-----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, G2uA6JyB7Z32wbNsll/JYOSEOB9olKGu0bw6VQLHMs64PrvBNBNy2RZh3p9AQ3Vl tRYJesutSDwNdMe2Tsxvyg== 0000893220-96-000496.txt : 19960521 0000893220-96-000496.hdr.sgml : 19960521 ACCESSION NUMBER: 0000893220-96-000496 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: 6141 IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14120 FILM NUMBER: 96540149 BUSINESS ADDRESS: STREET 1: 650 NAAMANS RD STREET 2: BRANDYWINE CORP CTR CITY: CLAYMONT STATE: DE ZIP: 19703 BUSINESS PHONE: 2156574000 MAIL ADDRESS: STREET 1: BRANDYWINE CORPORATE CENTER STREET 2: 650 NAAMANS ROAD CITY: CLAYMONT STATE: DE ZIP: 19703 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-K 1 FORM 10-K FOR ADVANTA CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] for the fiscal year ended December 31, 1995 or ------------------ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from ________ to _________ Commission File No. 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 Identification No.) organization)
Five Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044 ------------------------------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 657-4000 Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered None N/A
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value Class B Common Stock, $.01 par value 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)(SM)) - - ------------------------------------------------------------------------------ (Title of each class) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. 2 2 Advanta Corp. and Subsidiaries State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $ 577,899,664.50 as of March 1, 1996 which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by officers and directors of the Company (however, this does not constitute a representation or acknowledgment that any of such individuals is an affiliate of the Registrant). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 1, 1996 there were 17,508,520 shares of the Registrant's Class A Common Stock, $.01 par value, outstanding and 24,080,365 shares of the Registrant's Class B Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
Document Form 10-K Reference - - -------- ------------------- Definitive Proxy Statement relating to the Part III, Items 10-13 Registrant's 1996 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than 120 days following the end of the Registrant's last fiscal year, and referred to herein as the "Proxy Statement".
3 3 Advanta Corp. and Subsidiaries PART I ITEM 1. BUSINESS. OVERVIEW Advanta Corp. (the "Company") serves consumers and small businesses through innovative products and services primarily via direct, cost effective delivery systems. The Company primarily originates and services credit cards and mortgages. Other products include small-ticket equipment leasing, credit insurance and deposit products. The Company utilizes customer information attributes including credit assessments, usage patterns, and other characteristics enhanced by proprietary information to match customer profiles with appropriate products. At year end 1995 assets under management totaled $14 billion. Approximately 73% of total revenues are derived from credit cards marketed through carefully targeted direct mail campaigns. For the past several years, the Company's strategy has been to market this product in the form of a no annual fee, low variable-rate gold card. The Company has successfully grown to one of the ten largest issuers of gold cards and ranks among the top 15 bankcard issuers worldwide. Mortgage services contributes 9% of total revenues with a managed loan portfolio of $1.8 billion. Mortgage loans are originated directly with consumers, as well as through conduit relationships and wholesale purchases from brokers and other financial institutions. The Company was incorporated in Delaware in 1974 as Teachers Service Organization, Inc., the successor to a business originally founded in 1951. In January 1988, the Company's name was changed from TSO Financial Corp. to Advanta Corp. The Company's principal executive office is located at Five Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044-0749. The Company's telephone number at its principal executive office is (215) 657-4000. References to the Company in this Report include its consolidated subsidiaries unless the context otherwise requires. ADVANTA PERSONAL PAYMENT SERVICES During 1995, the Company's consumer credit card unit adopted the name Advanta Personal Payment Services, which more appropriately captures the unit's mission and its goal of expansion into new delivery systems. The credit card, a vehicle enabling the consumer to transact purchases and facilitate borrowing, offers utility to the consumer that may move beyond its traditional platform. For example, "smart" credit cards (credit cards containing a microchip processor) and on-line payment delivery systems associated with a credit card account are nascent technologies which may in the future be a part of Advanta Personal Payment Systems. The Company, which has been in the credit card business since 1983, issues gold (i.e., premium) and standard MasterCard(R)* and VISA(R)* credit cards nationwide. The Company has built a substantial cardholder base which, as of December 31, 1995, totaled 4.8 million accounts and $10.0 billion in managed receivables. The gold card strategy has produced a portfolio with 82% of its balances derived from gold cards. This contrasts with the bankcard industry as a whole, which is composed of 43% gold (versus standard) cards. The Company believes its concentration of gold card balances to be the highest among the top twenty bankcard issuers. The top twenty bankcard issuers, as of December 31, 1995, accounted for more than 75% of all balances outstanding. Both gold and standard accounts undergo the same credit analysis, but gold accounts have higher initial credit limits because of the cardholders' better credit quality. In addition, gold accounts generally offer a wider variety of services to cardholders. The primary method of account acquisition is direct mail solicitation. The Company - - -------------------------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc.; VISA(R) is a federally registered servicemark of VISA, U.S.A., Inc. 4 4 Advanta Corp. and Subsidiaries generally uses credit scoring by independent third parties and a proprietary market segmentation and targeting model to target its mailings to profitable segments of the market. In 1982, the Company acquired Colonial National Bank USA ("Colonial National"). As a national bank, Colonial National has the ability to make loans to consumers without many of the restrictions found in various state usury and licensing laws, to negotiate variable rate loans, to generate funds economically in the form of deposits insured by the Federal Deposit Insurance Corporation ("FDIC"), and to include in its product mix a MasterCard and VISA credit card program. In 1995, the Company chartered Advanta National Bank ("ANB") to complement the credit card activities of Colonial National. ANB is a type of limited purpose national bank known as a "credit card bank" whose lending activities are limited to consumer credit card lending. See "Government Regulation -- Colonial National Bank USA and Advanta National Bank." Prior to the establishment of ANB, substantially all of the Company's credit card receivables and bank deposits were originated by Colonial National. However, at December 31, 1995, ANB accounted for $1.7 billion of the Company's total of $10.0 billion of managed credit card assets, and $684 million of the total $1.9 billion of bank deposits. It is anticipated that in 1996, ANB will grow to represent a larger percentage of the Company's credit card business. MasterCard and VISA license banks, such as Colonial National and ANB (together the "Banks") and other financial institutions, to issue credit cards using their trademarks and to utilize their interchange networks. Cardholders may use their cards to make purchases at participating merchants or to obtain cash advances at participating financial institutions. Cardholders may also use special credit line drafts issued by the Banks to draw against their Visa or MasterCard credit lines for cash, purchases or balance transfers. Each credit card transaction is submitted to a merchant bank which remits to the merchant the purchase amount less a merchant discount fee, and submits the purchase to the card issuing bank for payment through the appropriate settlement system. The card issuing bank receives an interchange fee as compensation for the funding and credit and fraud risk that it takes when its customers use its credit card. MasterCard or VISA sets the interchange fee as a percentage of each card transaction (currently averaging approximately 1.4%). The Company generates interest and other income from its credit card business through finance charges assessed on outstanding loans, interchange income, cash advance and other credit card fees, and securitization income as described below. Credit card income also includes fees paid by credit card customers for product enhancements they may select, and revenues paid to the Banks by third parties for the right to market their products to the Company's credit card customers. Most of the Company's MasterCard and VISA credit cards carry no annual fee, and those credit cards which do include an annual fee generally have lower fees than those charged by many of the Company's competitors. The Company believes that this characteristic of no or low annual fee credit cards has appealed to consumers, and that the Company's credit cards have also appealed to consumers because of their competitive interest rates, credit lines, quality service, and payment terms. While the Company believes that its credit card offers will continue to appeal to consumers for the reasons stated, the Company also notes that for several years competition has been increasing in the credit card industry. At the same time, the U.S. consumer has become a generally more sophisticated and demanding user of credit. These forces are likely to produce significant changes in the industry. The Company is devoting substantial resources to meeting the challenges and taking advantage of the opportunities which management sees emerging in the industry. In 1994 and 1995, this included significant focus on balance transfer initiatives, in which the Company encouraged new and existing customers to transfer account balances they were maintaining with other credit card issuers to a Colonial National or ANB account with a lower interest rate. In addition, as part of the strategy to broaden and deepen its relationship with the consumer, the Company has launched some proprietary branded credit card products. These products were crafted to meet an identified long-term consumer need and 5 5 Advanta Corp. and Subsidiaries are expected to establish relationships with consumers that will be lasting. The Company intends to continue exploring new approaches to the credit card market. The interest rates on the majority of the Company's credit card receivables are variable, tied either to the prime rate or the London interbank offered rate ("LIBOR"). This variable rate structure helps the Company maintain net interest margins in both rising and declining interest rate environments. As Delaware, the Banks' state of domicile, does not have a usury ceiling applicable to banks, there is no statutory maximum interest rate that the Company may charge its credit cardholders, nor does Delaware law limit the amount of any annual fees, late charges and other ancillary charges which may be assessed. While the state in which an individual cardholder resides may seek to regulate the annual fees and ancillary charges which the Banks may charge to that state's residents, the enforceability of such regulation is unclear and is currently the subject of litigation in certain states. See "Government Regulation -- Colonial National Bank USA and Advanta National Bank." The following table shows the geographic distribution by state of total managed credit card receivables among the top five states, together with the impaired credit card receivables in those states, as of December 31, 1995.
PERCENT OF PERCENT OF PERCENT OF CREDIT TOTAL TOTAL IMPAIRED TO CARD TOTAL PORTFOLIO IMPAIRED TOTAL RECEIVABLES IMPAIRED BY STATE BY STATE RECEIVABLES ----------- -------- -------- -------- ----------- (Dollars in millions) California $ 1,590.6 $ 20.0 15.9% 19.0% .2% New York 766.3 9.9 7.6 9.3 .1 Texas 653.9 8.3 6.5 7.9 .1 Florida 581.7 8.2 5.8 7.8 .0 Illinois 436.8 4.1 4.4 3.9 .0 Other 6,001.4 54.9 59.8 52.1 .6 --------- ------ ------ ------ --- TOTAL $10,030.7 $105.4 100.0% 100.0% 1.0% ========= ====== ===== ===== ===
Since 1988, Colonial National has been active in the credit card securitization market, and since its inception in 1995 ANB has likewise become active, together securitizing $3.4 billion of credit card receivables in 1995. The Company continues to recognize income on a monthly basis from the securitized receivables. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 of the Notes to Consolidated Financial Statements. The Banks' securitization program provides a number of benefits: diversifying the Banks' funding base, providing liquidity, reducing regulatory capital requirements, lowering the cost of funds, providing a source of variable-rate funding to complement the variable-rate credit card portfolio and helping to limit the on-balance sheet growth of Colonial National to not more than 7% per annum. See "Government Regulation -- the Company." Furthermore, the Banks continue to own the credit card accounts and customer relationships, which the Company believes continue to build significant long-term value. While the Company believes that securitization will continue to be a reliable source of funding, there is no assurance that the Company will be able to continue securitizations in amounts or under terms comparable to its securitizations to date. A securitization involves the transfer by the Banks of the receivables generated by a pool of credit card accounts to a securitization trust. Certificates issued by the trust and sold to investors 6 6 Advanta Corp. and Subsidiaries represent undivided ownership interests in receivables transferred to the trust. The securitization results in removal of the receivables from the Banks' and the Company's balance sheet for financial and regulatory accounting purposes. For tax purposes, the investor certificates are characterized as a collateralized debt financing of the Banks. The trust receives finance and other charges paid by the credit card customers and pays a rate of return on a monthly basis to the certificate holders. While in most cases the rate of return paid to investors is variable in order to match the pricing dynamics of the underlying receivables, the Company also uses fixed rate securitizations in certain circumstances. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management." Credit losses on the securitized receivables are paid from the funds in the trust. Colonial National services the accounts for a fee, generally two percent per annum of the securitized receivables. Excess funds (defined as finance charges plus miscellaneous fees less interest paid to certificate holders, credit losses and servicing fees) are first retained to build up a reserve fund to a certain level, after which amounts are remitted to the Banks. The Banks' relationship with its credit card customers is not affected by the securitization. Investors in the trust receive payments only of interest during the first three to eight and one-half years, of the trust. Thereafter, an amortization period (generally between six and ten months) commences, during which the certificate holders are entitled to payment of principal and interest. Acceleration of the commencement of the amortization period (which may occur in limited circumstances) on a securitization would accelerate the Company's funding requirement. Upon full repayment of principal to the certificate holders, whether as a result of normal or accelerated amortization, the trust's lien on the accounts terminates and all related receivables and funds held in the trust, including the reserve fund, are transferred to the Banks. ADVANTA PERSONAL FINANCE SERVICES Formerly designated Advanta Mortgage, the new name Advanta Personal Finance Services ("APFS") reflects the growing diversification and product array of this business unit, which in 1995 expanded to include both Advanta Mortgage and Advanta Finance, and is poised to launch an automobile financing business (Advanta Auto Finance) in 1996. Advanta Mortgage Corp. USA originates, purchases, securitizes, and services non-conforming credit first and second mortgage loans directly, through its subsidiaries, and for Colonial National's "Advanta Mortgage USA" Division (collectively, "Advanta Mortgage"). Loan production is generated through multiple distribution channels including two centralized, direct to consumer origination centers (each one dedicated to a specific product), a broker network serviced by selected sales locations, correspondent relationships and purchases from other financial institutions. In 1995, Advanta Mortgage developed and tested a Home Equity Line of Credit product. Loan production volume relating to this product was not material in 1995 but is expected to grow significantly in 1996. During 1995 a new business channel, "Advanta Finance," was launched, offering loans directly to the consumer through a branch office system. Through December 31, 1995, eighteen branches were opened offering first and second lien mortgage loans similar to those offered by Advanta Mortgage. Production activity for the year was not material but is expected to become significant in 1996. The combined origination volume for APFS for 1995 was $773 million. Beginning in 1996, Advanta Auto Finance expects to offer loans secured by automobiles to sub-prime customers, largely through correspondent relationships. Advanta Mortgage originates and purchases loans, generally funding these loans through sales or securitizations which have been structured to qualify as real estate mortgage investment conduits ("REMICs") under the Internal Revenue Code. In a securitization, Advanta Mortgage typically sells receivables to a trust for cash while retaining an interest in the loans securitized. The cash purchase 7 7 Advanta Corp. and Subsidiaries price is generated through an offering of pass-through certificates by the trust. The purchasers of the pass-through certificates are generally entitled to the principal collected and a portion of the interest collected on the underlying loans while Advanta Mortgage retains the "excess spread." The excess spread represents the excess of the interest and fees paid by borrowers on the underlying loans over the sum of the pass-through rate of interest payable to the certificate holders, credit losses, a servicing fee which is paid to the Company in its role as servicer, and certain transaction related costs. During 1995, Advanta Mortgage securitized $542 million of loans. The excess spread is received over the life of the loans. However, in accordance with generally accepted accounting principles ("GAAP"), Advanta Mortgage recognizes the estimated present value of the excess spread as a component of mortgage banking income in the fiscal period in which the loans are sold. The gain recognized reflects estimates of the impact of future credit losses and loan prepayments. Other basic sources of income to Advanta Mortgage are net interest income on loans outstanding pending their sale, and loan servicing income, including "contract servicing" on loans which were never owned by the Company. See Note 1 of Notes to Consolidated Financial Statements. Advanta Mortgage's managed portfolio of receivables includes owned loans (generally held for sale) as well as the loans it services in which it retains an interest in the excess spread. At December 31, 1995, owned mortgage loans receivable totaled $322 million while total managed receivables were $1,798 million. Loans serviced under contract for a fee are not included in the Company's "managed portfolio" as the performance of such loans does not have a material impact on the Company's credit risk profile. In contrast, the performance of the managed portfolio, including loans sold by the Company, can materially impact ongoing mortgage banking income. See Note 1 of Notes to Consolidated Financial Statements. Total loans serviced at December 31, 1995, including loans serviced for others for a fee, were $2,421 million. Approximately 78% of the managed portfolio is secured by first mortgages and the balance is secured by second mortgages. Approximately 81% of the managed portfolio is comprised of fixed rate loans while the remainder represents adjustable rate loans. At December 31, 1995, total mortgage loans managed, and the nonperforming loans included in these totals, are concentrated in the following five states:
PERCENT OF PERCENT OF PERCENT OF NONPERFORMING MORTGAGE TOTAL PORTFOLIO BY NONPERFORMING BY TO TOTAL RECEIVABLES NONPERFORMING STATE STATE RECEIVABLES ----------- ------------- ----- ----- ----------- (Dollars in millions) California $ 389.0 $ 14.2 21.6% 25.0% 0.8% New York 182.5 8.7 10.2 15.3 0.5 New Jersey 179.0 11.2 10.0 19.8 0.6 Maryland 159.1 3.7 8.8 6.5 0.2 Pennsylvania 129.3 4.4 7.2 7.8 0.3 Other 758.7 14.5 42.2 25.6 0.8 TOTAL $1,797.6 $ 56.7 100.0% 100.0% 3.2%
