 17,820 $ 9,817,011 ----------- ----------- ----------- ----------- -----------
(1) Other includes insurance operations, investment activities not attributable to the reportable segments, and costs associated with exiting the auto finance business in 1999. NOTE 12) NET INTEREST INCOME The following table presents the components of net interest income:
THREE MONTHS ENDED MARCH 31, 2000 1999 -------- -------- Interest income: Loans and leases $ 49,386 $ 30,059 Investments 26,479 24,137 Interest component of previously discounted cash flows 6,289 11,118 -------- -------- Total interest income 82,154 65,314 Interest expense: Deposits 27,157 26,482 Debt and other borrowings 20,598 16,795 -------- -------- Total interest expense 47,755 43,277 -------- -------- Net interest income 34,399 22,037 Less: Provision for credit losses (11,399) (10,148) -------- -------- Net interest after provision for credit losses $ 23,000 $ 11,889 ======== ========
13 14 NOTE 13) INCOME TAX EXPENSE Income tax expense is based on the estimated annual effective tax rate of 38.5% for the three months ended March 31, 2000, compared to a 38% tax rate for the comparable 1999 period. Income tax expense consisted of the following:
THREE MONTHS ENDED MARCH 31, 2000 1999 ------- ------- Current: Federal $ 724 $ 5,000 State 1,180 1,766 ------- ------- Total current 1,904 6,766 ------- ------- Deferred: Federal 8,727 (936) State 54 (1,637) ------- ------- Total deferred 8,781 (2,573) ------- ------- Total tax expense $10,685 $ 4,193 ======= =======
The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
THREE MONTHS ENDED MARCH 31, 2000 1999 -------- -------- Statutory federal income tax $ 9,714 $ 3,838 State income taxes 802 84 Compensation limitation 35 44 Non taxable investment income (113) (160) Other 247 387 -------- -------- Consolidated tax expense $ 10,685 $ 4,193 ======== ========
NOTE 14) UNUSUAL CHARGES In accordance with the terms of the contribution agreement, dated as of October 28, 1997, as amended February 20, 1998, by and between Advanta and Fleet Financial Group, Inc. ("Fleet"), Advanta and certain of its subsidiaries and Fleet and certain of its subsidiaries each contributed certain assets and liabilities of their respective consumer credit card businesses to Fleet Credit Card LLC ("Fleet LLC") in exchange for an ownership interest in Fleet LLC (the "Consumer Credit Card Transaction"). Concurrently with the Consumer Credit Card Transaction, Advanta purchased 7,882,750 shares of its Class A Common Stock and 12,482,850 of its Class B Common Stock, each at $40 per share net, and 1,078,930 of its depositary shares each representing one one-hundredth interest in a share of 6 3/4% Convertible Class B Preferred Stock, Series 1995 Stock Appreciated Income Linked Securities at $32.80 per share net, through an issuer tender offer (the "Tender Offer") which was completed on February 20, 1998. In connection with the Consumer Credit Card Transaction, Advanta made major organizational changes during the first quarter of 1998 to reduce corporate expenses incurred in the past: (a) to support the business contributed to Fleet LLC in the Consumer Credit Card Transaction; and (b) associated with the business and products no longer being offered or not directly associated with its mortgage, business credit card and leasing units. In addition, in the first quarter of 1999, Advanta implemented a plan to exit the auto finance business and to implement cost reduction initiatives throughout the organization including the consolidation of support functions. Costs associated with 14 15 these changes were included in unusual charges on the consolidated income statements. The following table presents activity in the accrual related to these costs:
CHARGED 12/31/99 TO 3/31/00 ACCRUAL ACCRUAL ACCRUAL BALANCE IN 2000 BALANCE ------- ------- ------- Employee costs associated with staff reductions $ 822 $ 822 $ 0 Employee costs associated with Consumer Credit Card Transaction/Tender Offer 3,008 3,008 0 Expenses associated with exited businesses/products 20,648 1,712 18,936 ======= ======= ======= Total $24,478 $ 5,542 $18,936 ======= ======= =======
Employee costs associated with staff reductions In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs associated with staff reductions. These expenses included severance and outplacement costs associated with cost reduction initiatives and the consolidation of support functions. There were 121 employees severed who were entitled to benefits. This staff reduction was substantially complete by June 30, 1999. Employee costs associated with Consumer Credit Card Transaction/Tender Offer In connection with the organizational changes in 1998, Advanta incurred approximately $26.8 million of severance and related costs classified as employee costs associated with the Consumer Credit Card Transaction/Tender Offer. These expenses included severance and outplacement costs associated with the workforce reduction, option exercise and re-measurement costs, and other employee costs directly attributable to the Consumer Credit Card Transaction/Tender Offer. In connection with these organizational changes, 255 employees who ceased to be employed by Advanta were entitled to benefits, of which 190 employees were directly associated with the business contributed to Fleet LLC and 65 employees were associated with the workforce reduction. Additionally, during the first quarter of 1998, Advanta incurred approximately $35.5 million of other compensation charges. This amount includes $21.3 million attributable to payments under change of control plans and $14.2 million associated with the execution of the Tender Offer. Exited businesses/products In the first quarter of 1999, Advanta implemented a plan to cease the origination of auto loans and recorded a $3.4 million charge for costs associated with exited businesses/products. The charges included severance and outplacement costs for 22 employees in the auto origination group, and professional fees associated with exited businesses/products not directly associated with our mortgage, business credit card and leasing units. Advanta completed the closing of the auto loan origination center and termination of related employees during the second quarter of 1999. Advanta expects to pay a substantial portion of the remaining costs during the year ended December 31, 2000. During the first quarter of 1998, Advanta implemented a plan to exit certain businesses and product offerings not directly associated with its mortgage, business credit card and leasing units. In connection with this plan, contractual vendor commitments of 15 16 approximately $10.0 million associated with discontinued development and other activities were accrued. Advanta has substantially completed the settlement of these contractual commitments. Advanta also has contractual commitments to certain customers, and non-related financial institutions that are providing benefits to those customers, under a product that will no longer be offered and for which no future revenues or benefits will be received. In 1998, Advanta recorded a charge of $22.8 million associated with this commitment, and an $8.3 million charge associated with the write-down of assets associated with this program. In the fourth quarter of 1999, an additional charge of $10.0 million was recorded based on a change in the estimate of total expected costs for exited businesses. Advanta expects to pay a substantial portion of these costs over the next 33 months. The actions required to complete this plan include the settlement of contractual commitments and the payment of customer benefits. In connection with the Consumer Credit Card Transaction/Tender Offer and the other exited business and product offerings in 1998, Advanta also incurred $11.5 million of related professional fees and $1.5 million of other expenses related to these plans. 16 17 NOTE 15) EARNINGS PER SHARE The following table shows the calculation of basic earnings per share and diluted earnings per share.