Geographic concentration carries a risk of increased delinquency and/or loss if an area suffers an economic downturn. Advanta Mortgage monitors economic conditions in those regions through market and trend analyses. A Credit Policy Committee meets through the year to update lending policies based on the results of analyses, which may include abandoning lending activities in economically unstable areas of the country. The Company believes that the concentrations of nonperforming loans reflected in the preceding table are not necessarily reflective of general economic conditions in each region, but rather reflect the credit risk inherent in the different grades of loans originated in each area. 8 8 Advanta Corp. and Subsidiaries The interest rate charged and the maximum loan-to-value ratio permitted with respect to each grade of loans are adjusted to compensate for the credit risk inherent in the loan grade. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Provision for Credit Losses" and "-- Credit Risk Management -- Asset Quality." ADVANTA BUSINESS SERVICES In late 1994, the Company's subsidiary, Advanta Leasing Corp., changed its name to Advanta Business Services Corp. ("ABS"), reflecting the Company's intention to expand its offerings to small business customers. The name change followed the Company's introduction, in July 1994, of a business purpose MasterCard credit card as a supplement to its commercial equipment leasing business. Both lines of business continue to expand. The commercial equipment leasing business is generated primarily through third party referrals from manufacturers or distributors of equipment as well as independent brokers. Most contact with these referral sources is made from the Company's ABS headquarters in Voorhees, New Jersey, using extensive direct marketing operations. These operations include a staff of telephone sales representatives who are assigned to specific industries, and backed by the Company's direct mail advertising program. Additional business is also generated from direct contact with customers through these same channels. Leasing originations volume, measured by the cost of the equipment included in new lease contracts, continues to grow, from a total of $190 million in 1994 to $251 million in 1995. While much of this growth is due to increased penetration of existing markets, such as office machinery, security systems and computers, some has been the result of expansion into additional market segments. The most significant of these are leasing programs for certain industrial and agricultural equipment and programs for leasing equipment to agencies of State and local governments. The Company's growth in its traditional markets has been the result, in part, of an expanded National Accounts program which seeks referral business from larger distributors and manufacturers. The business-purpose credit card operation also continues to grow, with over 23,000 accounts as of December 31, 1995. Again, direct marketing techniques, primarily direct mail to prospective customers, are the source of new accounts. This marketing program is the result of extensive and ongoing testing of various campaigns, with success of each campaign measured by both the cost of acquisition of new business, and the credit performance of the resulting business. The "Advanta business card" is marketed by ABS and issued by its affiliate, Advanta Financial Corp. (see "Government Regulations -- Advanta Financial Corp."). During 1995 and continuing into 1996, ABS embarked on an aggressive systems development program. New systems, scheduled for implementation during the first half of 1996, will deliver more accurate and timely credit decisions on new lease applications, provide better portfolio performance analysis tools for business credit cards, and establish a centralized customer database to lower marketing costs. These new capabilities are also expected to enhance cross selling opportunities for current and future products. ADVANTA INSURANCE COMPANIES The Company mainly offers specialty credit related insurance products and services to its existing customer base. The focus of these products is on the customers' ability to repay their debt in the event of certain circumstances. Enrollment in these programs is achieved through the utilization of either direct mail or telemarketing distribution channels. 9 9 Advanta Corp. and Subsidiaries Through unaffiliated insurance carriers, the Company generally offers a combined credit life, disability and unemployment product to Advanta's lending customers. The Company's insurance subsidiaries reinsure 100% of these risks from the insurance carriers on a coinsurance basis. In consideration for assumption of these risks the insurance subsidiaries receive reinsurance premiums equal to 100% of the net premiums collected by the insurance carriers, less a ceding fee as defined by the reinsurance treaties, and all acquisition expenses, premium taxes and loss payments made by the carriers on these risks. Under the terms of certain reinsurance treaties the subsidiaries are either obligated to maintain in trust for the benefit of an insurance carrier an amount equal to 100% of the unearned premiums and all statutory reserves for future incurred loss payments or have certain of these loss reserves, as defined, withheld by an insurance carrier. Credit life insurance for credit card customers insures the life of the borrower (and any joint borrower) and provides for the payment to the primary beneficiary (the lender) in the event of the borrower's death of a benefit generally equal to the unpaid principal balance, subject to a maximum amount equal to the lesser of the borrower's balance at the date of death or $10,000. Credit disability and unemployment insurance for credit card customers generally provide for the payment of the minimum monthly payment required on the debt outstanding at the commencement of the primary borrower's inability to work as a result of disability or involuntary unemployment, until the customer is able to return to work or obtains other employment, subject to a maximum equal to the lesser of the borrower's balance at the date of unemployment or disability or $10,000. Commencing in 1992 and 1995, Colonial National and ANB, respectively, began offering to their credit card customers in certain states the option to purchase a debt cancellation agreement entitled Credit Protection Plus(R). Under the terms of the agreement, Colonial National or ANB will forgive the credit card borrower's balance in the event of the death or permanent disability of either the primary or joint (if purchased) credit card borrower up to the lesser of $10,000, the customer's balance or the customer's credit limit at the date of death or permanent disability. In addition, the agreement provides for the suspension of the contractual principal payment obligation and the wavier of all interest and service fees in the event that either the primary or joint (if purchased) credit card borrower is unable to work due to involuntary unemployment or short-term disability commencing from the date of initial unemployment and disability to the lesser of twelve months or the date the customer is able to return to work or obtains other employment. The Banks have purchased from the Company's insurance subsidiaries insurance protection against excess losses, as defined, incurred from providing these services. The Company also offers other specialty based insurance products to its customers. In consideration the lending institution receives an expense reimbursement percentage of insurance revenues collected. One of the Company's insurance subsidiaries began direct underwriting of an indemnity policy which protects ABS's interest in the business equipment leased to its customers against loss arising from certain perils. Approximately 90% of the Company's total insurance revenues are derived from the offering of the combined insurance product to credit card customers of Colonial National and ANB. ADVANTA PARTNERS Advanta Partners LP is a private venture capital equity investment firm formed in 1994. The firm focuses primarily on growth capital financings, restructurings and management buyouts in the financial services and information services industries. The investment objective of Advanta Partners is to earn attractive returns by building the long-term values of the businesses in which it invests. Advanta Partners combines transaction expertise, management skills and a broad contact base with strong industry- specific knowledge which is further enhanced by its relationship with the Company. 10 10 Advanta Corp. and Subsidiaries DEVELOPMENTAL INITIATIVES The Company has initiated a number of new programs focused on creating new products, entering new markets and expanding the Company's channels of delivery. As part of the Company's expansion into new markets, in 1995 the Company formed a joint venture with The Royal Bank of Scotland to market, issue and service bankcards in the United Kingdom. While initial test mailings have generated positive response, this effort was not material to the Company in 1995. The Company believes that the joint venture will not be material to earnings in 1996. Additionally, the Company has developed and launched several branded credit card products. The Company is continuing to explore new product concepts and expects to introduce new products in 1996. (See "Advanta Personal Payment Services"). Simultaneously, the Company is exploring new technologies and delivery systems related to payment services. In 1995 the Company formed a unit within Advanta Personal Finance that is expected to conduct business within automobile finance. The Company continues to engage in research development activities with respect to products and services outside the financial services sector. DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS The Company offers a range of insured deposit products through Colonial National and ANB and offers uninsured investment products of Advanta Corp. through both direct retail and underwritten sales of debt securities. In October 1995, the Company ceased selling subordinated retail investment notes, and instead began offering senior retail investment notes which (like the previous subordinated notes) are marketed by print advertising and direct mail solicitations to existing and prospective individual investors. In addition to the senior retail investment note program, the Company has filed a senior debt shelf registration with the Securities and Exchange Commission covering $1 billion of securities. As of December 31, 1995 $655 million was outstanding and $325 million remained available for sale under this shelf. The Company also filed a "universal shelf" registration statement in June 1995 for $500 million of debt and/or equity securities. In July 1995, $92.5 million of 6 3/4% Convertible Class B Preferred Stock was issued under that shelf. Investments in the Company's senior debt securities are primarily marketed to institutional investors. In addition, the Company has further diversified its funding capacity through the ability to borrow under a $510 million committed revolving bank line of credit from a consortium of domestic and international banks. Bank deposit products include at Colonial National: demand deposits, money market savings accounts, statement savings accounts, and retail certificates of deposit; and at both Colonial National and ANB: large denomination certificates of deposit (certificates of $100,000 or more). Consumer deposit business at Colonial National is generated from repeat sales to existing depositors and from new depositors attracted by newspaper advertising and direct mail solicitations. ANB is limited to the issuance of deposits having a minimum size of $100,000. The deposits and senior debt securities of the Banks continue to have investment grade ratings from the nationally recognized rating agencies. These ratings, which were first achieved in 1993 for Colonial National, and in 1995 for ANB, have allowed the Banks to further diversify their funding sources. The Banks, in September 1995, filed an offering circular with the Office of the Comptroller of the Currency for $2 billion in senior bank term debt and $250 million in subordinated bank term debt. As of December 31, 1995, $348 million of senior bank debt was outstanding under that offering circular. In addition to the funding diversity provided by the debt issuance capacity of the Company and the debt and deposit raising capabilities of the Banks, Advanta Financial Corp. ("AFC") has been taking deposits in the form of certificates of deposit since January 1992. AFC is an FDIC-insured industrial loan corporation organized under the laws of the State of Utah. As of December 31, 1995, AFC's funding capacity was not material to the Company. 11 11 Advanta Corp. and Subsidiaries GOVERNMENT REGULATION THE COMPANY The Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company owns Colonial National, which is a "bank" as defined under the BHCA as amended by the Competitive Equality Banking Act of 1987 ("CEBA"). However, under certain grandfathering provisions of CEBA, the Company is not required to register as a bank holding company under the BHCA, because Colonial National, which takes demand deposits but does not make commercial loans, did not come within the BHCA's definition of the term "bank" prior to the enactment of CEBA and it complies with certain restrictions set forth in CEBA, such as limiting its activities to those in which it was engaged prior to March 5, 1987 and limiting its growth rate to not more than 7% per annum. Such restrictions also prohibit Colonial National from cross-marketing products or services of an affiliate that are not permissible for bank holding companies under the BHCA. In addition, the Company complies with certain other restrictions set forth in CEBA, such as not acquiring control of more than 5% of the stock or assets of an additional "bank" or "savings association" as defined for these purposes under the BHCA. Consequently, the Company is not subject to examination by the Federal Reserve Board (other than for purposes of assuring continued compliance with the CEBA restrictions referenced in this paragraph). Should the Company or Colonial National cease complying with the restrictions set forth in CEBA, registration as a bank holding company under the BHCA would be required. Registration as a bank holding company is not automatic. The Federal Reserve Board may deny an application if it determines that control of a bank by a particular company will cause undue interference with competition or that such company lacks the financial or managerial resources to serve as a source of strength to its subsidiary bank. While the Company believes that it meets the Federal Reserve Board's managerial standards and that its ownership of Colonial National has improved the bank's competitiveness, should the Company be required to apply to become a bank holding company the outcome of any such application cannot be certain. Registration as a bank holding company would subject the Company and its subsidiaries to inspection and regulation by the Federal Reserve Board. Although the Company has no plans to register as a bank holding company at this time, the Company believes that registration would not restrict, curtail, or eliminate any of its activities at current levels, except that some portions of the current business operations of the Company's insurance subsidiaries would have to be discontinued, the effects of which would not be material. However, the Company is actively exploring additional lines of business, some of which the Company might not be able to pursue as a registered bank holding company under the BHCA. Under CEBA, neither ANB nor AFC is considered a "bank" for purposes of the BHCA, and so the Company's ownership of these institutions does not impact the Company's exempt status under the BHCA. ANB is a "credit card bank" under CEBA, and as such is subject to certain restrictions, including that it may only engage in credit card operations, it may not offer checking or transaction accounts, and it may only accept time deposits in amounts of $100,000 or more. However, unlike Colonial National, ANB's growth is not limited to 7% per annum. COLONIAL NATIONAL BANK USA AND ADVANTA NATIONAL BANK (THE "BANKS") The Company acquired Colonial National in 1982 and organized ANB in 1995. Both of the Banks are national banking associations organized under the laws of the United States of America. Colonial National's headquarters (which is also its sole branch) is located in Claymont, Delaware, and ANB's only office, its headquarters, is located in Wilmington, Delaware. ANB was chartered to complement the credit card activities of Colonial National. ANB is a "credit card bank," a class of FDIC-insured depository institution created under CEBA, which can only engage in credit card operations, can only 12 12 Advanta Corp. and Subsidiaries accept deposits in denominations of $100,000 or more, may not offer transaction (e.g., checking) accounts, may only maintain one office for the collection of deposits, and may not engage in commercial lending activities. The Company conducts substantially all of its consumer credit card lending business through the Banks, and conducts a large portion of its mortgage lending business through Colonial National. Under Federal law, the Banks may "export" (i.e., charge its customers resident in other states) the finance charges permissible under the law of their state of domicile, Delaware, which state has no usury statute applicable to banks. Consistent with prevailing industry practice, the Company also exports credit card fees (including, for example, annual fees, late charges, returned payment check fees and fees for exceeding credit limits) permitted under Delaware law. There is no precedent clearly applicable to the Banks as to the permissibility of exporting such fees. In a case involving this issue (to which the Company was not a party), the United States Court of Appeals for the First Circuit ruled that the Commonwealth of Massachusetts did not have the power to prevent a Delaware state-chartered financial institution from charging Massachusetts residents credit card fees in excess of those allowed under Massachusetts law. The United States Supreme Court declined to consider an appeal of the First Circuit's decision, and so that decision became final in 1992. However, litigation involving this issue has been initiated against various credit card issuers in other states, including one such lawsuit filed against Colonial National in the Court of Common Pleas, Philadelphia County, Pennsylvania on June 28, 1995, and there can be no assurance that either or both of the Banks will not also be named as defendants in future lawsuits or administrative actions challenging the fees and charges which they assess residents of other states. The Supreme Courts of California, Colorado and New Jersey have recently handed down decisions in similar actions. The California and Colorado Supreme courts opined that federal law governed late fees and found for the respective defendant banks, while the New Jersey Supreme Court found that late payment fees are not interest, and that, therefore, state law is not preempted by federal law with respect to such late fees. On January 19, 1996, the U.S. Supreme Court accepted an appeal of the California Supreme Court decision which found that the charge in question was governed by federal law and was therefore proper. Such actions and similar actions which may be brought in other states as a result of such actions, if resolved adversely to bank credit card issuers and, if supported by the U.S. Supreme Court, could have the effect of limiting certain charges, other than periodic finance charges, that could be assessed on credit card accounts of residents of such states and could require credit card issuers such as the Banks to pay refunds and civil penalties with respect to charges previously imposed on cardholders in such states. The Company cannot quantify the impact on its business, as a result of possible loss of fees, penalties or other sanctions, that could result from an adverse determination on this issue in one or more states. The Banks are subject primarily to regulation and periodic examination by the Office of the Comptroller of the Currency (the "Comptroller"). Such regulation relates to the maintenance of reserves for certain types of deposits, the maintenance of certain financial ratios, transactions with affiliates and a broad range of other banking practices. As national banks, the Banks are subject to provisions of federal law which restrict their ability to extend credit to their affiliates or pay dividends to their parent company. See "Dividends and Transfers of Funds." The Banks are subject to capital adequacy guidelines approved by the Comptroller. These guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. As of December 31, 1995, the minimum required ratio of total capital to risk-weighted assets (including certain off-balance sheet items) was 8%. At least half of the total capital is to be comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock ("Tier 1 capital"). The remainder may consist of other preferred stock, certain hybrid debt/equity instruments, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses ("Tier 2 capital"). In addition, the Comptroller has also adopted a minimum leverage ratio (Tier 1 capital divided by total average assets) of 3% for national banks that meet certain specified criteria, including that they have the highest regulatory rating. Under this guideline, the minimum leverage ratio would be at least 1 13 13 Advanta Corp. and Subsidiaries or 2 percentage points higher for national banks that do not have the highest regulatory rating, for national banks undertaking major expansion programs, and for other national banks in certain circumstances. As of December 31, 1995, Colonial National's Tier 1 capital ratio was 7.30%, its combined Tier 1 and Tier 2 capital ratio was 11.56%, and its leverage ratio was 6.79%. At December 31, 1995, ANB's Tier 1 capital ratio was 8.04%, its combined Tier 1 and Tier 2 capital ratio was 12.28%, and its leverage ratio was 7.87%. Recognizing that the risk-based capital standards address only credit risk (and not interest rate, liquidity, operational or other risks), the Comptroller has indicated that many national banks will be expected to maintain capital in excess of the minimum standards. As indicated above, both of the Banks' respective capital levels currently exceed the minimum standards. To date, the Comptroller has not required either of the Banks to maintain capital in excess of the minimum standards. However, there can be no assurance that such a requirement will not be imposed in the future, or if it is, what higher standard will be applicable. In addition, pursuant to certain provisions of the FDIC Improvement Act of 1991 ("FDICIA") and regulations promulgated thereunder, FDIC insured institutions such as the Banks may only accept brokered deposits without FDIC permission if they meet certain capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are "well-capitalized." To be "well-capitalized," a bank must have a ratio of total capital to risk-weighted assets of not less than 10%, Tier 1 capital to risk-weighted assets of not less than 6%, and a Tier 1 leverage ratio of not less than 5%. Based on the applicable standards under these regulations, both of the Banks are currently "well-capitalized," and the Company intends to maintain both Banks as "well-capitalized" institutions. ADVANTA FINANCIAL CORP. In January 1992, Advanta Financial Corp. ("AFC") opened for business and began accepting deposits. AFC is an FDIC-insured industrial loan corporation organized under the laws of the State of Utah and is subject to examination and regulation by both the FDIC and the Utah Department of Financial Institutions. At December 31, 1995, AFC had deposits of $38 million and total assets of $78 million. Currently, AFC's principal activities consist of small ticket equipment lease financing and issuance of the "Advanta business card" credit card marketed by ABS. The Company anticipates that AFC's managed receivables base of Advanta business card loans will grow significantly in 1996. LENDING AND LEASING ACTIVITIES The Company's activities as a lender are also subject to regulation under various federal and state laws including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Community Reinvestment Act, the Electronic Funds