THREE MONTHS ENDED MARCH 31, 2000 1999 -------- -------- Net income $ 17,069 $ 6,773 less: Preferred A dividends (141) (141) less: Preferred B dividends 0 (887) -------- -------- Income available to common shareholders $ 16,928 $ 5,745 Less: Class A dividends declared (519) (654) Less: Class B dividends declared (1,231) (1,256) -------- -------- Undistributed earnings $ 15,178 $ 3,835 Basic shares Class A 9,088 9,280 Class B 15,697 13,807 Combined (1) 24,785 23,087 Options A 1 2 Options B 247 89 Restricted shares Class A 54 0 Restricted shares Class B 297 0 Diluted shares Class A 9,143 9,282 Class B 16,241 13,896 Combined (1) 25,384 23,178 Basic earnings per share Class A $ .67 $ .24 Class B .69 .26 Combined (1) .68 .25 Diluted earnings per share Class A $ .65 $ .24 Class B .67 .26 Combined (1) .67 .25 -------- --------
(1) Combined represents a weighted average of Class A and Class B earnings per share. There were 14,211 shares of Advanta's Class B convertible preferred stock outstanding which were not included in the computation of diluted earnings per share for the three months ended March 31, 1999, because they were antidilutive for that period. Each share of Class B convertible preferred stock was mandatorily converted into one share of Class B Common Stock effective September 15, 1999. In the three months ended March 31, 2000, there were 1.2 million restricted shares of Class B Common Stock outstanding and 1.5 million options to purchase shares of Class B Common Stock outstanding that were not included in the computation of diluted earnings per share because they were antidilutive for that period. In the three months ended March 31, 1999, there were 1.4 million restricted shares of Class B Common Stock outstanding and 1.8 million options to purchase shares of Class B Common Stock outstanding that were not included in the computation of diluted earnings per share because they were antidilutive for that period. 17 18 NOTE 16) CONTINGENCIES On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which Advanta denies, center around Fleet's assertions that Advanta has failed to complete certain post-closing adjustments to the value of the assets and liabilities Advanta contributed to Fleet LLC in connection with the Consumer Credit Card Transaction. Fleet seeks damages of approximately $141 million. Advanta has filed an answer to the complaint denying the material allegations of the complaint, but acknowledging that Advanta contributed $1.8 million in excess liabilities in the post-closing adjustment process, after taking into account the liabilities Advanta has already assumed. Advanta also has filed a countercomplaint against Fleet for approximately $101 million in damages Advanta believes have been caused by certain actions of Fleet following the closing of the Consumer Credit Card Transaction. Formal discovery has begun and is ongoing. The court has scheduled trial in this matter to begin in September 2001. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on the financial position or future operating results of Advanta. Advanta and its subsidiaries are involved in other legal proceedings, claims and litigation, including those arising in the ordinary course of business. Management believes that the aggregate liabilities, if any, resulting from those actions will not have a material adverse effect on the consolidated financial position or results of operations of Advanta. However, as the ultimate resolution of these proceedings is influenced by factors outside of Advanta's control, it is reasonably possible that Advanta's estimated liability under these proceedings may change. 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this form 10-Q, "Advanta", "we", "us", and "our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. OVERVIEW For the quarter ended March 31, 2000, we reported net income of $17.1 million or $.67 per combined common share, assuming dilution, compared to $6.8 million or $.25 per combined diluted common share for the quarter ended March 31, 1999. The earnings for the three months ended March 31, 2000 include a non-operating gain of $6.7 million, after tax, on investments held by Advanta Partners, our private equity investment affiliate, and a $5.8 million charge, net of tax, for a reduction in the valuation of retained interests in leasing securitizations. The earnings for the three months ended March 31, 1999 include charges, after tax, of $14.5 million that are principally related to our exit from the auto finance business and severance and outplacement associated with cost cutting initiatives implemented in the first quarter of 1999. In addition, we recognized non-operating gains of $11.1 million, after tax, in the three months ended March 31, 1999 in connection with an investment held by Advanta Partners. Net income (loss) for the three months ended March 31, 2000 was $9.5 million for Advanta Mortgage, $8.6 million for Advanta Business Cards and ($6.2) million for Advanta Leasing Services. Net income for the three months ended March 31, 1999 was $6.9 million for Advanta Mortgage, $3.3 million for Advanta Business Cards, and $0.8 for Advanta Leasing Services. This report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements can be identified by the use of forward-looking phrases such as "will likely result," "may," "are expected to," "is anticipated," "estimate," "projected," "intends to" or other similar words. The most significant among these risks and uncertainties are: (1) our managed net interest margin; (2) competitive pressures; (3) factors that affect the level of delinquencies and charge-offs, including a deterioration of general economic conditions; (4) the rate of prepayments; (5) interest rate fluctuations; (6) the level of expenses; (7) managed and subserviced receivables volume; (8) the timing of the securitizations of our receivables; (9) the level of insurance policy renewals; (10) the effects of government regulation; (11) relationships with significant vendors, business partners and customers; (12) the amount and cost of financing available to us; and (13) the ratings on the debt of Advanta Corp. and its subsidiaries. Additional risks that may affect our future performance are set forth elsewhere in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 1999 and in our other filings with the Securities and Exchange Commission. ADVANTA MORTGAGE OVERVIEW Advanta Mortgage makes nonconforming home equity loans directly to consumers and through brokers. This business unit originates and services first and second lien mortgage loans, including home equity lines of credit, through subsidiaries of Advanta. In addition to servicing and managing the loans it originates, Advanta Mortgage contracts with third parties to service their nonconforming home equity loans on a subservicing basis. 19 20 Net income for Advanta Mortgage was $9.5 million for the quarter ended March 31, 2000, compared to net income of $6.9 million for the same period of 1999. The increase in net income is due to higher yields on originations and an increase in servicing revenues from growth in the subservicing portfolio. SECURITIZATION INCOME Advanta Mortgage recognized gains of $26.5 million from the securitization and sale of $484 million of loans in the three months ended March 31, 2000, and recognized gains of $36.6 million from the securitization and sale of $634 million of loans in the three months ended March 31, 1999. Gains on the sale of receivables, which represent 5.5% of the loans sold in the three months ended March 31, 2000, are comparable as a percentage of loans sold to the 5.8% recognized in the three months ended March 31, 1999. PORTFOLIO LENDER ANALYSIS In the fourth quarter of 1998, we began to report income for Advanta Mortgage that is essentially equal to that of a portfolio lender, rather than the front-ended income typically reported through gain on sale accounting. Since gain on sale accounting is required under generally accepted accounting principles for securitizations structured as sales, we intend to accomplish this by increasing our use of on-balance sheet funding and decreasing our degree of reliance on securitizations structured as sales over time. In this regard, we began to analyze and evaluate Advanta Mortgage's financial results from a portfolio lender's perspective as well as under generally accepted accounting principles. The following tables present Advanta Mortgage's reported results adjusted to approximate the results of a portfolio lender for the three months ended March 31, 2000 and 1999 ($ in thousands).
THREE MONTHS ENDED MARCH 31, 2000 Advanta Advanta Mortgage Mortgage as a As Pro forma Portfolio Reported Adjustments Lender --------- ----------- --------- REVENUES: Interest income $ 47,732 $ 177,904 $ 225,636 Securitization income 26,476 (26,476) 0 Servicing revenues 32,119 (12,238) 19,881 Other revenues, net 1,479 0 1,479 --------- --------- --------- Total revenues 107,806 139,190 246,996 EXPENSES: Operating expenses 63,848 1,809 65,657 Interest expense 24,575 115,787 140,362 Provision for credit losses 2,123 21,594 23,717 Minority interest in income of consolidated subsidiary 1,798 0 1,798 --------- --------- --------- Total expenses 92,344 139,190 231,534 --------- --------- --------- Income before income taxes 15,462 0 15,462 Income tax expense 5,953 0 5,953 --------- --------- --------- Net income $ 9,509 $ 0 $ 9,509 ========= ========= =========
20 21
THREE MONTHS ENDED MARCH 31, 1999 Advanta Advanta Mortgage Mortgage as a As Pro forma Portfolio Reported Adjustments Lender ------------ ------------ ------------ REVENUES: Interest income $ 40,572 $ 165,649 $ 206,221 Securitization income 36,560 (36,560) 0 Servicing revenues 22,320 (7,482) 14,838 Other revenues, net 1,130 0 1,130 ------------ ------------ ------------ Total revenues 100,582 121,607 222,189 EXPENSES: Operating expenses 62,962 1,798 64,760 Interest expense 21,906 111,030 132,936 Provision for credit losses 2,703 8,779 11,482 Minority interest in income of consolidated subsidiary 1,887 0 1,887 ------------ ------------ ------------ Total expenses 89,458 121,607 211,065 ------------ ------------ ------------ Income before income taxes 11,124 0 11,124 Income tax expense 4,254 0 4,254 ------------ ------------ ------------ Net income $ 6,870 $ 0 $ 6,870 ============ ============ ============
With respect to the pro forma portfolio lender results, individual line items are stated as if the securitized mortgages were still owned by Advanta and remained on the balance sheet. The pro forma adjustments (1) eliminate the gain on sale, including the servicing component, (2) reflect interest income, interest expense and operating expenses as if the sales had not occurred, and (3) eliminate the impact of valuation adjustments reflected in the reported results. The pro forma adjustment to provision for credit losses represents the amount by which the provision would have increased from that reported had the securitized Advanta Mortgage loans remained on the balance sheet and the provision for credit losses on the securitized loans been equal to actual reported charge-offs. The actual provision for credit losses of a portfolio lender could differ from the recorded charge-offs depending upon the age and composition of the portfolio and the timing of charge-offs. 21 22 ORIGINATIONS Originations for Advanta Mortgage were as follows ($ in thousands):
THREE MONTHS ENDED PERCENTAGE MARCH 31, INCREASE 2000 1999 (DECREASE) ---------- ---------- ---------- Direct $ 380,040 $ 403,204 (6)% Indirect: Broker 183,254 174,087 5 Conduit 0 117,286 (100) Corporate Finance 1,454 16,773 (91) ---------- ---------- Subtotal Indirect 184,708 308,146 (40) Auto 0 5,103 (100) ---------- ---------- Total $ 564,748 $ 716,453 (21)% ========== ==========
We continue to shift the composition of the managed mortgage portfolio toward a higher proportion of direct and broker originations, which tend to have higher yields and are typically more profitable than loans originated through conduit or corporate finance channels. The dollar volume of originations from direct to consumer channels represented 67% of total originations for the three months ended March 31, 2000 as compared to 57% in the same period of 1999. At March 31, 2000, 45% of the managed mortgage portfolio consisted of loans originated directly from consumers. This compares to 42% at December 31, 1999 and 35% at March 31, 1999. The decrease in the dollar volume of direct originations for the three months ended March 31, 2000 as compared to the same period of 1999 is due to the decrease in the average loan size and our focus on profitable loan growth over volume. The number of loans directly originated for the three months ended March 31, 2000 increased 5% over the number of loans directly originated in the same period of 1999. The decrease in indirect originations for the three months ended March 31, 2000 as compared to the same period of 1999 resulted from our decision in 1999 to curtail the purchase of pools of loans through the conduit and corporate finance channels. Consistent with the strategy of focusing on profitable loan growth over volume, the decision was based on unfavorable market pricing and management's commitment to purchasing loans only when the loans exceed certain profitability characteristics. There were no auto loans originated in 2000 due to our exit from the auto finance business in the first quarter of 1999. Advanta Mortgage originated more second lien home equity loans and home equity lines of credit as a percentage of total originations during the three months ended March 31, 2000 than it originated during the same period of 1999. This was primarily due to rising market interest rates that created increased demand for these types of loans. Second lien home equity loans and home equity lines of credit represented 38% of the dollar value of originations for the three months ended March 31, 2000, compared to 18% for the three months ended March 31, 1999. Home equity lines of credit represented 12% of the managed mortgage loan portfolio at March 31, 2000, as compared to 10% at December 31, 1999, and 6% at March 31, 1999. SERVICING REVENUES Servicing revenues were $32.1 million for the three months ended March 31, 2000, as compared to $22.3 million for the same period in 1999. The increase in servicing revenues is due to an increase in average serviced receivables of $3.9 billion as compared to the same period of 1999. Advanta Mortgage's subservicing portfolio was $13.1 billion at March 31, 2000 as compared to $11.9 billion at December 31, 1999 and 22 23 $8.9 billion at March 31, 1999. The increase in the subservicing portfolio resulted primarily from growth in existing clients' portfolios. ADVANTA BUSINESS CARDS OVERVIEW Advanta Business Cards offers MasterCard business credit cards to small businesses using targeted direct mail and the Internet. Net income for Advanta Business Cards was $8.6 million for the three months ended March 31, 2000 as compared to $3.3 million for the three months ended March 31, 1999. The increase in net income in 2000 resulted from increased volume of