Transfer Act, and the Fair Credit Reporting Act. Provisions of those statutes, and related regulations, among other matters, require disclosure to borrowers of finance charges in terms of an annual percentage rate, prohibit certain discriminatory practices in extending credit, require the Company's FDIC-insured depository institutions to serve the banking needs of their local communities, and regulate the dissemination and use of information relating to a borrower's creditworthiness. Certain of these statutes and regulations also apply to the Company's leasing activities. In addition, Advanta Mortgage, Advanta Finance and their respective subsidiaries are subject to licensure and regulation in various states as mortgage bankers, mortgage brokers, and originators, sellers and servicers of mortgage loans. DIVIDENDS AND TRANSFERS OF FUNDS There are various legal limitations on the extent to which Colonial National, AFC or ANB can finance or otherwise supply funds through dividends, loans or otherwise to the Company and its affiliates. The prior approval of the Comptroller is required if the total of all dividends declared by either of the Banks in any calendar year exceeds that institution's net profits (as defined) for that year combined with its retained 14 14 Advanta Corp. and Subsidiaries net profits for the preceding two years, less any required transfers to surplus accounts. In addition, neither Colonial National nor ANB may pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. The Comptroller also has authority under the Financial Institutions Supervisory Act to prohibit a national bank from engaging in any unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the Comptroller could claim that a dividend payment might under some circumstances be an unsafe or unsound practice. Colonial National, AFC and ANB are also subject to restrictions under Sections 23A and 23B of the Federal Reserve Act. These restrictions limit the transfer of funds by the depository institution to the Company and certain other affiliates, as defined in that Act, in the form of loans, extensions of credit, investments or purchases of assets, and they require generally that the depository institution's transactions with its affiliates be on terms no less favorable to the bank than comparable transactions with unrelated third parties. These transfers by any one institution to the Company or any single affiliate are limited in amount to 10% of the depository institution's capital and surplus and transfers to all affiliates are limited in the aggregate to 20% of the depository institution's capital and surplus. Furthermore, such loans and extensions of credit are also subject to various collateral requirements. In addition, in order for the Company to maintain its grandfathered exemption under CEBA, neither Colonial National nor ANB may make any loans to the Company or any of its subsidiaries. REGULATION OF INSURANCE The insurance subsidiaries are subject to the laws and regulations of, and supervision by, the states in which they are domiciled or have obtained authority to transact insurance business. These states have adopted laws and regulations which govern all marketing, administration and financial operations of an insurance company, including dividend payments and financial solvency. In addition, the insurance subsidiaries have registered as an Arizona Holding Company which requires approval of transactions between all affiliated entities. The maximum dividend that any of the insurance subsidiaries can distribute to its parent in any twelve month period without prior approval of the State of Arizona Department of Insurance is the lesser of 10% of the subsidiary's statutory surplus or its net income for any given twelve month period (if a life insurance company) or net investment income (if a property and casualty insurance company). The State of Arizona has adopted minimum risk-based capital standards as developed by the National Association of Insurance Commissioners. Risk-based capital is the quantification of an insurer's surplus requirements based on financial balances and underwriting activity risks. The ratio of an insurer's total adjusted capital and surplus, as defined, is compared to various levels of risk-based capital to determine what intervention, if any, is required by either the insurance company or an insurance department. All of the insurance companies meet all risk-based capital standards and require no action by any party. The Company's insurance subsidiaries reinsure risks whose underwriting insurance practices and rates are regulated in part or fully by state insurance departments. These rates are continually being reviewed and modified by the state insurance departments based on prior historical experience. Any modifications may impact the future profitability of the Company's insurance subsidiaries. GENERAL Because the banking and finance businesses in general are the subject of such extensive regulation at both the state and federal levels, and because numerous legislative and regulatory proposals are advanced each year which, if adopted, could affect the Company's profitability or the manner in which the Company conducts its activities, the Company cannot now predict the extent of the impact of any such new laws or regulations. 15 15 Advanta Corp. and Subsidiaries Various legislative proposals have been introduced in Congress in recent years, including, among others, proposals relating to imposing a statutory cap on credit card interest rates, permitting affiliations between banks and commercial or securities firms, and proposals which would place new restrictions on a lender's ability to utilize prescreening of consumers' credit reports through credit reporting agencies (credit bureaus) in connection with the lender's direct marketing efforts. It is impossible to determine whether any of these proposals will become law and, if so, what impact they will have on the Company. In 1994, Congress adopted the Interstate Banking and Branching Efficiency Act, which statute permits nationwide interstate bank acquisitions beginning in 1995, and interstate bank branching in 1997 (or earlier at a state's option). The Company does not currently believe that the changes in the country's banking system wrought by this statute will materially impact the Company's business. COMPETITION As a marketer of credit products, the Company faces intense competition from numerous providers of financial services. Many of these companies are substantially larger and have more capital and other resources than the Company. Competition among lenders can take many forms including convenience in obtaining a loan, customer service, size of loans, interest rates and other types of finance or service charges, duration of loans, the nature of the risk which the lender is willing to assume and the type of security, if any, required by the lender. Although the Company believes it is generally competitive in most of the geographic areas in which it offers its services, there can be no assurance that its ability to market its services successfully or to obtain an adequate yield on its loans will not be impacted by the nature of the competition that now exists or may develop. In both domestic and international VISA and MasterCard markets, the Company competes with national, regional, and local issuers. Additionally, American Express, and the Discover Card represent additional competition in the general purpose credit card markets in the United States. The Company does not believe that single purpose credit cards such as oil company, department store or telephone credit cards represent a significant competitive threat. A large segment of customers have been attracted to credit card issuers largely on the basis of product features, including price and credit limit; as such, customer loyalty may be limited. As a result, account and balance attrition can be significant factors in the credit card industry. In seeking investment funds from the public, the Company faces competition from banks, savings institutions, money market funds, credit unions and a wide variety of private and public entities which sell debt securities, some of which are publicly traded. Many of the competitors are larger and have more capital and other resources than the Company. Competition relates to such matters as rate of return, collateral, insurance or guarantees applicable to the investment (if any), the amount required to be invested, convenience and the cost to and conditions imposed upon the investor in investing and liquidating his investment (including any commissions which must be paid or interest forfeited on funds withdrawn), customer service, service charges, if any, and the taxability of interest. EMPLOYEES As of December 31, 1995, the Company had 2,409 employees, up from 1,753 employees at the end of 1994. The Company believes that it has good relationships with its employees. None of its employees are represented by a collective bargaining unit. CAUTIONARY STATEMENTS Information or statements provided by the Company from time to time may contain certain "forward-looking information" including information relating to anticipated growth in earnings per share, anticipated 16 16 Advanta Corp. and Subsidiaries returns on equity, anticipated growth in managed loans outstanding and credit card accounts, anticipated net interest margins, anticipated operations costs and employment growth, anticipated marketing expense or anticipated delinquencies and charge-offs. The cautionary statements provided below are being made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act for any such forward-looking information. Many of the following important factors discussed below as well as other factors have also been discussed in the Company's prior public filings. The Company cautions readers that any forward-looking information provided by the Company is not a guarantee of future performance and that actual results may differ materially from those in the forward-looking information as a result of various factors, including but not limited to: -- The impact of repricing accounts and the overall product mix of accounts on the Company's net interest margins; the actual amount of accounts (and related loan balances) repriced and the level and type of account originations at that time; and the ability of the Company on a competitive basis to use account management techniques to retain repriced accounts and the related loan balances. If the repriced accounts experience greater attrition than expected it could have an adverse financial effect on the Company. -- Increased credit losses (including increases due to a worsening of general economic conditions and decreases in property values), increased collection costs associated with rising delinquency levels, costs associated with an increase in the number of customers seeking protection under the bankruptcy laws, resulting in accounts being charged off as uncollectible, and costs and other effects of fraud by third parties or customers. -- Intense and increasing competition from numerous providers of financial services who may employ various competitive strategies. The Company faces competition from national, regional and local issuers of bankcards in each of its markets, some of which have substantially greater resources than the Company. Additionally, the Company competes with other general purpose credit card providers. More of the Company's competitors have begun pricing credit card products at attractive interest rates, including rates at or below those currently charged by the Company. -- The effects of interest rate fluctuations on the Company's net interest margin and the value of its assets and liabilities; the impact of the level of interest rates on mortgage prepayment activity; the continued legal or commercial availability of techniques (including interest rate swaps and similar financial instruments, loan repricing, hedging and other techniques) used by the Company to manage the risk of such fluctuations and the continuing operational viability of those techniques. -- Difficulties or delays in the securitization of the Company's receivables and the resulting impact on the cost and availability of such funding. Such difficulties and delays may result from changes in the availability of credit enhancement in securitizations, the current legal, regulatory, accounting and tax environment and adverse change in the performance of the securitized assets. -- Changes in the Company's aggregate accounts or loan balances and the growth rate thereof, including changes resulting from factors such as shifting product mix, amount of actual marketing investment made by the Company, attrition of accounts and loan balances (to competing card issuers in connection with repricing of customers or otherwise) and general economic conditions and other factors beyond the control of the Company. For customers that are attracted to credit card issuers largely on the basis of price, customer loyalty may be limited. 17 17 Advanta Corp. and Subsidiaries -- The impact of "seasoning" (the average age of a lender's portfolio) on the Company's level of delinquencies and losses which may require higher loan loss provisions and one or two reserves for on-balance sheet assets, and may adversely impact credit card, mortgage and leasing securitization income. The addition of account originations or balances and the attrition of such accounts or balances could significantly impact the seasoning of the overall portfolio. -- The amount, and rate of growth in, the Company's expenses (including employee and marketing expenses) as the Company's business develops or changes and the Company expands into new market areas; the acquisition of assets (interest-earning, fixed or other); and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. -- The amount, type and cost of financing available to the Company, and any changes to that financing; the effects of changes within the Company's organization or in its compensation and benefit plans; the activities of parties with which the Company has agreements or understandings, including any activities affecting any investment. -- Difficulties or delays in the development, production, testing and marketing of products or services, including, but not limited to, a failure to implement new product or service programs when anticipated, the failure of customers to accept these products or services when planned, losses associated with the testing of new products or services or financial, legal or other difficulties as may arise in the course of such implementation. -- The effects of, and changes in, monetary and fiscal policies, laws and regulations (financial, consumer regulatory or otherwise), other activities of governments, agencies and similar organizations, and social and economic conditions, such as inflation, and changes in taxation of the Company's earnings. -- The costs and other effects of legal and administrative cases and proceedings, settlements and investigations, claims and changes in those items, developments or assertions by or against the Company or its subsidiaries; adoptions of new, or changes in existing, accounting policies and practices and the application of such policies and practices. ITEM 2. PROPERTIES. The Company leases an aggregate of approximately 213,000 square feet of office space in five office buildings located in Horsham, Pennsylvania, a Philadelphia suburb, and owns three buildings in Horsham aggregating approximately 218,000 square feet. The Company also leases an aggregate of approximately 88,000 square feet of office space for its Advanta Mortgage and Advanta Finance offices in Arizona, California, Colorado, Maryland, Missouri, Pennsylvania and Virginia. In New Jersey, Advanta Business Services owns a 56,000 square foot building and leases an aggregate of approximately 21,000 square feet of office space. In Utah, Advanta Financial Corp. leases an aggregate of approximately 7,000 square feet of office space. The Company's principal executive offices are currently located in approximately 33,000 square feet of owned space in Horsham, Pennsylvania. ANB's and Colonial National's respective principal operating offices are currently located in approximately 88,000 square feet of leased space in two office buildings in Delaware. 18 18 Advanta Corp. and Subsidiaries ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 19 19 Advanta Corp. and Subsidiaries EXECUTIVE OFFICERS OF THE REGISTRANT Each of the executive officers of the Company listed below was elected by the Board of Directors, to serve at the pleasure of the Board in the capacities indicated.
DATE NAME AGE OFFICE ELECTED ---- --- ------ ------- Dennis Alter 53 Chairman of the Board 1972 Alex W. Hart 55 Chief Executive Officer and 1995 Director Richard A. Greenawalt 52 President, Chief Operating Officer and 1987 Director William A. Rosoff 52 Vice Chairman 1996 James J. Allhusen 47 Executive Vice President 1995 James W. John 45 Senior Vice President, Administration 1994 Arthur D. Kranzley 45 Senior Vice President 1995 Albert E. Lindenberg 43 President and Director, Advanta 1988 Business Services Robert A. Marshall 55 Executive Vice President and Group 1993 Executive, Advanta Personal Payment Services Charles H. Podowski 49 President and Director, Advanta 1995 Insurance Companies Milton Riseman 59 President and Director, Advanta 1994 Mortgage Corp. USA and Subsidiaries John W. Roblin 50 Senior Vice President and Chief 1995 Information Officer, Advanta Personal Payment Services David D. Wesselink 53 Senior Vice President and Chief 1993 Financial Officer Ronald W. Averett 39 Vice President 1988 Jeffrey D. Beck 47 Vice President and Treasurer 1992 John J. Calamari 41 Vice President, Finance 1988 Katharin S. Dyer 38 Vice President, Marketing 1992
20 20 Advanta Corp. and Subsidiaries Michael A. Girman 46 Vice President, Audit and Control 1991 John B. Hofmann 49 Vice President, Human Resources 1987 Edward E. Millman 44 Vice President and Chief Financial 1993 Officer, Advanta Personal Payment Services Gene S. Schneyer 42 Vice President, Secretary and General 1989 Counsel
Mr. Alter became Executive Vice President and a director of the Company in 1967. He was elected President and Chief Executive Officer in 1972, and Chairman of the Board of Directors in August 1985. In February 1986, he relinquished the title of President, and in August 1995 he relinquished the title of Chief Executive Officer. Mr. Hart joined the Company in March 1994 as a Director and Executive Vice Chairman. He became Chief Executive Officer in August 1995. For the five years prior to joining the Company he had been President and Chief Executive Officer of MasterCard International, Inc., a worldwide association of over 29,000 member financial institutions. Prior to joining MasterCard in November 1988, Mr. Hart was Executive Vice President of First Interstate Bancorp, Los Angeles, California. Mr. Greenawalt was elected President and Chief Operating Officer of the Company in November 1987. Prior to joining the Company, Mr. Greenawalt served as President of Transamerica Financial Corp., Los Angeles, California, from May 1986. For the 15 years prior to that, Mr. Greenawalt served in various capacities with Citicorp, including most recently as Chairman and Chief Executive Officer of Citicorp Person-to-Person, Inc., St. Louis, Missouri, and, prior to that, as President and Chief Executive Officer of Citicorp Retail Services, Inc., New York, New York. Mr. Rosoff, age 52, joined the Company in January 1996 as a Director and Vice Chairman. Prior to joining the Company, Mr. Rosoff was a long time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen, the Company's outside counsel, where he advised the Company for over 20 years. While at Wolf, Block, Schorr and Solis-Cohen he served as Chairman of its Executive Committee and, immediately before joining the Company, as a member of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff is a Trustee of RPS Realty Trust. Mr. Allhusen was elected Executive Vice President of the Company in October 1995. Prior to joining the Company, from 1990 Mr. Allhusen served Standard Chartered Bank in various capacities, most recently as General Manager for the Middle East and South Asia region located in Dubai, United Arab Emirates. Prior to joining Standard Chartered Bank, Mr. Allhusen worked for Household Bank from 1986 to 1990 as its President, Midwest Division. Mr. John joined the Company in June 1994 as Senior Vice President, Administration. From April 1989 until joining the Company, Mr. John was with MasterCard International where he was Executive Vice President responsible for Canada, Latin America, and the Caribbean Regions. From 1983 until joining MasterCard International, Mr. John was Vice President of First Interstate Bancorp where he was responsible for a wide range of activities in consumer banking and operations. Mr. Kranzley was elected Senior Vice President of the Company in October 1995. For five years prior to joining the Company Mr. Kranzley was Senior Vice President and General Manager of Debit Products for MasterCard International. In this capacity Mr. Kranzley also served as President and Chief Executive Officer of Maestro U.S.A., Inc., the membership corporation of the Maestro global, on-line point-of-sale debit program in the United States. 