managed receivables, increases in portfolio yields and increased interchange income. These increased revenues were partially offset by an increase in operating expenses due to increased marketing and account origination activities. SECURITIZATION INCOME Advanta Business Cards recognized securitization income of $13.2 million for the three months ended March 31, 2000 and $6.2 million for the three months ended March 31, 1999. Advanta Business Cards sells receivables to existing securitization trusts on a continuous basis to replenish the investors' interests in trust receivables that have been repaid by the card holders. The increase in securitization income in 2000 was due to increased yields on the securitized receivables and increased volume of securitized receivables. ORIGINATIONS Originations for Advanta Business Cards were $748 million for the three months ended March 31, 2000 as compared to $400 million for the three months ended March 31, 1999. Advanta Business Cards originated 106 thousand business credit card accounts for the three months ended March 31, 2000 as compared to 21 thousand originated for the three months ended March 31, 1999. The increase in business credit card originations as compared to 1999 resulted from the successful application of our information based strategy to expand the universe of potential business credit card customers. ADVANTA LEASING SERVICES OVERVIEW Advanta Leasing Services offers flexible lease financing programs on small-ticket equipment to small businesses. Net loss for Advanta Leasing Services was $6.2 million for the three months ended March 31, 2000 as compared to net income of $761 thousand for the three months ended March 31, 1999. The decrease in net income in 2000 was primarily attributable to a $9.5 million pretax reduction in the valuation of retained interests in leasing securitizations. Excluding the $9.5 million charge, net loss for the three months ended March 31, 2000 was $391 thousand. The decrease in net income also resulted from a decrease in gains recognized on the sale of lease receivables and an increase in the provision for credit losses, partially offset by increased net interest income from on-balance sheet receivables. SECURITIZATION INCOME Advanta Leasing Services recognized $2.0 million in gains on the sale of $107 million of leases for the three months ended March 31, 2000, as compared to $4.4 million in gains on the sale of $96 million of leases for the three months ended March 31, 1999. As a percentage of receivables sold, these gains represented 1.9% in 2000 and 4.6% in 1999. The decrease in gain as a percentage of loans sold resulted from a reduction in net interest 23 24 income spread on securitized receivables. The sales were through a combination of commercial paper conduit programs and a public lease securitization. For the three months ended March 31, 2000, securitization income also included a $9.5 million pretax charge associated with increasing the credit loss assumption used in the valuation of retained interests in leasing securitizations. There were no similar charges in the three months ended March 31, 1999. ORIGINATIONS Originations for Advanta Leasing Services were as follows ($ in thousands):
THREE MONTHS ENDED PERCENTAGE MARCH 31, INCREASE 2000 1999 (DECREASE) --------- --------- Vendor $ 43,788 $ 45,494 (4)% Broker 30,599 60,515 (49) Other 34,695 3,827 807 --------- --------- $ 109,082 $ 109,836 (1) ========= =========
Total lease originations for the three months ended March 31, 2000 were relatively consistent with the same period of the prior year. The decrease in broker originations was consistent with our strategy to reduce broker originations with lower profitability characteristics. The increase in other originations represents a private label program for a national direct marketer of leases. ADVANTA CORP. INTEREST INCOME AND EXPENSE Interest income on receivables and investments, excluding the interest component of previously discounted cash flows, increased by $21.7 million for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999. Interest expense increased by $4.5 million for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999. The increase in interest income was due to an increase in yields on receivables as well as an increase in average on-balance sheet receivables. The increase in interest expense was due to an increase in the cost of funds. Our cost of funds increased to 6.41% for the three months ended March 31, 2000 from 5.80% for the three months ended March 31, 1999. The increase in the cost of funds in 2000 was primarily attributable to rising market interest rates. The following table provides an analysis of owned interest income and expense data, average balance sheet data, net interest spread, and net interest margin. Net interest spread represents the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin represents the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets. Average owned loan and lease receivables and the related interest revenues include certain loan fees and costs. 24 25 INTEREST RATE ANALYSIS ($ IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2000 1999 ----------------------------- -------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE ---------- -------- ------ ---------- -------- ------- ON-BALANCE SHEET Mortgage loans $ 1,109,657 $29,283 10.61% $ 921,289 $20,834 9.17% Business credit cards 346,231 15,686 18.22 144,642 5,116 14.34 Leases 137,603 4,125 11.99 105,321 2,102 7.98 Auto loans 3,383 244 28.98 44,302 1,712 15.67 Other loans 20,752 243 4.71 17,820 548 12.46 ---------- ------- --------- ------- Total receivables(2) 1,617,626 49,581 12.32 1,233,374 30,312 9.96 Subordinated trust assets 409,460 11,220 10.96 293,137 5,532 7.55 Investments(2) 961,136 15,279 6.35 1,394,865 18,389 5.28 ---------- ------- ---------- ------- Total interest-earning assets $ 2,988,222 $76,080 10.21% $2,921,376 $54,233 7.48% Interest-bearing liabilities $ 2,920,683 $46,649 6.41% $2,928,571 $42,030 5.80% Net interest spread 3.80% 1.68% Net interest margin 3.96% 1.69% OFF-BALANCE SHEET Mortgage loans securitized $ 7,236,664 $7,192,855 Business credit cards securitized 774,404 678,210 Leases securitized 667,801 558,553 Auto loans securitized 74,062 154,019 ---------- ---------- Total average securitized receivables $ 8,752,931 $8,583,637 =========== ========== Total average managed receivables $10,370,557 $9,817,011 =========== ========== Managed net interest margin (3) 4.49% 3.64%
(1) Includes assets held and available for sale and nonaccrual loans and leases. (2) Interest and average rate for tax-exempt securities, loans and leases are computed on a tax equivalent basis using a statutory rate of 35%. (3) Managed net interest margin represents a combination of owned interest-earning assets/owned interest-bearing liabilities and securitized mortgage and business credit card assets/liabilities. 25 26 OTHER REVENUES ($ in thousands)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------- ------- Equity securities gains $10,914 $17,854 Business credit card interchange income 12,602 6,230 Leasing other revenues 4,063 4,670 Other mortgage banking income 1,111 706 Insurance revenues, net and other 2,051 2,976 ------- ------- Total other revenues, net $30,741 $32,436 ======= =======
Equity securities gains represent changes in the fair value and realized gains on Advanta Partners investments. Equity securities gains for the three months ended March 31, 2000 include a $9.4 million gain on the sale of an investment. Equity securities gains for the three months ended March 31, 1999 include an $18 million gain on an investment in a company that was merged with another entity in exchange for that entity's stock in the first quarter of 1999. The stock received had a value significantly higher than Advanta Partners' basis in its investment. Business credit card interchange income increased by $6.4 million for the three months ended March 31, 2000 as compared to the same period of 1999. The increase in 2000 was due to an increase in average managed business credit card receivables, as well as an increase in interchange rates. OPERATING EXPENSES ($ in thousands)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------- ------- Salaries and employee benefits $29,568 $33,836 Marketing 22,724 14,125 Equipment expense 5,683 5,152 Credit and collection expense 5,408 5,153 Professional fees 5,255 6,560 External processing 4,513 3,335 Amortization of business credit card deferred origination costs, net 4,271 1,157 Occupancy expense 4,173 4,111 Telephone expense 3,036 2,838 Postage 1,529 1,505 Credit card fraud losses 277 252 Other 7,272 8,409 ------- ------- Total operating expenses $93,709 $86,433 ======= ======= At quarter end (in thousands): Number of accounts managed 775 625 Number of employees 2,807 2,540 For the quarter: Operating expenses as a percentage of average managed receivables(1) 3.45% 3.47% ------- -------
(1) Excludes amortization of business credit card deferred origination costs, net. 26 27 Operating expenses as a percentage of average managed receivables for the three months ended March 31, 2000 were relatively consistent with the same period of 1999. Marketing expenses have increased by $8.6 million for the three months ended March 31, 2000 as compared to the same period of 1999. This increase is primarily due to increased marketing and account origination activities in Advanta Business Cards. In addition, there was an increase in advertising associated with the Advanta Retail Note Program, through which we offer unsecured debt of Advanta Corp. to retail investors. The $3.1 million increase in the amortization of business credit card deferred origination costs, net, and the $1.2 million increase in external processing expense is due to the growth in managed business credit card receivables. The $1.3 million decrease in professional fees is due to a decrease in consulting and outsourcing costs. PROVISION FOR CREDIT LOSSES For the three months ended March 31, 2000 the provision for credit losses increased to $11.4 million from $10.1 million for the same period in 1999. The provision for the three months ended March 31, 1999 included a $4.6 million provision related to our exit from the auto finance business. Excluding the provision related to the auto exit in 1999, the increase in the provision in 2000 was $5.9 million. The majority of this increase was in the provision for credit losses relating to Advanta Business Cards, which increased by $5.4 million for the three months ended March 31, 2000 as compared to the same period of 1999. The increase in Advanta Business Cards' provision relates to a $202 million increase in average on-balance sheet business credit card receivables. In addition, the leasing provision increased by $1.0 million due to a $32 million increase in average on-balance sheet lease receivables and an increase in delinquencies on owned receivables. ASSET QUALITY Nonperforming assets include: Advanta Mortgage loans, business credit cards and leases past due 90 days or more; real estate owned; and bankrupt, decedent and fraudulent business credit cards. We charge losses on nonperforming Advanta Mortgage loans against the allowance generally at the earlier of foreclosure or when they have become twelve months delinquent. Losses on lease receivables are generally charged against the allowance when 121 days contractually delinquent. Our charge-off policy, as it relates to business credit card accounts, is to charge-off a receivable, if not paid, at 180 days contractually delinquent. Business credit card accounts suspected of being fraudulent are charged-off after a 90-day investigative period, unless the investigation shows no evidence of fraud. The carrying value for real estate owned is based on fair value, net of costs of disposition, and is reflected in other assets. Advanta Mortgage continues to emphasize profitability enhancement over loan growth, and to emphasize the direct to consumer channels over indirect channels for originations. This has resulted in a significant reduction in the rate of portfolio growth relative to prior periods. The decline in the growth rate has reduced the proportion of new, unseasoned loans in the portfolio. This "seasoning" effect results in higher reported delinquencies and charge-offs consistent with an aging portfolio. The increase in reported delinquency and charge-off rates is primarily attributable to seasoning of the mortgage loan portfolio. 27 28 Delinquency and charge-off rates on business credit cards have improved in the three months ended March 31, 2000 as compared to the same period of the prior year. Charge-off rates on leases have increased in the three months ended March 31, 2000 as compared to the same period in the prior year. This increase is due to the performance of a certain segment of the leasing portfolio. We expect the impact of this segment of the lease portfolio to moderate by the end of the year. The following tables provide a summary of nonperforming assets, delinquencies and charge-offs, as of and for the year-to-date periods indicated ($ in thousands).