21 21 Advanta Corp. and Subsidiaries Mr. Lindenberg had been the Chairman of the Board and President of an equipment leasing business, LeaseComm Financial Corporation, from that company's inception in June 1985 until its purchase by the Company. Following the acquisition, Mr. Lindenberg was elected President and Chief Executive Officer of Advanta Business Services, the successor to LeaseComm. Prior to starting LeaseComm, Mr. Lindenberg had been with First Pennsylvania Bank, Philadelphia, Pennsylvania since 1982, where he had served in various capacities, most recently as Vice President of the national division responsible for that bank's commercial lending activities in leasing and electronics. Mr. Marshall joined the Company in January 1988 and was elected Senior Vice President in February 1988. In August 1993 he was elected Executive Vice President and Group Executive, Advanta Personal Payment Services. Prior to joining the Company, from July 1987 he was Chief Operations Officer of a Scudder, Stevens & Clark joint venture. Prior to that, Mr. Marshall served in various capacities at Citibank from 1976. At the time he left Citibank, he was a Senior Vice President of Citicorp Retail Services, managing a major portion of its client relationships. Mr. Podowski was elected President of Advanta Insurance Companies in April 1995. Prior to joining the Company Mr. Podowski served CIGNA Corporation in various capacities for seventeen years, most recently as Senior Vice President in their International Division, with responsibility for CIGNA's life subsidiaries in Asia and Australia. Prior to joining CIGNA Mr. Podowski worked for The Chase Manhattan Bank, N.A. Mr. Riseman came to the Company in June 1992 as Senior Vice President, Administration. In February 1994, Mr. Riseman became President and Director of Advanta Mortgage Corp. USA and its subsidiaries. Prior to joining the Company, Mr. Riseman had 27 years experience with Citicorp, most recently as Director of Training and Development. Prior to that he held Citicorp positions as Business Manager for the Long Island Region, Head of Policy and Administration for New York's Retail Bank, and Chairman of Citicorp Acceptance Co. which was involved in the financing and leasing of autos and financing of mobile homes. Mr. Roblin became Senior Vice President and Chief Information Officer, Advanta Personal Payment Services, in December 1994. Prior to joining the Company, Mr. Roblin spent nineteen years with the Chubb Group of Insurance Companies in Warren, New Jersey holding a variety of positions. He was the Chief Information Office and a Managing Director of Chubb from 1986 through 1991. In 1991 he joined USF&G in Baltimore as Chief Information Officer and Senior Vice President until 1993. After a year as an independent consultant, he briefly joined the Personal Lines Division of the Travelers Insurance Companies in Hartford, Connecticut as Chief Information Officer from May, 1994 to November, 1994. Mr. Wesselink joined the Company in November 1993 as Senior Vice President and Chief Financial Officer after serving as Vice President and Treasurer of Household International for the previous seven years. Prior to that, he served in various capacities at Household from 1971, including Vice President and Director of Research, Group Vice President and Chief Financial Officer, and Senior Vice President and Chief Financial Officer of Household Finance Corporation. Mr. Averett came to the Company as Vice President in January 1988. Prior to joining the Company, Mr. Averett worked with Citicorp from 1980 to 1987. Most of this tenure was in a retail credit card division (CRS) holding a wide array of positions from financial analyst to credit cycle manager and eventually Regional Collections Manager. Mr. Beck joined the Company in 1986 as Senior Vice President of Colonial National and was elected Vice President and Treasurer in 1992. Prior to joining the Company, he was Vice President at Fidelity Bank, N.A., responsible for asset/liability planning, as well as for managing a portfolio of investment securities held at the bank. From 1970 through 1980, he served in various treasury and planning capacities for Wilmington Trust Company. 22 22 Advanta Corp. and Subsidiaries Mr. Calamari joined the Company in May 1988. From May 1985 through April 1988, Mr. Calamari served in various capacities in the accounting departments of Chase Manhattan Bank, N.A. and its subsidiaries, culminating in the position of Chief Financial Officer of Chase Manhattan of Maryland. From 1976 until May 1985, Mr. Calamari was an accountant with the public accounting firm of Peat, Marwick, Mitchell in New York. Ms. Dyer joined the Company as Vice President, Marketing in 1992. Prior to joining the Company, she was Vice President and Director of Marketing for the Retail Finance Division of MNC Financial. From 1985 to 1989, she was Director, Product Development and Management at the Student Loan Marketing Association and had previously held marketing management positions with Citicorp in their credit card, mortgage and consumer finance businesses. Mr. Girman joined the Company as Vice President, Accounting Operations, Policies and Procedures in July 1988, and was elected Vice President, Audit and Control, in April 1991. Prior thereto, Mr. Girman served as Vice President, Management Accounting and Accounting Policies and Procedures for The Chase Manhattan Bank (USA), N.A. from April 1985 until joining the Company. Mr. Hofmann came to the Company as Director of Human Resources in November 1986 and was elected Vice President, Human Resources in March 1987. Prior to joining the Company, he was Manager, Human Resources Planning and Development for Subaru of America, Inc. from October 1984, and Manager, Management and Organization Development for Shared Medical Systems, Inc. from March 1981 until October 1984. Mr. Millman joined the Company in September 1989 and was elected Assistant Treasurer in July 1990. Prior to joining the Company, Mr. Millman served as Director of Financial Planning for Knight-Ridder, Inc. from March 1987 to January 1988, and as Chief Financial Officer of Osteotech, Inc. from January 1988 to September 1989. Mr. Millman was elected Vice President, Corporate Funds Management in August 1991, and Vice President and Chief Financial Officer, Advanta Personal Payment Services in December 1993. Mr. Schneyer joined the Company as Associate General Counsel in September 1986 and was elected to the offices of Vice President, Secretary and General Counsel in March 1989. Prior to joining the Company, from October 1983 Mr. Schneyer was an attorney in the Legal Department of Allied-Signal, Inc., Morristown, New Jersey. 23 Advanta Corp. and Subsidiaries PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market(SM) under the symbols ADVNB (non- voting common stock) and ADVNA (voting common stock). Following are the high, low and closing sale prices and cash dividends declared for the last two years as they apply to each class of stock:
Cash Dividends Quarter Ended: High Low Close Declared - - -------------------------------------------------------- March 1994 $33.25 $26.00 $29.25 $ .06 June 1994 37.50 28.75 32.25 .06 September 1994 34.75 26.50 29.25 .06 December 1994 30.50 23.25 25.25 .08 March 1995 32.25 24.50 31.25 .08 June 1995 38.75 30.75 37.75 .08 September 1995 42.50 36.00 42.50 .08 December 1995 45.00 35.13 36.38 .108 - - -------------------------------------------------------- Class A: - - -------------------------------------------------------- March 1994 $36.00 $26.50 $31.50 $ .05 June 1994 41.75 30.50 35.63 .05 September 1994 37.50 28.25 30.13 .05 December 1994 33.50 24.25 26.25 .067 March 1995 34.75 25.50 33.50 .067 June 1995 42.50 33.00 41.69 .067 September 1995 46.25 39.50 45.00 .067 December 1995 48.88 37.50 38.25 .09 ========================================================
At December 31, 1995, the Company had approximately 930 and 700 holders of record of Class B and Class A common stock, respectively. ITEM 6. SELECTED FINANCIAL DATA. Financial Highlights
(In thousands, except per share amounts) Year Ended December 31, - - --------------------------------------------------------------------------------------------------------------------------- Five-Year 1995 1994 1993 1992 1991 1990 CAGR(2) - - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net operating revenues(1) $ 615,914 $ 447,837 $ 334,224 $ 266,320 $ 207,347 $ 139,948 34% Net interest income 72,900 70,381 78,644 73,176 73,990 62,964 3 Noninterest revenues 543,014 395,808 255,580 193,144 133,357 85,894 45 Provision for credit losses 53,326 34,198 29,802 47,138 55,461 42,411 5 Operating expenses 350,685 266,784 181,167 142,082 112,567 83,917 33 Income before income taxes and extraordinary items 211,903 165,207 123,255 77,100 39,319 22,530 57 Income before extraordinary items 136,677 106,063 77,920 48,037 25,165 15,095 55 Net income 136,677 106,063 76,647 48,037 25,165 15,095 55 - - --------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Income before extraordinary items $ 3.20 $ 2.58 $ 1.95 $ 1.38 $ .81 $ .53 43% Net income 3.20 2.58 1.92 1.38 .81 .53 43 Cash dividends declared(3) Class B .348 .260 .200 .104 N/A N/A * Class A .290 .217 .167 .107 .063 .037 51 Book value 14.35 11.12 8.82 5.22 3.70 2.60 41 Average shares used to compute EPS(4) 42,670 41,046 39,777 34,590 31,044 28,053 9 Closing stock price Class B 36.38 25.25 29.00 19.33 N/A N/A * Class A 38.25 26.25 33.25 21.58 11.50 3.33 63 - - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION--YEAR END Investments and money market instruments $ 1,090,047 $ 671,661 $ 542,222 $ 521,567 $ 270,267 $ 187,631 42% Gross receivables Owned 2,762,927 1,964,444 1,277,305 998,244 1,273,420 1,129,493 20 Securitized 9,452,428 6,190,793 3,968,856 2,721,726 1,573,164 980,856 57 Managed 12,215,355 8,155,237 5,246,161 3,719,970 2,846,584 2,110,349 42 Total assets Owned 4,524,259 3,113,048 2,140,195 1,775,067 1,716,350 1,450,942 26 Managed 13,976,687 9,303,841 6,109,051 4,496,793 3,289,514 2,431,798 42 Deposits 1,906,601 1,159,358 1,254,881 1,204,486 1,205,035 1,052,322 13 Long-term debt 587,877 666,033 368,372 173,668 112,609 80,990 49 Stockholders' equity 672,964 441,690 342,741 174,870 118,859 70,895 57 Stockholders' equity and long-term debt 1,260,841 1.107,723 711,113 348,538 231,468 151,885 53 - - --------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS Return on average assets 4.06% 4.47% 3.91% 2.82% 1.63% 1.09% * Return on average common equity 26.15 26.97 27.50 33.32 27.09 23.28 * Return on average total equity 24.75 26.97 27.50 33.32 27.09 23.28 * Equity/Managed assets 4.81 4.75 5.61 3.89 3.61 2.92 * Equity/Owned assets 14.87 14.19 16.01 9.85 6.93 4.88 * Dividend payout 9.97 9.24 9.56 7.69 7.85 6.90 * Managed net interest margin(5) 5.87 6.72 7.77 8.05 7.54 6.70 * As a percentage of managed receivables: Total loans 30 days or more delinquent 3.3 2.7 3.6 5.0 5.6 6.0 * Net charge-offs 2.2 2.3 2.9 3.4 3.2 2.7 * Other operating expenses 2.9 3.7 4.1 4.4 4.6 4.5 * ===========================================================================================================================
(1) Excludes gains on sales of credit card accounts in 1990 and 1994. (2) Compound annual growth rate from December 31, 1990. (3) 1992 cash dividends include dividends for three quarters on the Class B common stock and the full year on the Class A common stock. (4) Includes common stock equivalents. 1995 amount includes equivalent shares related to convertible preferred Class B stock. (5) Combination of owned interest-earning assets/interest-bearing liabilities and securitized credit card assets/liabilities. * Not meaningful. 24 Advanta Corp. and Subsidiaries ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. RESULTS OF OPERATIONS OVERVIEW Net income for 1995 of $136.7 million increased $30.6 million or 29% from the $106.1 million reported for 1994. Earnings per share of $3.20 advanced 24% from the $2.58 reported for 1994. The higher earnings resulted primarily from substantial growth in average managed receivables, partially offset by the contraction in the managed net interest margin. Additionally, disciplined cost management and continued strong credit quality performance enhanced the financial results. Earnings grew in 1995 primarily as a result of a 56% increase in average managed receivables, from $6.1 billion in 1994 to $9.5 billion in 1995, partially offset by an approximate 13% contraction in the managed net interest margin. As a majority of the receivables continue to be securitized, the Company records the net earnings on these securitized receivables as noninterest revenues. Noninterest revenues of $543.0 million in 1995 increased $147.2 million or 37% from $395.8 million in 1994. This increase was primarily due to a 62% increase in average securitized receivables. In 1995, the Company's venture capital unit, Advanta Partners LP, recorded $15.4 million of equity securities gains which are included in noninterest revenues. In 1994, noninterest revenues included an $18.4 million gain on the sale of $150 million of credit card customer relationships. Total other operating expenses (excluding the amortization of credit card deferred origination costs, net) increased only 22% despite the 56% growth in average managed receivables. Thus, the operating expense ratio decreased to 2.9% in 1995 from 3.7% in 1994. The total managed charge-off rate for 1995 fell to 2.2% from 2.3% in 1994. Average managed receivables have tripled from the $3.2 billion reported in 1992. This receivable growth has greatly contributed to higher net income and earnings per share. The Company intends to continue pursuing a strategy of receivable growth with a goal of increasing average managed receivables by 40% or more in 1996. A significant component of this growth strategy is the Company's continuing efforts to market "risk-adjusted" credit card products, whereby credit cards are issued with lower rates to customers whose credit quality is expected to result in a lower rate of credit losses (the "risk-adjusted pricing strategy"). The Company's pricing structure on its credit card products also reflects low "introductory" credit card rates, which reprice upwards after an introductory period of up to one year. In 1995, as in 1994, the impact of these introductory rates was to reduce the managed net interest margin, as the success of the Company's marketing campaigns resulted in substantial growth of new receivables earning interest at the introductory rates. It is estimated that approximately $2.2 billion of receivables will reprice upwards in the first quarter of 1996. At repricing, most of the receivables on these credit cards will have been securitized, and consequently, the enhanced revenues on those receivables will be recorded primarily as increased noninterest revenues (securitization income). Although this will not affect the owned net interest margin, it is expected that it will positively impact the managed net interest margin. Net income for 1994 rose to $106.1 million or $2.58 per share. This reflects increases of 38% and 34%, respectively, from the $76.6 million or $1.92 per share reported in 1993. Earnings for 1994 increased primarily as a result of a $1.9 billion or 45% increase in average managed receivables, improvements in credit quality with the total managed charge-off rate decreasing from 2.9% in 1993 to 2.3% in 1994, and controlled growth in operating expenses. The 45% increase in average managed receivables and an $18.4 million gain on the sale of credit card customer relationships were the major factors in the $140.2 million or 55% increase in noninterest revenues to $395.8 million in 1994, from $255.6 million in 1993. Disciplined cost management resulted in other operating expenses increasing only 30% while average managed receivables grew 45%, lowering the operating expense ratio to 3.7% for 1994 from 4.1% in 1993. EARNINGS PER SHARE [GRAPH]
1991 1992 1993 1994 1995 --------------------------------------------------- .81 1.38 1.92 2.58 $3.20
25 Advanta Corp. and Subsidiaries NET INTEREST INCOME Net interest income represents the excess of income generated from interest earning assets, including receivables, investments and money market instruments over the interest paid on interest-bearing liabilities, primarily deposits and debt. Net interest income of $72.9 million for 1995 increased $2.5 million or 4% from 1994 as a result of a $737 million or 37% increase in average interest earning assets, largely offset by a lower owned net interest margin, which fell to 2.80% in 1995 from 3.67% in 1994. The lower owned net interest margin primarily resulted from a 124 basis point increase in the cost of funds. The yield on average interest earning assets increased 45 basis points, but would have been considerably higher had it not been for the volume of credit card receivables issued at low "introductory" rates. Net interest income of $70.4 million for 1994 decreased $8.3 million or 11% from 1993 as a result of a lower owned net interest margin partially offset by a $336 million increase in average earning asset balances. The significant increase in credit cards offered at low "introductory" rates in 1994 compared to the previous year contributed to the lower owned net interest margin. Credit card, mortgage and lease receivable securitization activity shifts revenues from interest income to noninterest revenues. This ongoing securitization activity reduces the level of higher-yielding receivables on the balance sheet while proportionately increasing the balance sheet levels of new lower-yielding receivables and money market assets. Net interest income on securitized credit card balances is reflected in credit card securitization income. Net interest income on securitized mortgage loans is reflected in income from mortgage banking activities, and net interest income on securitized lease receivables is reflected in leasing revenues, net. All securitization income is included in noninterest revenues. See Note 1 to Consolidated Financial Statements. Average managed credit card receivables of $7.7 billion for 1995 increased $3.0 billion or 64% from 1994. This increase resulted from the very successful marketing of low introductory rate credit cards which generated approximately 1.7 million new accounts and from large volumes of balance transfers from both new and established cardholders. In 1995, average owned credit card receivables were $1.6 billion compared to $1.2 billion in 1994. Owned receivable balances would have been higher in both years had it not been for the securitization of $3.4 billion of credit card receivables in 1995 and $2.2 billion in 1994. Average managed mortgage loans increased to $1.5 billion in 1995, a 26% increase from $1.2 billion in 1994. The average balance of owned mortgage loans increased to $184.9 million in 1995 from $120.0 million in 1994 partially due to the strategic decision not to securitize mortgages in the fourth quarter of 1995. Mortgage loan originations of $773 million in 1995 were up $280 million or 57% from 1994. Yields on owned mortgage loans increased to 9.38% from 8.18% in 1994 reflecting a lower proportion of nonperforming loans on the balance sheet in 1995 versus the prior year. During 1994, the Company initiated a program to repurchase nonperforming loans from the securitization trusts (see discussion under "Provision for Credit Losses"). Average managed lease receivables of $315 million increased $113 million or 56% from 1994. Average owned balances of leases increased only $24 million or 39% during 1995 due to the securitization of $146 million of lease receivables in 1995. Yields on owned leases decreased to 12.59% in 1995 from 14.36% in 1994. An increase in the owned average cost of funds occurred in 1995 as the cost of funds rose to 6.46% from 5.22% in 1994. The full effect of the rising rate environment that began in the first quarter of 1994 was experienced in 1995, as the Federal Funds rate (the rate at which banks borrow from one another) increased from 3.0% in early 1994 to 6.0% in midyear 1995. Consequently, the rollover of deposits and debt during 1995 was at higher rates than in 1994. The Company has utilized derivatives to manage the impact of rising rates on net income (see discussion under "Derivatives Activities"). The following table provides an analysis of both owned and managed interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets) for 1993 through 1995. Average owned loan and lease receivables and the related interest revenues include certain loan fees. 26 Advanta Corp. and Subsidiaries Interest Rate Analysis
($ in thousands) Year Ended December 31, - - ------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------------- ------------------------------- ---------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate - - ------------------------------------------------------------------------------------------------------------------------- ON-BALANCE SHEET Interest-earning assets: Receivables: Credit cards $1,580,352 $ 163,637 10.35% $1,171,266 $117,661 10.05% $ 899,650 $108,518 12.06% Mortgage loans 184,855 17,334 9.38 119,919 9,809 8.18 154,210 15,286 9.91 Leases 84,216 10,603 12.59 60,437 8,681 14.36 57,877 10,825 18.70 Other loans 5,979 446 7.46 3,893 280 7.19 1,911 177 9.26 ---------- --------- ---------- -------- ---------- -------- Total receivables 1,855,402 192,020 10.35 1,355,515 136,431 10.06 1,113,648 134,806 12.10 Federal funds sold 141,031 8,210 5.82 103,674 4,437 4.28 93,507 2,831 3.03 Interest-bearing deposits 371,826 22,243 5.98 196,468 10,216 5.20 177,942 7,927 4.45 Tax-free securities(1) 60,412 3,654 6.05 81,761 4,858 5.94 42,669 2,585 6.06 Taxable investments 296,700 16,121 5.43 250,535 11,899 4.75 223,991 11,324 5.06 ---------- --------- ---------- -------- ---------- -------- Total interest-earning assets(2) $2,725,371 $ 242,248 8.89% $1,987,953 $167,841 8.44% $1,651,757 $159,473 9.65% ========== ========= ===== ========== ======== ===== ========== ======== ===== Interest-bearing liabilities: Deposits: Savings $ 270,550 $ 17,728 6.55% $ 269,583 $ 11,411 4.23% $ 214,351 $ 6,984 3.26% Time deposits under $100,000 547,710 31,618 5.77 560,015 27,543 4.92 686,159 35,676 5.20 Time deposits of $100,000 or more 380,918 23,466 6.16 217,683 9,314 4.28 268,064 10,729 4.00 ---------- --------- ---------- -------- ---------- -------- Total deposits 1,199,178 72,812 6.07 1,047,281 48,268 4.61 1,168,574 53,389 4.57 Debt 981,816 67,908 6.92 583,317 36,347 6.23 302,430 22,951 7.59 Other borrowings 388,340 25,312 6.52 185,298 10,143 5.47 59,957 2,963 4.94 ---------- --------- ---------- -------- ---------- -------- Total interest-bearing liabilities 2,569,334 166,032 6.46 1,815,896 94,758 5.22 1,530,961 79,303 5.18 Net noninterest- bearing liabilities 156,037 172,057 120,796 ---------- ---------- ---------- Sources to fund interest-earning assets $2,725,371 $ 166,032 6.09% $1,987,953 $ 94,758 4.77% $1,651,757 $ 79,303 4.80% ========== ========= ===== ========== ======== ===== ========== ======== ===== Net interest spread 2.43% 3.22% 4.47% ===== ===== ===== Net interest margin 2.80% 3.67% 4.85% ===== ===== ===== OFF-BALANCE SHEET Average balance on securitized: Credit cards $6,105,575 $3,507,801 $2,110,583 Mortgage loans 1,355,383 1,105,610 895,237 Leases 230,696 141,421 87,875 ---------- ---------- ---------- Total average securi- tized receivables 7,691,654 4,754,832 3,093,695 ---------- ---------- ---------- Total average managed receivables $9,547,056 $6,110,347 $4,207,343 ========== ========== ========== MANAGAGED NET INTEREST ANALYSIS(3) Interest-earning assets $8,830,946 $1,081,779 12.25% $5,495,754 $665,009 12.10% $3,762,340 $479,799 12.75% Interest-bearing liabilities $8,674,909 $ 563,385 6.49% $5,323,697 $295,880 5.56% $3,641,544 $187,269 5.14% Net interest spread 5.76% 6.54% 7.61% Net interest margin 5.87% 6.72% 7.77% ========================================================================================================================
(1) Interest and average rate computed on a tax equivalent basis using a statutory rate of 35%. (2) Includes assets held and available for sale, and nonaccrual loans and leases. (3) Combination of owned interest-earning assets/owned interest-bearing liabilities and securitized credit card assets/liabilities. 27 Advanta Corp. and Subsidiaries INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET The following table presents the effects of changes in average volume and interest rates on individual financial statement line items on a tax equivalent basis and including certain loan fees. Changes not solely due to volume or rate have been allocated on a pro rata basis between volume and rate. The effects on individual financial statement line items are not necessarily indicative of the overall effect on net interest income.