MAR. 31, DEC. 31, MAR. 31, CONSOLIDATED - MANAGED 2000 1999 1999 - ------------------------------------------ -------- -------- -------- Nonperforming assets $515,862 $511,301 $471,819 Accruing loans past due 90 days or more 0 0 95 Impaired assets 515,862 511,301 471,914 Total loans 30 days or more delinquent 794,868 838,563 775,446 As a percentage of gross receivables: Nonperforming assets 4.9% 5.0% 4.7% Impaired assets 4.9 5.0 4.7 Total loans 30 days or more delinquent 7.6 8.2 7.8 Net charge-offs: Amount $ 47,667 $155,452 $ 33,495 As a percentage of average gross receivables (annualized) 1.8% 1.6% 1.4% ADVANTA MORTGAGE LOANS - MANAGED - ------------------------------------------ Nonperforming assets $475,153 $475,711 $435,435 Total loans 30 days or more delinquent 681,759 729,187 677,555 As a percentage of gross receivables: Nonperforming assets 5.6% 5.7% 5.2% Total loans 30 days or more delinquent 8.1 8.7 8.1 Net charge-offs - Mortgage Loans: Amount $ 23,732 $ 64,303 $ 10,330 As a percentage of average gross receivables (annualized) 1.1% 0.8% 0.5% Net charge-offs - Auto Loans: Amount $ 2,653 $ 18,855 $ 6,706 As a percentage of average gross receivables (annualized) 13.7% 13.9% 13.5% BUSINESS CREDIT CARDS - MANAGED - ------------------------------------------ Nonperforming assets $ 26,393 $ 23,498 $ 25,923 Total loans 30 days or more delinquent 42,198 38,437 38,533 As a percentage of gross receivables: Nonperforming assets 2.2% 2.3% 3.1% Total loans 30 days or more delinquent 3.4 3.7 4.6 Net charge-offs - Business Credit Cards: Amount $ 12,379 $ 44,309 $ 11,535 As a percentage of average gross receivables (annualized) 4.4% 5.0% 5.6% LEASES - MANAGED - ------------------------------------------ Nonperforming assets $ 13,864 $ 11,472 $ 10,165 Total loans 30 days or more delinquent 69,996 69,695 58,789 As a percentage of gross receivables: Nonperforming assets 1.7% 1.4% 1.5% Total loans 30 days or more delinquent 8.5 8.8 8.4 Net charge-offs - Leases: Amount $ 8,903 $ 25,586 $ 4,925 As a percentage of average gross receivables (annualized) 4.4% 3.6% 3.0%
28 29
MAR. 31, DEC. 31, MAR. 31, CONSOLIDATED - OWNED 2000 1999 1999 - ----------------------------------------- -------- ------- ------- Allowance for credit losses $ 47,210 $41,847 $37,898 Nonperforming assets 49,268 45,620 57,647 Accruing loans past due 90 days or more 0 0 95 Impaired assets 49,268 45,620 57,742 Total loans 30 days or more delinquent 70,934 62,850 80,159 As a percentage of gross receivables: Allowance for credit losses 3.0% 2.8% 3.3% Nonperforming assets 3.2 3.1 5.1 Impaired assets 3.2 3.1 5.1 Total loans 30 days or more delinquent 4.6 4.3 7.0 Net charge-offs: Amount $ 6,036 $27,547 $ 5,688 As a percentage of average gross receivables (annualized) 1.5% 2.4% 1.8% ADVANTA MORTGAGE LOANS - OWNED - ----------------------------------------- Allowance for credit losses $ 21,824 $21,743 $23,378 Nonperforming assets 37,019 36,709 47,752 Total loans 30 days or more delinquent 49,531 45,263 64,176 As a percentage of gross receivables: Allowance for credit losses 2.0% 2.1% 2.7% Nonperforming assets 3.3 3.5 5.6 Total loans 30 days or more delinquent 4.5 4.3 7.5 Net charge-offs - Mortgage Loans: Amount $ 2,138 $ 8,389 $ 1,551 As a percentage of average gross receivables (annualized) 0.8% 1.1% 0.7% Net charge-offs - Auto Loans: Amount $ (96) $ 3,732 $ 1,600 As a percentage of average gross receivables (annualized) (11.4%) 25.6% 14.4% BUSINESS CREDIT CARDS - OWNED - ----------------------------------------- Allowance for credit losses $ 18,752 $14,663 $ 6,998 Nonperforming assets 7,155 6,408 6,381 Total loans 30 days or more delinquent 11,123 10,347 7,286 As a percentage of gross receivables: Allowance for credit losses 6.2% 5.3% 4.9% Nonperforming assets 2.4 2.3 4.4 Total loans 30 days or more delinquent 3.7 3.8 5.1 Net charge-offs - Business Credit Cards: Amount $ 3,531 $10,103 $ 2,025 As a percentage of average gross receivables (annualized) 4.1% 4.8% 5.6% LEASES - OWNED - ----------------------------------------- Allowance for credit losses $ 4,303 $ 3,110 $ 2,795 Nonperforming assets 4,642 1,883 3,218 Total loans 30 days or more delinquent 9,365 5,996 8,128 As a percentage of gross receivables: Allowance for credit losses 3.4% 2.3% 2.2% Nonperforming assets 3.6 1.4 2.4 Total loans 30 days or more delinquent 7.3 4.5 6.3 Net charge-offs - Leases: Amount $ 463 $ 2,926 $ 512 As a percentage of average gross receivables (annualized) 1.3% 2.7% 1.9%
29 30 UNUSUAL CHARGES Employee costs associated with staff reductions In the first quarter of 1999, we recorded a $3.3 million charge for costs associated with staff reductions. These expenses included severance and outplacement costs associated with cost reduction initiatives and the consolidation of support functions. There were 121 employees severed who were entitled to benefits. This staff reduction was substantially complete by June 30, 1999. The final payment outstanding related to these severance costs was paid in the three months ended March 31, 2000. Employee costs associated with Consumer Credit Card Transaction/Tender Offer In 1998, we accelerated vesting of 43.15% of outstanding options that were not vested at the time of the closing of the Consumer Credit Card Transaction. In connection with the Tender Offer (see Note 14 to the Consolidated Condensed Financial Statements), present and former directors and employees who held exercisable options to purchase Class A and Class B Common Stock tendered these options in lieu of first exercising the options and tendering the underlying stock. We used approximately $850 million, before taking into account the exercise price of options, to repurchase the shares in the Tender Offer. In addition, we also amended the terms of options granted to employees who became employees of Fleet LLC or whose employment with us was otherwise terminated in connection with the Consumer Credit Card Transaction (the "Affected Employees") to extend the post-employment exercise period. Although there was a charge to earnings associated with this amendment, there was no net impact to capital as a result of this amendment. We also canceled options issued to certain members of the Board of Directors and replaced the canceled options with stock appreciation rights. In March 1997, the Compensation Committee of the Board of Directors approved the Advanta Senior Management Change of Control Severance Plan which provides benefits to senior management employees in the event of a change of control of Advanta if, within one year of the date of a change of control, there has been either an actual or constructive termination of the senior management employee. In February 1998, pursuant to our agreement with Fleet, the Compensation Committee approved an amendment to the management severance plan that allows the Office of the Chairman, in its sole discretion, to extend the level of benefits that would otherwise be allowed in the event of a change of control to Affected Employees. The Board of Directors also authorized the Chairman of the Board, in his sole discretion, to pay bonuses to certain key employees in recognition of their efforts on behalf of Advanta in the strategic alternatives process. In accordance with our agreement with Fleet, Fleet LLC agreed to assume Advanta's management severance plan and 50% of the bonus payments with respect to those Affected Employees who became employees of Fleet LLC in connection with the Consumer Credit Card Transaction. In May 1997, the Board of Directors adopted the Office of the Chairman Supplemental Compensation Program which entitled the members of the Office of the Chairman to receive benefits in the event of a change of control or other similar transaction. In October 1997, we announced that the Chief Executive Officer of Advanta Corp. and the Chief Executive Officer of the consumer credit card business unit were leaving Advanta in connection with the Consumer Credit Card Transaction. These benefits were all contingent upon the consummation of the Consumer Credit Card Transaction and were recognized upon the closing of the transaction. 