($ in thousands) - - --------------------------------------------------------------------------------------------------------------------------- 1995 vs. 1994 1994 vs. 1993 ----------------------------- ----------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ----------------------------- ----------------------------- Volume Rate Total Volume Rate Total - - --------------------------------------------------------------------------------------------------------------------------- Interest income from Loan and lease receivables: Credit cards $42,852 $ 3,124 $45,976 $29,193 $(20,050) $ 9,143 Mortgage loans 5,921 1,604 7,525 (3,068) (2,409) (5,477) Leases 2,799 (877) 1,922 505 (2,649) (2,144) Other loans 155 11 661 150 (47) 103 Federal funds sold 1,888 1,885 3,773 335 1,271 1,606 Interest-bearing deposits 10,296 1,730 12,026 874 1,415 2,289 Tax-free securities (1,295) 92 (1,203) 2,325 (52) 2,273 Taxable investments 2,376 1,846 4,222 1,294 (719) 575 ------- -------- ------- ------- -------- ------- Total interest income(1) 64,992 9,415 74,407 31,608 (23,240) 8,368 ------- -------- ------- ------- -------- ------- Interest expense on Deposits: Savings 41 6,276 6,317 2,055 2,372 4,427 Time deposits under $100,000 (593) 4,668 4,075 (6,291) (1,842) (8,133) Time deposits of $100,000 or more 8,925 5,227 14,152 (2,256) 841 (1,415) Debt 27,158 4,403 31,561 18,125 (4,729) 13,396 Other borrowings 12,907 2,262 15,169 6,829 351 7,180 ------- -------- ------- ------- -------- ------- Total interest expense 48,438 22,836 71,274 18,462 (3,007) 15,455 ------- -------- ------- ------- -------- ------- Net interest income $16,554 $(13,421) $ 3,133 $13,146 $(20,233) $(7,087) ===========================================================================================================================
(1) Includes income from assets held and available for sale. MANAGED PORTFOLIO DATA The Company analyzes its financial results on a managed assets basis in addition to analyzing data as reported under generally accepted accounting principles. The following table provides selected information on a managed basis, as well as a summary of the effects of credit card securitizations on selected line items of the Company's Consolidated Income Statements for the past three years.
($ in thousands) - - ---------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------------- Balance Sheet Data: Average managed receivables $ 9,547,056 $6,110,347 $4,207,343 Managed receivables 12,215,355 8,155,237 5,246,161 Total managed assets 13,976,687 9,303,841 6,109,051 Managed net interest margin (on a fully tax equivalent basis) 5.87% 6.72% 7.77% As a percentage of gross managed receivables: Total loans 30 days or more delinquent 3.3% 2.7% 3.6% Net charge-offs 2.2 2.3 2.9 Effects of Credit Card Securitizations on: Net interest income $ (442,178) $ (296,046) $ (212,360) Provision for credit losses 157,735 92,530 82,343 ======================================================================================================================
With respect to the above information on the effects of credit card securitizations, net interest income represents the amount by which net interest income would have been higher had the securitized receivables remained on the balance sheet. In addition, the provision for credit losses represents the amount by which the provision for credit losses would have been higher had the securitized receivables remained as owned and the provision for credit losses been equal to charge-offs. Both net interest income and the provision for credit losses described above are netted and included in other noninterest revenues in the Consolidated Income Statements. 28 Advanta Corp. and Subsidiaries TOTAL MANAGED RECEIVABLES ($ in millions) [GRAPH]
1991 1992 1993 1994 1995 - - ------------------------------------------------------------------------------------- Serviced 2,847 3,720 5,246 8,155 $12,215 Owned - - -------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES The provision for credit losses of $53.3 million in 1995 increased $19.1 million or 56% from $34.2 million in 1994. The increase was primarily due to the Company's desire to maintain a targeted level of reserve coverage of impaired assets on credit cards as well as to provide additional reserves against a possible downturn in the economy given an increase in impaired asset and delinquency levels. The owned impaired asset level on credit cards increased from $14.7 million in 1994 to $19.9 million in 1995. The total owned impaired asset level, however, decreased by $4.0 million from $43.3 million in 1994 to $39.3 million at the end of 1995. The higher 1994 level was due to the repurchase of approximately $50 million of nonperforming mortgage loans from the securitization trusts, an action undertaken in order to lower funding costs on those mortgages. In connection with these repurchases, the Company also transferred $13 million of off-balance sheet recourse reserves to on-balance sheet reserves. These repurchases increased the owned impaired asset level while having no impact on either the level of managed impaired assets or the provision for credit losses. At December 31, 1995, approximately $11.6 million of the loans repurchased during 1994 remained on the balance sheet as either nonperforming loans or other real estate owned. The provision for credit losses of $34.2 million in 1994 increased only $4.4 million or 15% from $29.8 million in 1993 despite a 22% increase in average owned receivables. The owned impaired asset level on credit cards was relatively flat in 1994 compared to 1993. A description of the credit performance of the loan portfolio is set forth under the section entitled "Credit Risk Management." NONINTEREST REVENUES
($ in thousands) - - -------------------------------------------------------------------- 1995 1994 1993 - - -------------------------------------------------------------------- Gain on sale of credit cards $ 0 $ 18,352 $ 0 Other noninterest revenues: Credit card securitization income 183,360 149,043 98,521 Credit card servicing income 117,369 68,960 41,593 Credit card interchange income 92,439 71,740 56,107 Income from mortgage banking activities 50,541 37,586 24,146 Leasing revenues, net 41,050 21,551 10,317 Insurance revenues, net 27,654 12,734 9,249 Equity securities gains 15,386 0 0 Other credit card revenues 14,230 14,209 11,545 Other 985 1,633 4,102 - - -------------------------------------------------------------------- Total other noninterest revenues $543,014 $377,456 $255,580 - - -------------------------------------------------------------------- Total noninterest revenues $543,014 $395,808 $255,580 ====================================================================
Noninterest revenues of $543.0 million in 1995 increased $147.2 million or 37% from $395.8 million in 1994. This improvement resulted from a 74% growth in average securitized credit card receivables, a 63% growth in average securitized lease receivables and a $15.4 million equity securities gain on an investment held by the Company's venture capital unit, partially offset by a contraction in the net interest margin on the securitized credit card portfolio. The 1994 total reflected an $18.4 million gain on the sale of credit card customer relationships. Due to the securitization of credit card receivables, activity from securitized account balances normally reported as net interest income and charge-offs is reported in securitization income and servicing income, both of which are included in noninterest revenues. Credit card securitization income increased 23% to $183.4 million from $149.0 million in 1994 as a result of a 74% increase in average securitized credit card receivables from $3.5 billion in 1994 to $6.1 billion in 1995, partially offset by a contraction in the net interest margin. See Note 1 to Consolidated Financial Statements for further description of securitization income. Credit card securitization income is the excess of revenue collected on the securitized receivables, including interest and certain fees, over the related securitization trust expenses, including interest payments to investors in the trusts, charge-offs, servicing costs and transaction expenses. Credit card servicing income which represents fees paid to the Company for continuing to service accounts which 29 Advanta Corp. and Subsidiaries NONINTEREST REVENUES ($ in millions) [GRAPH]
1991 1992 1993 1994 1995 - - ------------------------------------------------------------------------------------------------ Other Noninterest Revenues 133 193 256 396 $543 Credit Card Securitization Income - - ------------------------------------------------------------------------------------------------
have been securitized, increased to $117.4 million in 1995 from $69.0 million in 1994. Such fees generally approximate 2% of securitized receivables. Interchange income represents fees that are payable by merchants to the credit card issuer for sale transactions. For 1994 and 1993, interchange income on securitized credit cards has been reclassified from credit card securitization income to credit card interchange income. Total interchange income, which represents approximately 1.4% of credit card purchases, increased 29% to $92.4 million in 1995 from $71.7 million in 1994. During 1995, the Company securitized $542 million of mortgage loans compared to $456 million in 1994. Mortgage banking income of $50.5 million for 1995 increased 34% from $37.6 million in 1994. See Note 1 to Consolidated Financial Statements for a description of mortgage banking income. Leasing revenues, net, increased $19.5 million to $41.1 million in 1995 primarily due to a 63% growth in average securitized lease receivables from 1994. Insurance revenues, net, were $27.7 million in 1995, an increase of $15.0 million over 1994. This strong growth is attributed to the successful marketing of insurance products in the credit card, mortgage and leasing businesses. Noninterest revenues of $395.8 million in 1994 increased $140.2 million or 55% from $255.6 million in 1993, primarily due to increases in credit card securitization, servicing and interchange income, the gain on the sale of the credit card customer relationships, and higher leasing and insurance revenues. OPERATING EXPENSES
($ in thousands) - - ---------------------------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------------------- Amortization of credit card deferred origination costs, net $ 72,258 $ 39,381 $ 6,566 Other operating expenses: Salaries and employee benefits 116,681 88,681 65,469 External processing 28,407 22,618 16,604 Marketing 25,374 32,339 18,742 Credit card fraud losses 20,029 16,654 13,779 Postage 18,518 12,732 9,818 Professional fees 14,937 10,985 10,761 Equipment expense 12,751 9,293 6,550 Telephone expense 11,959 8,615 5,402 Occupancy expense 9,254 8,425 6,247 Credit and collection expense 9,039 7,604 7,055 Other 11,478 9,457 14,174 - - ---------------------------------------------------------------------------- Total other operating expenses $278,427 $227,403 $174,601 - - ---------------------------------------------------------------------------- Total operating expenses $350,685 $266,784 $181,167 ============================================================================ At year end: Number of accounts managed (000's) 5,031 3,968 2,827 Number of employees 2,409 1,753 1,614 For the year: Other operating expenses as a percentage of average managed receivables 2.9% 3.7% 4.1% ============================================================================
The amortization of credit card deferred origination costs, net, increased from $39.4 million in 1994 to $72.3 million in 1995. This increase resulted primarily from amortization related to the $80.6 million of credit card origination costs that were deferred since the fourth quarter of 1994 (see Note 1 of Notes to Consolidated Financial Statements). Total other operating expenses of $278.4 million for 1995 were up $51.0 million or 22% from $227.4 million in 1994. The increase in total other operating expenses resulted from a $28.0 million or 32% increase in salaries and employee benefits, partially due to the addition of senior management to assist in the strategic growth of the various business units. Other factors affecting the increase in other operating expenses were a $5.8 million or 26% increase in external processing resulting primarily from a 27% increase in the number of accounts managed year-to-year, and an overall increase in credit card related costs due to a 26% increase in the number of managed credit card accounts. 30 Advanta Corp. and Subsidiaries The amortization of credit card deferred origination costs, net, increased from $6.6 million in 1993 to $39.4 million in 1994, primarily due to a $25.7 million increase in amounts deferred under third party agreements. Total other operating expenses of $227.4 million for 1994 rose $52.8 million or 30% from 1993. This overall growth was a result of a $23.2 million or 35% increase in salaries and employee benefits as well as increases in marketing, external processing and other credit card related costs, as a result of the 42% increase in the number of managed credit card accounts in 1994. OPERATING EXPENSE RATIO (in percent) [GRAPH] 1991 4.6 1992 4.4 1993 4.1 1994 3.7 1995 2.9%
As a result of continued investments in developmental initiatives, in 1995, the Company entered into a joint venture agreement with The Royal Bank of Scotland ("RBS"), for the purpose of issuing credit cards in the United Kingdom. This new company, RBS Advanta, first began issuing bankcards in October 1995. The net results from the operations are not currently material to the Company and are not expected to be so in 1996. However, the Company expects that the anticipated receivable growth will favorably impact future earnings. Income Taxes The Company's consolidated income tax expense was $75.2 million for 1995, or an effective tax rate of 36%, compared to tax expense of $59.1 million, or a 36% effective rate, in 1994 and tax expense of $45.3 million, or a 37% effective rate, in 1993. The decrease in the effective tax rate from 1993 to 1994 resulted from a higher level of tax-free income and lower levels of state income taxes. ASSET/LIABILITY MANAGEMENT The financial condition of Advanta Corp. is managed with a focus on maintaining high credit quality standards, disciplined interest rate risk management and prudent levels of leverage and liquidity. Interest Rate Sensitivity Interest rate sensitivity refers to managed net interest income variability resulting from mismatches between asset and liability indices (basis risk) and the effects which changes in market interest rates have on asset and liability repricing mismatches (gap risk). The Company attempts to minimize the impact of market interest rate fluctuations on net interest income and net income by regularly evaluating the risk inherent in its asset and liability structure, including securitized assets. This risk arises from continuous changes in the Company's asset/liability mix, market interest rates, the yield curve, prepayment trends and the timing of cash flows. Computer simulations are used to evaluate net interest income volatility under varying rate, spread and volume projections over monthly time periods of up to two years. In managing its interest rate sensitivity position, the Company periodically securitizes receivables, sells and purchases assets, alters the mix and term structure of its funding base, changes its investment portfolio and short-term investment position, and uses derivative financial instruments. Derivative financial instruments are used for the express purpose of managing exposures to changes in interest rates and foreign exchange rates. Derivative financial instruments, by policy, are not used for any speculative purposes (see discussion under "Derivatives Activities"). The Company has primarily utilized variable rate funding in pricing its credit card securitization transactions in an attempt to match the variable rate pricing dynamics of the underlying receivables sold to the trusts. Variable rate funding is used on the balance sheet as well, in support of unsecuritized receivables which carry variable rates. Although credit card receivable rates are generally set at a spread over a floating rate index, they often contain interest rate floors. These floors have the impact of converting the credit card receivables to fixed rate receivables in a low interest rate environment. In addition, the Company at times offers fixed rate pricing to consumers for the introductory rate period of its credit cards. In instances when a significant portion of credit card receivables carry fixed rate introductory pricing or are at their floors, the Company may convert part of 31 Advanta Corp. and Subsidiaries the underlying funding to a fixed rate by using interest rate hedges, swaps and fixed rate securitizations. In pricing mortgage and lease securitizations, both fixed rate and variable rate funding are used depending upon the characteristics of the underlying receivables. Additionally, basis risk exists in on-balance sheet funding as well as in securitizing credit card receivables at a spread over the London interbank offered rate ("LIBOR") when the rate on the underlying assets is indexed to the prime rate. The Company measures the basis risk resulting from potential variability in the spread between prime and LIBOR and incorporates such risk into the asset and liability management process. During 1995, substantially all new credit cards were issued using LIBOR as the repricing index. The effect of this change will be the reduction of prime/LIBOR basis risk over time. The Company continues to seek cost-effective alternatives for minimizing this risk. Interest rate fluctuations affect net interest income at virtually all financial institutions. While interest rate volatility does have an effect on net interest income, other factors also contribute significantly to changes in net interest income. Specifically, within the credit card portfolio, pricing decisions and customer behavior regarding convenience usage affect the yield on the portfolio. These factors may counteract or exacerbate income changes due to fluctuating interest rates. The Company closely monitors interest rate movements, competitor pricing and consumer behavioral changes in its ongoing analysis of net interest income sensitivity. Liquidity, Funding and Capital Resources The Company's goal is to maintain an adequate level of liquidity, both long and short-term, through active management of both assets and liabilities. During 1995, the Company, through its subsidiaries, securitized $3.4 billion of credit card receivables, $542 million of mortgage loans and $146 million of lease receivables. Cash generated from these transactions was temporarily invested in short-term, high quality investments at money market rates awaiting redeployment to pay down borrowings and to fund future credit card, mortgage loan and lease receivable growth. See the Consolidated Statements of Cash Flows for more information regarding liquidity, funding and capital resources. In addition, see Note 5 to the Consolidated Financial Statements and the Supplemental Schedules thereto for additional information regarding the Company's investment portfolio. Over the last eight years, the Company has successfully accessed the securitization market to efficiently support its growth strategy. While securitization should continue to be a reliable source of funding for the Company, other funding sources are available and include deposits, medium-term notes, senior and subordinated debt, repurchase agreements, committed and uncommitted bank lines, bank notes, federal funds purchased and the ability to sell assets and raise additional equity. In February 1995, the Company's wholly owned subsidiary, Advanta National Bank ("Advanta National"), a Delaware-based credit card bank, commenced operations. The Company's initial capitalization of Advanta National was $50 million, consisting of $25 million in common stock and $25 million of additional paid-in-capital. Additional capital infusions totaling $39 million took place during 1995. As a credit card bank, Advanta National is limited to one office, can engage only in consumer credit card operations and cannot accept deposits other than savings and time deposits of $100,000 or more. It is anticipated that Advanta National will continue to be the originator of a substantial portion of the Company's credit cards. Advanta National had total assets of $1.1 billion at December 31, 1995. Funding diversification is an essential component of the Company's liquidity management. The debt securities of Advanta Corp., Colonial National Bank USA ("Colonial National"), and Advanta National have achieved investment-grade ratings from the nationally recognized rating agencies. These ratings have allowed the Company to further diversify its funding sources. Efforts continue to develop new sources of funding, both through previously untapped customer segments and through developing new financing structures. In 1994, the Company obtained revolving credit facilities totaling $255 million from a consortium of banks and $255 million in money market bid lines. In the second quarter of 1995, the Company's $255 million revolving credit facilities were replaced with a new $510 million revolving credit facility which is available to Advanta National as well. The Company may also sell up to $325 million of medium-term notes as needed. In August 1995, in a public offering, the Company sold 2,500,000 depositary shares each representing a one-hundredth interest in a share of Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995 (SAILS). On September 15, 1999, unless either previously redeemed by the Company or converted at the option of the holder, 32 Advanta Corp. and Subsidiaries each share of the SAILS will automatically convert into 100 shares of Class B Common Stock. Proceeds from the offering, net of underwriting discount, were approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including financing the growth of its subsidiaries. In September 1995, Colonial National and Advanta National (the "Banks") established a $2.25 billion bank note program. The Banks may issue an aggregate of $2.0 billion of senior bank notes and $250 million of subordinated bank notes. These notes may have maturities ranging from seven days to fifteen years from date of issuance. In the fourth quarter of 1995, Advanta National sold $323 million of senior notes through this program. In addition, at the Advanta parent company level, steady building of liquidity and capital in 1995 and 1994 was achieved as a result of $66.1 million of dividends from subsidiaries in 1995 and $39.6 million in 1994, and retained earnings of $121.2 million in 1995 and $96.2 million in 1994. The Board of Directors currently intends to have the Company pay regular quarterly dividends to its shareholders, maintaining an approximate 20% premium on the dividend paid on the Class B common shares; however, the Company plans to reinvest the majority of its earnings to support future growth. At December 31, 1995, the Company was carrying $1.1 billion of loans available for sale. The fair value of such loans was in excess of their carrying value at year end. In connection with liquidity and asset/liability management, the Company had $533 million of investments available for sale at December 31, 1995. See Note 18 to the Consolidated Financial Statements for fair value disclosures. The following tables detail the composition of the deposit base and the composition of debt and other borrowings at year end for each of the past five years. COMPOSITION OF DEPOSIT BASE
($ in millions) As of December 31, - - --------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % Amount % - - --------------------------------------------------------------------------------------------------------------- Demand deposits $ 91.7 5% $ 64.5 5% $ 33.4 3% $ 24.8 2% $ 20.2 2% Money market savings 277.5 14 301.7 26 220.7 17 210.7 17 197.1 16 Time deposits of $100,000 or less 965.5 51 691.0 60 961.4 77 926.8 77 932.5 77 Time deposits of more than $100,00 571.9 30 102.2 9 39.4 3 42.4 4 55.2 5 - - --------------------------------------------------------------------------------------------------------------- Total deposits $1,906.6 100% $1,159.4 100% $1,254.9 100% $1,204.5 100% $1,205.0 100% ===============================================================================================================
COMPOSITION OF DEBT AND OTHER BORROWINGS
($ in millions) As of December 31, - - --------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------- Amount % Amount % Amount % Amount % Amount % - - --------------------------------------------------------------------------------------------------------------- Subordinated notes and certificates $ 76.2 4% $ 282.1 20% $301.3 63% $271.1 83% $192.6 55% Senior notes and certificates 200.6 11 0 0 0 0 0 0 0 0 Subordinated debentures 0 0 0 0 0 0 33.2 10 33.2 10 Short-term bank notes 25.0 1 85.0 6 0 0 0 0 0 0 Medium-term bank notes 322.7 18 0 0 0 0 0 0 0 0 5 1/8% notes, due 1996 150.0 8 149.9 11 149.9 32 0 0 0 0 Medium-term notes 504.7 28 359.7 25 15.0 3 0 0 0 0 Term fed funds 443.0 25 309.0 22 0 0 0 0 0 0 Securities sold under agreements to repurchase 0 0 86.5 6 0 0 0 0 101.8 29 Lines of credit and term funding arrangements 0 0 50.0 4 7.5 2 16.5 5 14.0 4 Other borrowings 81.8 5 80.9 6 0 0 7.1 2 6.3 2 - - --------------------------------------------------------------------------------------------------------------- Total debt and other borrowings $1,804.0 100% $1,403.1 100% $473.7 100% $327.9 100% $347.9 100% ===============================================================================================================
33 Advanta Corp. and Subsidiaries As a grandfathered institution under the Competitive Equality Banking Act of 1987 ("CEBA"), the Company must limit Colonial National's average on-balance sheet asset growth to 7% per annum. For the fiscal CEBA year ended September 30, 1995, Colonial National's average assets did not exceed the allowable amount and, accordingly, Colonial National was in full compliance with CEBA growth limits. The timing and size of securitizations, on-balance sheet liability structure and rapid changes in balance sheet structure are frequently due to the management of Colonial National's balance sheet within this growth constraint. In addition to Colonial National's total deposits of $1.3 billion, deposits at December 31, 1995 included $612 million of time deposits at Advanta National and $38 million of deposits at Advanta Financial Corp. ("AFC"), a Utah state-chartered, FDIC-insured industrial loan corporation. AFC's assets and operations are not currently material to the Company, and the Company does not expect them to become material in the near term. While there are no specific capital requirements for Advanta Corp., the Office of the Comptroller of the Currency requires that Colonial National and Advanta National maintain a risk-based capital ratio of at least 8%. Both banks were in excess of the required level and exceeded the minimum capital level of 10% required for designation as a "well-capitalized" depository institution. At December 31, 1995 and 1994, Colonial National's risk-based capital ratio was 11.56% and 12.04%, respectively. Advanta National's risk-based capital ratio at December 31, 1995 was 12.28%. The Company intends to take the necessary actions to maintain Colonial National and Advanta National as "well-capitalized" banks. In addition, the Company's insurance subsidiaries are subject to certain capital, deposit and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. At December 31, 1995 and 1994 the insurance subsidiaries were in compliance with all requisite rules and regulations. CAPITAL EXPENDITURES The Company spent $20.6 million for capital expenditures in 1995, primarily for the purchase of land in Delaware, additional space in existing buildings, office and voice communication equipment and furniture and fixtures. This compared to $24.1 million for capital expenditures in 1994 and $13.3 million in 1993. In 1996, the Company anticipates capital expenditures to exceed those of 1995 as its facilities are expanding and the Company is continuing to upgrade its voice and communication systems. The Company also anticipates that its 1996 marketing expenditures will exceed those of 1995 as the Company continues to originate new accounts, manage account retention and develop new consumer products for its customers. DERIVATIVES ACTIVITIES The Company utilizes derivative financial instruments for the purpose of managing its exposure to interest rate and foreign currency risks. The Company has a number of mechanisms in place that enable it to monitor and control both market and credit risk from these derivatives activities. At the broader level, all derivatives strategies are managed under a hedging policy approved by the Board of Directors that details the use of such derivatives and the individuals authorized to execute derivatives transactions. All derivatives strategies must be approved by the Company's senior management (President, Chief Executive Officer, Chief Financial Officer and Treasurer). As part of this approval process, a market risk analysis is completed to determine the potential impact on the Company from severe negative (stressed) movements in the market. By policy, derivatives transactions may only be used to manage the Company's exposure to interest rate and foreign currency risks or for cost reduction and may not be used for speculative purposes. As such, the impact of any derivatives transaction is calculated using the Company's asset/liability model to determine its suitability. The Company's Investment Committee (a management committee) has a counterparty credit policy. This policy details the maximum credit exposure, transaction limit and transaction term for counterparties based on an internally assigned Investment Committee credit rating. Counterparty internal credit ratings reflect the credit ratings from nationally recognized rating agencies, as well as other significant credit factors where appropriate. Each counterparty's credit quality is reviewed as new information becomes available, and, in any case, at least quarterly. Activities with counterparties will be suspended if there is reason to believe that their credit quality is below the Company's set standards. For each individually approved counterparty, a credit exposure amount, representing the maximum aggregate credit exposure from derivatives transactions the Company is willing to accept from that counterparty, is calculated for a hypothetical stress environment. 34 Advanta Corp. and Subsidiaries To manage counterparty exposure, the Company also uses negotiated agreements that establish threshold exposure amounts for each counterparty above which the Company has the right to call for and receive collateral for the amount of such excess, thereby limiting its exposure to the threshold amount. The threshold levels can be fixed or may change as the credit rating of the counterparty changes, and in all cases, the threshold levels are well below the maximum allowable exposure amounts described above. Counterparty master agreements and any collateral agreements, by policy, must be signed prior to the execution of any derivatives transactions with a counterparty. To date, substantially all master agreements with counterparties have included bilateral collateral agreements. As such, the potential exposure from a particular counterparty is limited to the maximum threshold level for that counterparty. The Company has a treasury middle office independent of the trading function, which measures, monitors, and reports on credit, market, and liquidity risk exposures from hedging and derivative product activities. It is the responsibility of this department to ensure compliance with respect to the hedging policy, including the counterparty transaction limits, transaction terms and trader authorizations. In addition, this department marks each derivatives position to market on a weekly basis using both internal and external models. These models have been benchmarked against a sample of derivatives dealers' valuation models for accuracy. Position and counterparty exposure reports are generated and used to manage collateral requirements of the counterparty and the Company. All of these procedures and processes are designed to provide reasonable assurance that prior to and after the execution of any derivatives strategy, market, credit and liquidity risks are fully analyzed and incorporated into the Company's asset/liability and risk measurement models and the proper accounting treatment for the transaction is identified and executed. CREDIT RISK MANAGEMENT Management regularly reviews the loan portfolio in order to evaluate the adequacy of the reserve for credit losses. The evaluation includes such factors as the inherent credit quality of the loan portfolio, past experience, current economic conditions, projected credit losses and changes in the composition of the loan portfolio. The reserve for credit losses is maintained for on-balance sheet receivables. The on-balance sheet reserve is intended to cover all credit losses inherent in the owned loan portfolio. With regard to securitized assets, anticipated losses and related recourse reserves are reflected in the calculations of Securitization Income, Amounts due from Credit Card Securitizations and Other Assets. Recourse reserves are intended to cover all probable credit losses over the life of the securitized receivables. Management evaluates both its on-balance sheet and recourse reserve requirements and, as appropriate, effects transfers between these accounts. The reserve for credit losses on a consolidated basis was $53.5 million, or 1.9% of receivables, at December 31, 1995, compared to $41.6 million, or 2.1% of receivables, at December 31, 1994. The reserve coverage of impaired assets (nonperforming assets and accruing loans past due 90 days or more on credit cards) increased to 136.3% at December 31, 1995, from 96.1% at December 31, 1994. Reserve coverage of impaired credit card assets was 185.8% at December 31, 1995, relatively even with 186.5% at year end 1994. The reserve for credit losses on a consolidated basis was $41.6 million, or 2.1% of receivables, in 1994, compared to $31.2 million, or 2.4% of receivables, in 1993. 35 Advanta Corp. and Subsidiaries ASSET QUALITY Impaired assets include both nonperforming assets (mortgage loans and leases past due 90 days or more, real estate owned, bankrupt, decedent and fraudulent credit card accounts, and off-lease equipment) and accruing loans past due 90 days or more on credit cards. The carrying values for both real estate owned and equipment held for lease or sale are based on net realizable value after taking into account holding costs and costs of disposition and are reflected in other assets. On the total managed portfolio, impaired assets were $167.1 million, or 1.4% of receivables, at year end 1995 compared to $102.4 million, or 1.3% of receivables, in 1994. Nonperforming assets on the total managed portfolio were $82.2 million, or .7% of receivables, compared to $61.6 million, or .8%, in 1994. The total managed charge-off rate for 1995 was 2.2%, compared to 2.3% for 1994. The charge-off rate on managed credit cards was 2.5% for 1995, flat with 1994. On the total owned portfolio, impaired assets were $39.3 million, or 1.4% of receivables in 1995, compared to $43.3 million, or 2.2%, in 1994. Gross interest income that would have been recorded in 1995 and 1994 for owned nonperforming assets, had interest been accrued throughout the year in accordance with the assets' original terms, was approximately $4.0 million and $5.1 million, respectively. The amount of interest on nonperforming assets included in income for 1995 and 1994 was $1.3 million and $1.7 million, respectively. Past due loans represent accruing loans that are past due 90 days or more as to collection of principal and interest. Credit card receivables, except those on bankrupt, decedent and fraudulent accounts, continue to accrue interest until the time they are charged off at 186 days contractual delinquency. In contrast, all mortgage loans and leases are put on nonaccrual status when they become 90 days past due. Owned credit card receivables past due 90 days or more and still accruing interest were $17.4 million or .7% of receivables at December 31, 1995, compared to $11.2 million, or .6% of receivables, a year ago. During 1991, the Company adopted a new policy for the charge-off of bankrupt, decedent and fraudulent credit card accounts. Under the new policy, the Company charges off bankrupt or decedent accounts within 30 days of notification and accounts suspected of being fraudulent after a 90-day investigation period, unless the investigation shows no evidence of fraud. Under the previous policy, such accounts were charged off in accordance with the Company's normal credit card charge-off policy at 186 days contractual delinquency. Consequently, in 1991, both newly identified bankrupt, decedent and fraudulent accounts, as well as those previously identified, were written off. The 1991 charge-off rates included in the following tables exclude the effect of this acceleration. During 1994, the Company implemented a new policy for the charge-off of mortgage loans. Under this policy, when a nonperforming mortgage loan becomes twelve months delinquent, the Company writes down the loan to its net realizable value, regardless of anticipated collectibility. Consequently, in 1994, all mortgage loans that had been twelve or more months delinquent, as well as any mortgages that became twelve months delinquent during the year were written down to their net realizable value. Thus, 1994's managed mortgage loan charge-off rate of 1.7% was unusually high compared to the 1995 level of .9%. 36 Advanta Corp. and Subsidiaries The following tables provide a summary of reserves, impaired assets, delinquencies and charge-offs for the past five years:
($ in thousands) December 31, - - ---------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - - ---------------------------------------------------------------------------------------------------------------- CONSOLIDATED--MANAGED Nonperforming assets $ 82,171 $ 61,587 $ 63,589 $ 57,797 $ 47,587 Accruing loans past due 90 days or more 84,892 40,837 31,514 34,890 33,250 Impaired assets 167,063 102,424 95,103 92,687 80,837 Total loans 30 days or more delinquent 404,072 220,390 186,297 184,670 159,345 As a percentage of gross receivables: Nonperforming assets .7% .8% 1.2% 1.6% 1.7% Accruing loans past due 90 days or more .7% .5% .6% .9% 1.2% Impaired assets 1.4% 1.3% 1.8% 2.5% 2.8% Total loans 30 days or more delinquent 3.3% 2.7% 3.6% 5.0% 5.6% Net charge-offs: Amount $212,865 $139,676 $122,715 $108,606 $ 89,072 As a percentage of gross receivables 2.2% 2.3% 2.9% 3.4% 3.2%(1) - - ---------------------------------------------------------------------------------------------------------------- CREDIT CARDS--MANAGED Nonperforming assets $ 20,516 $ 14,227 $ 10,881 $ 7,592 $ 5,586 Accruing loans past due 90 days or more 84,878 40,721 31,489 34,890 33,239 Impaired assets 105,394 54,948 42,370 42,482 38,825 Total loans 30 days or more delinquent 262,299 133,121 94,035 99,308 97,100 As a percentage of gross receivables: Nonperforming assets .2% .2% .3% .3% .3% Accruing loans past due 90 days or more .8% .6% .8% 1.3% 1.6% Impaired assets 1.1% .8% 1.1% 1.6% 1.9% Total loans 30 days or more delinquent 2.6% 2.0% 2.4% 3.7% 4.8% Net charge-offs: Amount $193,160 $115,218 $105,966 $100,465 $ 84,113 As a percentage of gross receivables 2.5% 2.5% 3.5% 4.5% 4.4%(1) - - ---------------------------------------------------------------------------------------------------------------- MORTGAGE LOANS--MANAGED(2) Nonperforming assets $ 56,743 $ 44,678 $ 50,418 $ 46,755 $ 37,371 Total loans 30 days or more delinquent 106,223 65,966 75,747 69,962 51,137 As a percentage of gross receivables: Nonperforming assets 3.2% 3.3% 4.4% 5.1% 5.2% Total loans 30 days or more delinquent 5.9% 4.9% 6.6% 7.7% 7.1% Net charge-offs: Amount $ 13,836 $ 20,709 $ 13,991 $ 5,924 $ 3,031 As a percentage of gross receivables .9% 1.7% 1.3% .8% .5% - - ---------------------------------------------------------------------------------------------------------------- LEASES--MANAGED Nonperforming assets $ 4,912 $ 2,682 $ 2,290 $ 3,432 $ 4,625 Total loans 30 days or more delinquent 35,274 20,972 16,476 15,320 11,048 As a percentage of receivables: Nonperforming assets 1.3% 1.0% 1.3% 2.5% 4.5% Total loans 30 days or more delinquent 9.3% 7.9% 9.7% 11.1% 10.8% Net charge-offs: Amount $ 5,846 $ 3,747 $ 2,759 $ 2,352 $ 2,130 As a percentage of receivables 1.9% 1.9% 1.9% 2.2% 2.5% ================================================================================================================