30 31 In connection with our evaluation of strategic alternatives and the Consumer Credit Card Transaction, we adopted special retention programs. Under these programs, certain employees were entitled to receive special payments based on their targeted bonuses and contingent upon their continued employment with Advanta or a successor entity. The first payments under the special retention programs were made in March 1998. Further, in March 1998, we identified employees that would be terminated in connection with the Consumer Credit Card Transaction as part of the corporate restructuring to reduce corporate expenses. During the first quarter of 1998, the Board of Directors approved the corporate restructuring and affected employees were informed of the termination benefits they would receive. Substantially all of these employees ceased employment with Advanta before April 30, 1998. We recorded a $62.3 million pretax charge to earnings in connection with the foregoing plans, plan amendments and workforce reduction activities in 1998. The final payment outstanding related to these employee costs was paid in the three months ended March 31, 2000. Expense Associated with Exited Businesses/Products In the first quarter of 1999, we implemented a plan to cease the origination of auto loans and recorded a $3.4 million charge for costs associated with exited businesses/products. The charges included severance and outplacement costs for 22 employees in the auto origination group, and professional fees associated with exited businesses/products not directly associated with our mortgage, business credit card and leasing units. We completed the closing of the auto loan origination center and termination of related employees during the second quarter of 1999. We expect to pay a substantial portion of the remaining costs during the year ended December 31, 2000. In connection with our efforts to reduce expenses associated with business and product offerings which are not directly associated with our mortgage, business credit card and leasing units, management approved exit and disposition plans during the first quarter of 1998 related to certain businesses and products previously offered. We recorded charges in the quarter ended March 31, 1998 related to costs to be incurred by us in executing these plans, including contractual obligations to customers for which no future revenue will be received, and contractual vendor obligations for services from which no future benefit will be derived. The charges also include termination benefits to employees associated with the businesses and products identified in the exit plan. Related to the exit plan, certain assets were identified for disposal and written down to estimated realizable value. In addition, we recognized investment banking, professional and consulting fees that were contingent upon completion of the Consumer Credit Card Transaction as well as other professional and consulting fees associated with our corporate restructuring. During the quarter ended March 31, 1998, we recorded a $54.1 million pretax charge to earnings in connection with these exit plans. In 1999, an additional charge of $10.0 million was recorded associated with exited products based on a change in the estimate of total expected costs. We expect to pay a substantial portion of these costs over the next 33 months. The actions required to complete these plans include the settlement of contractual commitments and the payment of customer benefits. ASSET/LIABILITY MANAGEMENT We manage our financial condition with a focus on maintaining disciplined management of market risks and prudent levels of leverage and liquidity. 31 32 MARKET RISK SENSITIVITY We measure our interest rate risk using a rising rate scenario and a declining rate scenario. Net interest income is estimated using a third party software model that uses standard income modeling techniques. We estimate that at March 31, 2000, our net interest income over a twelve-month period would increase or decrease by approximately 5% if interest rates were to rise or fall by 200 basis points. Both increasing and decreasing rate scenarios assume an instantaneous shift in rates and measure the corresponding change in expected net interest income over one year. The above estimates of net interest income sensitivity alone do not provide a comprehensive view of our exposure to interest rate risk. The quantitative risk information is limited by the parameters and assumptions utilized in generating the results. These analyses are useful only when viewed within the context of the parameters and assumptions used. The above rate scenarios in no way reflect management's expectation regarding the future direction of interest rates, and they depict only two possibilities out of a large set of possible scenarios. In addition to interest rate risk, we are also subject to prepayment risk related to other financial instruments, namely servicing rights and retained interest-only strips. Prepayments are principal payments received in excess of scheduled principal payments. Prepayments generally result from entire loan payoffs due largely to refinancing a loan or selling a home. Actual or anticipated prepayment rates are expressed in terms of a constant prepayment rate, which represents the annual percentage of beginning loan balances that prepay. To a degree, prepayment rates are related to market interest rates and changes in those interest rates. The relationship between them, however, is not precisely determinable. Accordingly, we believe it is more relevant to disclose the fair value sensitivity of these instruments based on changes in prepayment rate assumptions rather than based on changes in interest rates. Our servicing rights and interest-only strips are derived from both fixed and variable rate loans, the majority of which are fixed. Fixed and variable rate loans are currently prepaying at different rates, which is expected to continue in the future. We have estimated the impact on the fair value of these assets assuming a 2.3% change in constant prepayment rate for fixed rate loans and 3.4% change in constant prepayment rate for variable rate loans. We have estimated that these changes in prepayment assumptions could result in a $28 million change in the combined fair value of these assets as of March 31, 2000. These estimates do not factor in the impact of changes in the interest rate environment associated with the changes in the prepayment rates. Changes in interest rates generally affect the level of loan originations. Prepayment assumptions are not the only assumptions in the fair value calculation for these assets. Other key assumptions are not directly impacted by market forces as defined earlier. The above prepayment scenarios do not reflect management's expectation regarding the future direction of prepayments, and they depict only two possibilities out of a large set of possible scenarios. 32 33 DERIVATIVES ACTIVITIES The following table summarizes by notional amounts our derivative instruments as of March 31, 2000 and December 31, 1999 ($ in thousands):
ESTIMATED FAIR VALUE MARCH 31, MARCH 31, DECEMBER 31, 2000 ASSET/ 2000 1999 (LIABILITY) ------------- ----------- ----------- Interest rate swaps $ 2,562,421 $ 2,975,086 $ 32,749 Interest rate caps written 399,823 409,278 (4,028) Interest rate caps purchased 399,823 409,278 4,028 Put options purchased 156,000 156,000 147 Forward contracts 327,000 565,000 (2,105) ------------- ----------- ----------- Total $ 3,845,067 $ 4,514,642 $ 30,791 ============= ============= ===========