(1) The 1991 charge-off rates are normalized to exclude the acceleration of the charge-off of bankrupt and decedent accounts related to the adoption of a new credit card charge-off policy in 1991. Including these amounts, the charge-off rates for 1991 were 3.8% and 5.3% on a consolidated-managed and credit card-managed basis, respectively. (2) In 1994, the Company implemented a new mortgage loan charge-off policy (see Asset Quality). 37 Advanta Corp. and Subsidiaries
($ in thousands) December 31, - - --------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - - --------------------------------------------------------------------------------------------------------------- CONSOLIDATED--OWNED Reserve for credit losses $53,494 $41,617 $31,227 $40,228 $36,355 Nonperforming assets 21,856 31,949 11,487 15,318 18,367 Accruing loans past due 90 days or more 17,399 11,354 11,038 16,270 20,989 Impaired assets 39,255 43,303 22,525 31,588 39,356 Reserve as a percentage of impaired assets 136.3% 96.1% 138.6% 127.4% 92.4% As a percentage of gross receivables: Reserve 1.9% 2.1% 2.4% 4.0% 2.9% Nonperforming assets .8% 1.6% .9% 1.5% 1.4% Accruing loans past due 90 days or more .6% .6% .9% 1.6% 1.7% Impaired assets 1.4% 2.2% 1.8% 3.2% 3.1% Net charge-offs: Amount $42,549 $35,293 $26,776 $39,965 $50,807 As a percentage of gross receivables 2.3% 2.6% 2.4% 3.9% 4.0%(1) - - --------------------------------------------------------------------------------------------------------------- CREDIT CARDS--OWNED Reserve for credit losses $36,889 $27,486 $25,859 $35,743 $31,193 Nonperforming assets 2,466 3,502 3,062 2,780 3,008 Accruing loans past due 90 days or more 17,385 11,238 11,013 16,270 20,978 Impaired assets 19,851 14,740 14,075 19,050 23,986 Reserve as a percentage of impaired assets 185.8% 186.5% 183.7% 187.6% 130.0% As a percentage of gross receivables: Reserve 1.6% 1.6% 2.3% 4.8% 3.0% Nonperforming assets .1% .2% .3% .4% .3% Accruing loans past due 90 days or more .7% .6% 1.0% 2.2% 2.0% Impaired assets .8% .9% 1.2% 2.6% 2.3% Net charge-offs: Amount $35,425 $22,688 $23,623 $37,382 $47,252 As a percentage of gross receivables 2.2% 1.9% 2.6% 4.6% 4.9%(1) - - --------------------------------------------------------------------------------------------------------------- MORTGAGE LOANS--OWNED(2) Reserve for credit losses $ 3,360 $ 5,164 $ 2,706 $ 2,926 $ 2,447 Nonperforming assets 18,676 27,379 7,090 10,266 11,801 Reserve as a percentage of impaired assets 18.0% 18.9% 38.2% 28.5% 20.7% As a percentage of gross receivables: Reserve 1.0% 3.6% 3.0% 1.4% 1.3% Nonperforming assets 5.8% 19.2% 7.8% 4.8% 6.3% Net charge-offs: Amount $ 5,962 $11,689 $ 2,207 $ 1,451 $ 1,627 As a percentage of gross receivables 3.2% 9.7% 1.4% .8% .8% - - --------------------------------------------------------------------------------------------------------------- LEASES--OWNED Reserve for credit losses $ 977 $ 1,076 $ 1,826 $ 1,442 $ 1,119 Nonperforming assets 714 1,068 1,335 2,254 3,553 Reserve as a percentage of impaired assets 136.8% 100.7% 136.8% 64.0% 31.5% As a percentage of receivables: Reserve 1.0% 1.2% 3.6% 3.1% 3.1% Nonperforming assets .8% 1.2% 2.6% 4.8% 9.7% Net charge-offs: Amount $ 1,139 $ 914 $ 947 $ 1,267 $ 2,130 As a percentage of receivables 1.4% 1.5% 1.6% 2.8% 3.1% ===============================================================================================================
(1) The 1991 charge-off rates are normalized to exclude the acceleration of the charge-off of bankrupt and decedent accounts related to the adoption of a new credit card charge-off policy in 1991. Including these amounts, the charge-off rates for 1991 were 4.7% and 5.8% on a consolidated-owned and credit card-owned basis, respectively. (2) In 1994, the Company initiated a program for repurchasing nonperforming assets from the securitized mortgage portfolios and implemented a new mortgage loan charge-off policy (see Asset Quality). 38 Advanta Corp. and Subsidiaries ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Balance Sheets
($ in thousands) December 31, - - --------------------------------------------------------------------------------------------------------------- 1995 1994 - - --------------------------------------------------------------------------------------------------------------- ASSETS Cash $ 45,714 $ 43,706 Federal funds sold 146,375 39,050 Interest-bearing deposits 410,709 313,852 Investments available for sale 532,963 318,759 Loan and lease receivables, net: Available for sale 1,079,478 573,076 Other loan and lease receivables, net 1,699,771 1,406,378 --------------------------- Total loan and lease receivables, net 2,779,249 1,979,454 Premises and equipment (at cost, less accumulated depreciation of $37,621 in 1995 and $28,906 in 1994) 43,453 33,219 Amounts due from credit card securitizations 190,819 144,483 Other assets 374,977 240,525 - - --------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $4,524,259 $3,113,048 =============================================================================================================== LIABILITIES Deposits: Noninterest-bearing $ 91,721 $ 64,510 Interest-bearing 1,814,880 1,094,848 --------------------------- Total deposits 1,906,601 1,159,358 Other borrowings 1,216,127 737,095 Long-term debt 587,877 666,033 Other liabilities 140,690 108,872 - - --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 3,851,295 2,671,358 - - --------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (See Note 8) Class A preferred stock, $1,000 par value: Authorized, issued and outstanding--1,010 shares in 1995 and 1994 1,010 1,010 Class B preferred stock, $.01 par value: Authorized--1,000,000 shares; Issued--25,000 shares in 1995 0 0 Class A common stock, $.01 par value; Authorized--200,000,000 shares; Issued--17,481,022 shares in 1995 and 17,347,468 shares in 1994 175 173 Class B common stock, $.01 par value; Authorized--200,000,000 shares; Issued--24,007,352 shares in 1995 and 23,131,498 shares in 1994 240 231 Additional paid-in capital, net 280,294 176,465 Retained earnings, net 391,245 263,811 - - --------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 672,964 441,690 - - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,524,259 $3,113,048 ===============================================================================================================
See Notes to Consolidated Financial Statements. 39 Advanta Corp. and Subsidiaries Consolidated Income Statements
(In thousands, except per share data) Year Ended December 31, - - ---------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------- Interest income: Loans and leases $189,983 $135,429 $134,184 Investments: Taxable 46,574 26,552 22,083 Exempt from federal income tax 2,375 3,158 1,680 ------------------------------- Total investments 48,949 29,710 23,763 ------------------------------- TOTAL INTEREST INCOME 238,932 165,139 157,947 ------------------------------- Interest expense: Deposits 72,812 48,268 53,389 Debt 67,908 36,347 22,951 Other borrowings 25,312 10,143 2,963 ------------------------------- TOTAL INTEREST EXPENSE 166,032 94,758 79,303 ------------------------------- NET INTEREST INCOME 72,900 70,381 78,644 PROVISION FOR CREDIT LOSSES 53,326 34,198 29,802 ------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 19,574 36,183 48,842 NONINTEREST REVENUES: Gain on sale of credit cards 0 18,352 0 Other noninterest revenues 543,014 377,456 255,580 ------------------------------- TOTAL NONINTEREST Revenues 543,014 395,808 255,580 ------------------------------- OPERATING EXPENSES: Amortization of credit card deferred origination costs, net 72,258 39,381 6,566 Other operating expenses 278,427 227,403 174,601 ------------------------------- TOTAL OPERATING EXPENSES 350,685 266,784 181,167 ------------------------------- Income before income taxes and extraordinary item 211,903 165,207 123,255 Provision for income taxes 75,226 59,144 45,335 ------------------------------- NET INCOME BEFORE EXTRAORDINARY ITEM $136,677 $106,063 $ 77,920 EXTRAORDINARY ITEM, NET (See Note 9) 0 0 (1,273) ------------------------------- NET INCOME $136,677 $106,063 $ 76,647 ================================================================================================================ EARNINGS PER COMMON SHARE BEFORE EXTRAODINARY ITEM (See Note 1) $ 3.20 $ 2.58 $ 1.95 ================================================================================================================ EARNINGS PER COMMON SHARE (See Note 21) $ 3.20 $ 2.58 $ 1.92 ================================================================================================================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,670 41,046 39,777 ================================================================================================================
See Notes to Consolidated Financial Statements. 40 Advanta Corp. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
($ in thousands) - - ------------------------------------------------------------------------------------------------ Class A Class B Class A Class B Additional Preferred Preferred Common Common Paid-In Deferred Stock Stock Stock Stock Capital Compensation - - ------------------------------------------------------------------------------------------------ Balance at Dec. 31, 1992 $1,010 $0 $170 $172 $ 74,311 $ (5,137) Change in unrealized appreciation of investments Preferred and common cash dividends declared Exercise of stock options 2 4 1,866 Issuance of stock: Public offering 45 89,980 Benefit plans 5 9,575 (7,934) Amortization of deferred compensation 1,960 Termination/Tax benefit--benefit plans 1,922 103 Net Income - - ------------------------------------------------------------------------------------------------ Balance at Dec. 31, 1993 1,010 0 172 226 177,654 (11,008) Change in unrealized appreciation of investments Preferred and common cash dividends declared Exercise of stock options 1 2 1,671 Issuance of stock: Benefit plans 3 11,543 (9,542) Amortization of deferred compensation 5,327 Termination--benefit plans (190) 1,010 Net Income - - ------------------------------------------------------------------------------------------------ Balance at Dec. 31, 1994 1,010 0 173 231 190,678 (14,213) Change in unrealized appreciation of investments Preferred and common cash dividends declared Exercise of stock options 2 3 2,049 Issuance of stock: Public offering 0 88,927 Benefit plans 6 18,360 (16,523) Amortization of deferred compensation 7,661 Termination/Tax benefit--benefit plans 1,917 1,438 Net Income - - ------------------------------------------------------------------------------------------------ Balance at Dec. 31, 1995 $1,010 $0 $175 $240 $301,931 $(21,637) ================================================================================================
($ in thousands) - - ------------------------------------------------------------------------------- Unrealized Investment Total Holding Gains Retained Treasury Stockholders' (losses) Earnings Stock Equity - - ------------------------------------------------------------------------------- Balance at Dec. 31, 1992 $ (39) $104,814 $ (431) $174,870 Change in unrealized appreciation of investments 563 563 Preferred and common cash dividends declared (7,298) (7,298) Exercise of stock options 1,872 Issuance of stock: Public offering 90,025 Benefit plans 419 2,065 Amortization of deferred compensation 1,960 Termination/Tax benefit--benefit plans 12 2,037 Net Income 76,647 76,647 - - ---------------------------------------------------------------------------- Balance at Dec. 31, 1993 524 174,163 0 342,741 Change in unrealized appreciation of investments (7,062) (7,062) Preferred and common cash dividends declared (9,877) (9,877) Exercise of stock options 184 1,858 Issuance of stock: Benefit plans 636 2,640 Amortization of deferred compensation 5,327 Termination--benefit plans (820) 0 Net Income 106,063 106,063 - - ---------------------------------------------------------------------------- Balance at Dec. 31, 1994 (6,538) 270,349 0 441,690 Change in unrealized appreciation of investments 6,258 6,258 Preferred and common cash dividends declared (15,501) (15,501) Exercise of stock options 59 2,113 Issuance of stock: Public offering 88,927 Benefit plans 1,296 3,139 Amortization of deferred compensation 7,661 Termination/Tax benefit--benefit plans (1,355) 2,000 Net Income 136,677 136,677 - - ---------------------------------------------------------------------------- Balance at Dec. 31, 1995 $ (280) $391,525 $ 0 $672,964 ============================================================================
See Notes to Consolidated Financial Statements. 41 Advanta Corp. and Subsidiaries Consolidated Statements of Cash Flows
($ in thousands) Year Ended December 31, - - --------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 136,677 $ 106,063 $ 76,647 Adjustments to reconcile net income to net cash provided by operating activities: Equity securities gains (6,776) 0 0 Depreciation and amortization of intangibles 10,802 7,907 5,206 Provision for credit losses 53,326 34,198 29,802 Change in other assets and amounts due from securitizations (127,931) (43,599) (19,549) Change in other liabilities 51,757 27,616 16,952 Gain on securitization of mortgages and leases (35,652) (27,189) (19,127) Loss on repurchase of senior subordinated debentures 0 0 1,928 - - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 82,203 104,996 91,859 INVESTING ACTIVITIES Purchase of investments available for sale (3,313,555) (1,804,963) (1,020,355) Proceeds from sale of investments available for sale 1,683,934 623,663 840,936 Proceeds from maturing investments available for sale 1,430,276 1,159,702 81,592 Change in fed funds sold and interest-bearing deposits (202,262) (34,973) 78,089 Change in credit card receivables, excluding sales (4,223,419) (2,790,421) (1,441,397) Proceeds from sales/securitizations of receivables 4,331,739 2,738,740 1,686,913 Purchase of mortgage/lease portfolios (214,094) (143,804) (70,014) Principal collected on mortgages 30,945 25,753 21,257 Mortgages made to customers (608,064) (451,892) (472,099) Purchase of premises and equipment (20,652) (24,088) (13,271) Proceeds from sale of premises and equipment 20 647 930 Excess of cash collections over income recognized on direct financing leases 38,910 21,691 20,493 Equipment purchased for direct financing lease contracts (235,773) (160,080) (90,002) Net change in other loans (4,062) (75) (1) - - -------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,306,057) (840,100) (376,929) FINANCING ACTIVITIES Increase in demand and savings deposits 3,023 112,048 18,666 Proceeds from deposits sold 30,018 0 0 Proceeds from sales of time deposits 1,322,388 448,624 820,904 Payments for maturing time deposits (608,186) (656,195) (789,175) Change in repurchase agreements and term fed funds 47,545 395,455 0 Proceeds from issuance of subordinated/senior debt 59,256 39,437 135,000 Payments on redemption of subordinated/senior debt (64,642) (58,618) (103,480) Redemption of senior subordinated debentures 0 0 (36,404) Proceeds from issuance of medium-term notes 487,759 344,787 15,000 Proceeds from issuance of 5 1/8% notes 0 0 149,851 Proceeds from issuance of notes payable 465,006 137,276 121,069 Repayment of notes payable (594,983) (9,787) (137,196) Proceeds from issuance of stock 94,179 4,498 93,542 Cash dividends paid (15,501) (9,877) (7,298) - - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,225,862 747,648 280,479 - - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 2,008 12,544 (4,591) Cash at beginning of year 43,706 31,162 35,753 Cash at end of year $ 45,714 $ 43,706 $ 31,162 ==========================================================================================================================
See Notes to Consolidated Financial Statements. 42 Advanta Corp. and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Advanta Corp. (the "Company"), a Delaware corporation, is a financial services company which provides a variety of products to consumers and small businesses. The Company services approximately 5 million customers and manages receivables in excess of $12.2 billion. The Company issues credit cards primarily through its two wholly-owned subsidiaries Colonial National Bank USA ("Colonial National") and Advanta National Bank ("Advanta National"). Substantially all of the Company's credit card processing is performed by a single outside third party processor. Total managed credit card receivables at December 31, 1995 totaled $10 billion. The Company also operates through other wholly owned subsidiaries including: Advanta Mortgage Corp. USA ("AMC") which originates mortgage loans, Advanta Business Services ("ABS") which provides small ticket leases to businesses, and Advanta Life Insurance Company which reinsures or writes various credit insurance products available to the Company's customers. Total managed receivables for AMC and ABS totaled approximately $1.8 billion and $.4 billion respectively, at December 31, 1995. PRINCIPLES OF CONSOLIDATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES 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 period. The ultimate results could differ from those estimates. RECLASSIFICATION Certain prior-period amounts have been reclassified to conform with current-year classifications. CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES Credit Card Origination Costs The Company accounts for credit card origination costs under Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"). This accounting standard requires certain loan and lease origination fees and costs to be deferred and amortized over the life of a loan or lease as an adjustment to interest income. Origination costs are defined under this standard to include costs of loan origination associated with transactions with independent third parties and certain costs relating to underwriting activities and preparing and processing loan documents. The Company engages third parties to solicit and originate credit card account relationships. Amounts deferred under these arrangements approximated $71.9 million in 1995, $55.2 million in 1994 and $29.5 million in 1993. The Company amortizes deferred credit card origination costs under the consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") regarding the acquisition of individual credit card accounts from independent third parties (EITF Issue 93-1). The consensus stated that credit card accounts acquired individually should be accounted for as originations under SFAS 91 and EITF Issue 92-5. Amounts paid to a third party to acquire individual credit card accounts should be deferred and netted against the related credit card fee, if any, and the net amount should be amortized on a straight-line basis over the privilege period. If a significant fee is charged, the privilege period is the period that the fee entitles the cardholder to use the card. If there is no significant fee, the privilege period should be one year. In accordance with this consensus, direct origination costs incurred related to credit card account originations initiated after the May 20, 1993 consensus date are deferred and amortized over 12 months. Costs incurred for originations which were initiated prior to May 20, 1993 will continue to be amortized over a 60 month period as was the practice prior to the EITF Issue 93-1 consensus. Prior to the EITF Issue 93-1 consensus, it was the Company's practice to write-off deferred origination costs related to credit card receivables that had been securitized. This practice had effectively written off credit card origination costs much more quickly than the 60 month period previously utilized. In connection with the