The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of our exposure through our use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivative contracts. The fair value of interest rate swaps, options and forward contracts is the estimated amount that we would pay or receive to terminate the agreement at the reporting date, taking into account current interest and foreign exchange rates and the current creditworthiness of the counterparty. Our credit exposure to derivatives, with the exception of caps written, is represented by contracts with a positive fair value without giving consideration to the value of any collateral exchanged. For caps written, credit exposure does not exist since the counterparty has performed its obligation to pay us a premium payment. LIQUIDITY AND CAPITAL RESOURCES Our goal is to maintain an adequate level of liquidity, for both long-term and short-term needs, through active management of both assets and liabilities. During the three months ended March 31, 2000, we securitized or sold approximately $484 million of Advanta Mortgage loans, $157 million of business credit card receivables and $107 million of leases. We temporarily invested cash generated from these transactions in short-term, high quality investments at money market rates pending redeployment to pay down borrowings and to fund future mortgage loan, business credit card and lease receivable growth. At March 31, 2000, we had $192 million of federal funds sold, $651 million of loan and lease receivables held for sale, and $595 million of investments that could be sold to generate additional liquidity. Equity, including capital securities, was $705 million at March 31, 2000. Our funding strategy relies on cash, cash equivalents and investments as well as deposit gathering activity at Advanta National Bank and Advanta Bank Corp. (together, the "banks"), unsecured debt of Advanta Corp., and securitizations. Advanta and the banks use both retail and institutional on-balance sheet funding sources. We have the ability to issue a variety of debt securities and, through the banks, deposit products. As of March 31, 2000, Advanta National Bank's total deposits were $1.7 billion and Advanta Bank Corp.'s total deposits were $474 million. 33 34 After paying down $122 million in medium term notes in the three months ended March 31, 2000, we had over $325 million of unrestricted cash, cash equivalents and marketable securities at the parent company level at March 31, 2000. At March 31, 2000, the parent company's assets include advances to wholly-owned non-bank subsidiaries to fund $87 million in loans, $34 million in retained interest-only strips and contractual mortgage servicing rights, $195 million in subordinated trust assets, and $38 million of equity securities accounted for at fair value. At March 31, 2000, we had a $500 million committed warehouse financing facility for mortgage loans. At March 31, 2000, we had additional uncommitted warehouse financing facilities for mortgage loans of $550 million. At March 31, 2000, we had $730 million of committed commercial paper facilities for business credit card receivables and a $360 million committed commercial paper facility for lease contracts and lease residuals. At March 31, 2000, we had available $1.1 billion in unused warehouse financing facilities and commercial paper conduit facilities. We also offer unsecured debt of Advanta Corp. to retail investors through the Advanta Retail Note Program. In addition, notwithstanding our current liquidity, efforts continue to develop new sources of funding, both through previously untapped customer segments and through development of new financing structures. At March 31, 2000, Advanta National Bank's combined total capital ratio (combined Tier I and Tier II capital) was 15.18% and Advanta Bank Corp.'s combined total capital ratio was 12.56%. At December 31, 1999, Advanta National Bank's combined total capital ratio (combined Tier I and Tier II capital) was 14.86%, and Advanta Bank Corp.'s combined total capital ratio was 13.28%. In each case, Advanta National Bank and Advanta Bank Corp. had capital levels that met the definition of "well-capitalized" under the regulatory framework for prompt corrective action. We intend to maintain capital ratios at both institutions in order to be "well-capitalized" under current guidelines. Recently an FDIC discussion draft proposal has been made public regarding capital requirements for subprime lenders. Under the proposal, regulatory capital required to be held for certain loan classes included in the institution's portfolio could be increased. The ultimate resolution of this proposal and its impact on financial results is uncertain at this time. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is set forth in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report on Form 10-Q. See "Asset/Liability Management-Market Risk Sensitivity." 34 35 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which Advanta denies, center around Fleet's assertions that Advanta has failed to complete certain post-closing adjustments to the value of the assets and liabilities Advanta contributed to Fleet LLC in connection with the Consumer Credit Card Transaction. Fleet seeks damages of approximately $141 million. Advanta has filed an answer to the complaint denying the material allegations of the complaint, but acknowledging that Advanta contributed $1.8 million in excess liabilities in the post-closing adjustment process, after taking into account the liabilities Advanta has already assumed. Advanta also has filed a countercomplaint against Fleet for approximately $101 million in damages Advanta believes have been caused by certain actions of Fleet following the closing of the Consumer Credit Card Transaction. Formal discovery has begun and is ongoing. The court has scheduled trial in this matter to begin in September 2001. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on the financial position or future operating results of Advanta. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits - The following exhibits are being filed with this report on Form 10-Q.
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 January 25, 2000, was filed by Advanta setting forth the financial highlights of Advanta's results of operations for the fiscal year ended December 31, 1999. 35 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Advanta Corp. (Registrant) May 11, 2000 By /s/Philip M. Browne ---------------------------------- Senior Vice President and Chief Financial Officer May 11, 2000 By /s/James L. Shreero ---------------------------------- Vice President and Chief Accounting Officer 36 37 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- Exhibit 12 Consolidated Computation of Ratio of Earnings to Fixed Charges Exhibit 27 Financial Data Schedule
37 EX-12 2 CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
Three Months Ended March 31, 2000 1999 ------- ------- Net earnings $17,069 $ 6,773 Federal and state income taxes 10,685 4,193 Earnings before income taxes 27,754 10,966 Fixed charges: Interest 47,755 43,277 One-third of all rentals 755 779 Preferred stock dividend of subsidiary trust 2,248 2,248 Total fixed charges 50,758 46,304 Earnings before income taxes and fixed charges 78,512 57,270 Ratio of earnings to fixed charges (A) 1.55x 1.24x
(A)For purposes of computing these ratios, "earnings" represent income before income taxes plus fixed charges. "Fixed charges" consist of interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense on operating leases, and preferred stock dividends of subsidiary trust. 38 EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-2000 MAR-31-2000 58202 48128 192357 0 903046 0 0 1531742 47210 4055560 2133552 484665 294516 438010 0 1010 278 603529 4055560 49386 26479 6289 82154 27157 47755 34399 11399 10914 95929 27754 17069 0 0 17069 .68 .67 3.96 49268 0 0 0 41847 7611 1575 47210 47210 0 0
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