prospective adoption of a 12 month 43 Advanta Corp. and Subsidiaries amortization period for deferred credit card account origination costs, the Company no longer writes off deferred origination costs related to credit card receivables being securitized. Under the EITF Issue 93-1 consensus, such costs are not directly associated with the receivables. Credit Card Securitization Income Since 1988, the Company, through its subsidiaries Colonial National and, beginning in 1995, Advanta National have completed 30 credit card securitizations totaling $8.8 billion in receivables. See Note 3 and Note 16. In each transaction, credit card receivables were transferred to a trust and interests in the trust were sold to investors for cash. The Company records excess servicing income on credit card securitizations representing additional cash flow from the receivables initially sold based on estimates of the repayment term, including prepayments. As these estimates are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Prior to the EITF Issue 93-1 consensus, net gains were not recorded at the time each transaction was completed as excess servicing income was offset by the write-off of deferred origination costs and the establishment of recourse reserves. Subsequent to the prospective adoption discussed above, excess servicing income has been recorded at a lower level at the time of each transaction, and is predominantly offset by the establishment of recourse reserves. The lower level of excess servicing income corresponds with the discontinuance of deferred origination cost write-offs upon securitization of receivables, as discussed above. During the "revolving period" of each trust, income is recorded based on additional cash flows from the new receivables which are sold to the trusts on a continual basis to replenish the investors' interest in trust receivables which have been repaid by the credit cardholders. Credit Card Fees Annual fees on credit cards are deferred and amortized on a straight-line basis over the fiscal year of the account. MORTGAGE LOAN ORIGINATION FEES The Company generally charges origination fees ("points") for mortgage loans where permitted under state law. Origination fees, net of direct origination costs, are deferred and amortized over the contractual life of the loan. However, upon the sale or securitization of the loans, the unamortized portion of such fees is recognized and included in the computation of the gain on sale. LOAN AND LEASE RECEIVABLES AVAILABLE FOR SALE Loan and lease receivables available for sale represent receivables currently on the balance sheet that the Company generally intends to sell or securitize within the next six months. These assets are reported at the lower of cost or fair market value. INVESTMENTS HELD TO MATURITY Investments held to maturity include those investments that the Company has the positive intent and ability to hold to maturity. These investments are reported at cost, adjusted for the amortization of premiums or the accretion of discounts. At December 31, 1995 and 1994 the Company had no investments classified as held to maturity. INVESTMENTS AVAILABLE FOR SALE Investments available for sale include securities that the Company sells from time to time to provide liquidity and in response to changes in the market. Debt and equity securities classified as Available for Sale are reported at market value under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, unrealized gains and losses on these securities (except those held by the Company's venture capital unit, Advanta Partners LP) are reported as a separate component of stockholders' equity and included in retained earnings. Changes in the fair value of Advanta Partners LP investments are reported in noninterest revenues as equity securities gains or losses. For investments that are not publicly traded, estimates of fair value have been made by management that consider the investees' financial results, conditions and prospects, and the values of comparable public companies. Because of the nature of these investments, the equity method of accounting is not used in situations where the Corporation has a greater than 20 percent ownership interest. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses various derivative financial instruments ("derivatives") such as interest rate swaps and caps, forward contracts, options on securities, and financial futures as part of its strategy to reduce interest rate and foreign currency exposures. Derivatives are classified as hedges or synthetic alterations of 44 Advanta Corp. and Subsidiaries specific on-balance sheet items, off-balance sheet items or anticipated transactions. In order for derivatives to qualify for hedge accounting treatment the following conditions must be met: 1) the underlying item being hedged by derivatives exposes the Company to interest rate or foreign currency risks, 2) the derivative used serves to reduce the Company's sensitivity to interest rate or foreign currency risks, and 3) the derivative used is designated and deemed effective in hedging the Company's exposure to interest rate or foreign currency risks. In addition to meeting these conditions, anticipatory hedges must demonstrate that the anticipated transaction being hedged is probable to occur and the expected terms of the transaction are identifiable. For derivatives designated as hedges of interest rate exposure, gains or losses are deferred and included in the carrying amounts of the related item exposing the Company to interest rate risk and ultimately recognized in income as part of those carrying amounts. For derivatives designated as hedges of foreign currency exposure, gains or losses are reported in stockholders' equity. Accrual accounting is applied for derivatives designated as synthetic alterations with income and expense recorded in the same category as the related underlying on-balance sheet or off-balance sheet item synthetically altered. Gains or losses resulting from early terminations of derivatives are deferred and amortized over the remaining term of the underlying balance sheet item or the remaining term of the derivative, as appropriate. Derivatives not qualifying for hedge or synthetic accounting treatment would be carried at market value with realized and unrealized gains and losses included in noninterest revenues. At December 31, 1995, 1994 and 1993, all the Company's derivatives qualified as hedges or synthetic alterations. INCOME FROM MORTGAGE BANKING ACTIVITIES The Company, through its subsidiaries, sells mortgage loans through both secondary market securitizations and whole loan sales, typically with servicing retained. Income is recognized at the time of sale approximately equal to the present value of the anticipated future cash flows resulting from the retained yield adjusted for an assumed prepayment rate, net of any anticipated charge-offs, and allowing for a normal servicing fee. Changes in the anticipated future cash flows, as well as the receipt of cash flows which differ from those projected, affect the recognition of current and future mortgage banking income. Also included in income is any difference between the net sales proceeds and the carrying value of the mortgage loans sold at the time of the transaction. See Note 3 and Note 16. The carrying value includes deferred loan origination fees and costs which include certain fees and costs related to acquiring and processing a loan held for resale. These deferred origination fees and costs are netted against income from mortgage banking activities when the loans are sold. Mortgage banking income also includes loan servicing fees equal to .5% of the outstanding balance of securitized loans less amortization of previously recorded mortgage servicing assets and, beginning in 1992, loan servicing fees on mortgage loan portfolios which were never owned by the Company ("contract servicing"). INCOME FROM LEASE SECURITIZATIONS The Company, through its subsidiaries, sells equipment lease receivables through secondary market securitizations. Income is recorded at the time of sale approximately equal to the present value of the anticipated future cash flows net of anticipated charge-offs, partially offset by deferred initial direct costs, transaction expenses and estimated credit losses under certain recourse requirements of the trust. As these estimates are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Also included in income is the difference between the net sales proceeds and the carrying amount of the receivables sold. Subsequent to the initial sale, securitization income is recorded in proportion to the actual cash flows received from the trusts. See Note 3 and Note 16. INSURANCE Reinsurance premiums, net of commissions on credit life, disability and unemployment policies on credit cards, are earned monthly based upon the outstanding balance of the underlying receivables. Insurance premiums are earned ratably over the period of insurance coverage provided. The cost of acquiring new reinsurance is deferred and amortized over the respective periods in order to match the expense with the anticipated revenue. Insurance loss reserves are based on estimated settlement amounts for both reported losses and incurred but not reported losses. CREDIT LOSSES The Company's charge-off policy, as it relates to consumer credit card accounts, is to charge off a receivable, if not paid, at 186 days contractual delinquency. Under this policy, bankrupt and decedent 45 Advanta Corp. and Subsidiaries accounts are written off within 30 days of notification, and accounts suspected of being fraudulent are written off after a 90 day investigation period, unless the investigation shows no evidence of fraud. During 1994, the Company implemented a new policy for the charge-off of nonperforming mortgage loans. Under this policy, the Company charges off potential losses on all nonperforming mortgages that have become twelve months delinquent, regardless of anticipated collectibility. During the 1994 transition period, losses with respect to both mortgages that became twelve months delinquent in 1994, as well as those mortgages that had been twelve months or more delinquent, were charged off. PREMISES AND EQUIPMENT Premises, equipment, computers and software are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are charged to expense as incurred. GOODWILL Goodwill, representing the cost of investments in subsidiaries and affiliated companies in excess of net assets acquired at acquisition, is amortized on a straight-line basis over 25 years. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. EARNINGS PER SHARE Earnings per common share are computed by dividing net earnings after Class A preferred stock dividends by the average number of shares of common stock and common stock equivalents outstanding during each year. The outstanding Class A preferred stock is not a common stock equivalent. The outstanding Class B preferred stock is mandatorily convertible into common stock and thus is considered a common stock equivalent. CASH FLOW REPORTING For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks. Cash paid during 1995, 1994 and 1993 for interest was $147.2 million, $91.5 million and $78.8 million, respectively. Cash paid for taxes during these periods was $43.9 million, $60.9 million and $30.0 million, respectively. RECENT ACCOUNTING PRONOUNCEMENTS The FASB has issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures" ("SFAS 118"), an amendment of SFAS 114. Both statements are effective for fiscal years beginning after December 15, 1994. By their terms, SFAS 114 and SFAS 118 do not apply either to a large group of smaller-balance homogeneous loans that are collectively evaluated for impairment (such as the Company's credit card loans and all except an immaterial amount of the Company's mortgage loan portfolio), or to leases. In 1995, the Company adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 94-6, "Disclosure of Certain Significant Risks and Uncertainties." This SOP requires the Company to make certain disclosures regarding the use of estimates in the preparation of its financial statements. Effective January 1, 1995, the Company adopted the provisions of SFAS No. 122 "Accounting for Mortgage Servicing Rights," and capitalized $2.8 million of originated mortgage servicing rights during 1995 which are included in other assets. The FASB has issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement is effective for fiscal years beginning after December 15, 1995, and requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The required information, if the Company chooses to continue to apply certain allowable accounting provisions, will not reflect any adjustments to reported net income or earnings per share. 46 Advanta Corp. and Subsidiaries NOTE 2. LOAN AND LEASE RECEIVABLES Loan and lease receivables consisted of the following:
December 31, - - ----------------------------------------------------------------------------- 1995 1994 - - ----------------------------------------------------------------------------- Credit cards(A) $2,338,280 $1,730,176 Mortgage loans(B) 321,711 142,874 Leases(C) 93,660 86,157 Other loans 9,276 5,237 - - ----------------------------------------------------------------------------- Gross loan and lease receivables 2,762,927 1,964,444 - - ----------------------------------------------------------------------------- Add: Deferred origination costs, net of deferred fees(D) 69,816 56,627 Less: Reserve for credit losses: Credit cards (36,889) (27,486) Mortgage loans (3,360) (5,164) Leases (977) (1,076) Other (12,268) (7,891) - - ----------------------------------------------------------------------------- Total (53,494) (41,617) - - ----------------------------------------------------------------------------- Net loan and lease receivables $2,779,249 $1,979,454 =============================================================================
(A) Includes credit card receivables available for sale of $776.7 million and $420.0 million in 1995 and 1994, respectively. (B) Includes mortgage loan receivables available for sale of $279.4 million and $116.1 million in 1995 and 1994, respectively. (C) Includes lease receivables available for sale of $18.0 million and $36.0 million in 1995 and 1994, respectively, and is net of unearned income of $15.9 million and $17.9 million in 1995 and 1994, respectively. Also includes residual interest for both years. (D) Includes approximately $5.3 million and $1.0 million in 1995 and 1994,respectively, related to loan and lease receivables available for sale. Receivables serviced for others consisted of the following items:
December 31, - - ----------------------------------------------------------------------------- 1995 1994 - - ----------------------------------------------------------------------------- Credit cards $7,692,463 $4,808,257 Mortgage loans 1,475,871 1,203,226 Leases 284,094 179,310 - - ----------------------------------------------------------------------------- Total $9,452,428 $6,190,793 =============================================================================
The geographic concentration of managed receivables was as follows:
December 31, - - ----------------------------------------------------------------------- 1995 1994 - - ----------------------------------------------------------------------- Receivables % Receivables % - - ----------------------------------------------------------------------- California $ 2,043,281 16.7% $1,491,094 18.3% New York 983,832 8.1 648,746 8.0 Texas 692,665 5.7 442,185 5.4 Florida 640,859 5.3 406,240 5.0 New Jersey 599,867 4.9 443,784 5.4 All other 7,254,851 59.3 4,723,188 57.9 - - ----------------------------------------------------------------------- Total managed receivables $12,215,355 100.0% $8,155,237 100.0% =======================================================================
In the normal course of business, the Company makes commitments to extend credit to its credit card customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. The Company does not require collateral to support this financial commitment. At December 31, 1995 and 1994, the Company had $33.3 billion and $24.7 billion, respectively, of commitments to extend credit outstanding for which there is potential credit risk. The Company believes that its customers' utilization of these lines of credit will continue to be substantially less than the amount of the commitments, as has been the Company's experience to date. At December 31, 1995 and 1994, outstanding managed credit card receivables represented 30% and 26%, respectively, of outstanding commitments. NOTE 3. CREDIT CARD, MORTGAGE LOAN AND EQUIPMENT LEASE SECURITIZATIONS Colonial National and Advanta National together had securitized credit card receivables outstanding of $7.7 billion at December 31, 1995. In each securitization transaction, credit card receivables were transferred to a trust which issued certificates representing ownership interests in the trust primarily to institutional investors. The Banks retained a participation interest in each trust, reflecting the excess of the total amount of receivables transferred to the trust over the portion represented by certificates sold to investors. The retained participation interests in the credit card trusts were $1.5 billion and $1.3 billion at December 31, 1995 and 1994, respectively. Although the Banks continue to service the underlying credit card accounts and maintain the customer relationships, these transactions are treated as sales for financial reporting purposes to the extent of the investors' interests in the trusts. Accordingly, the associated receivables are not reflected on the balance sheet. The Banks are subject to certain recourse provisions in connection with these securitizations. At December 31, 1995 and 1994, the Banks had reserves of $167.4 million and $74.5 million, respectively, related to these recourse provisions. These reserves are netted against the amounts due from credit card securitizations. At December 31, 1995, the Company had amounts receivable from credit card securitizations, including the related interest-bearing deposits, of $453.2 million, $262.4 million of which constitute amounts subject to liens by the providers of the credit enhancement facilities for the individual securitizations and amounts to be distributed to investors. At December 31, 1994, the amounts receivable were $318.6 million and amounts subject to lien or due to investors were $174.1 million. At December 31, 1995, the Company had $1.5 billion of securitized mortgage loan receivables 47 Advanta Corp. and Subsidiaries outstanding which are subject to certain recourse provisions. The Company had reserves of $27.2 million and $17.3 million at year end 1995 and 1994, respectively, related to these recourse provisions which are netted against the excess mortgage servicing rights. See Note 16. At December 31, 1995, the Company had amounts receivable from mortgage loan sales and securitizations of $162.4 million, $58.1 million of which was subject to liens. At December 31, 1994, the amounts receivable and amounts subject to lien were $128.6 million and $49.1 million, respectively. At December 31, 1995, the Company had $284 million of securitized equipment lease receivables outstanding which are subject to certain recourse provisions. The asset-backed certificates carry both fixed and variable rates to investors. There were reserves of $15.3 million and $9.7 million at year end 1995 and 1994, respectively, related to these recourse provisions which are netted against the excess servicing on lease securitizations. See Note 16. The Company had accounts receivable from lease securitizations of $22.2 million at year end 1995 and $14.4 million at year end 1994, of which $7.5 million and $6.4 million, respectively, were subject to liens by providers of the credit enhancement facilities. Total interest in residuals for lease assets sold was $22.4 million and $12.0 million at December 31, 1995 and 1994, respectively, and is also subject to recourse provisions. As indicated in Note 1, recourse reserves are established at the time of the securitization transactions based on anticipated future cash flows, prepayment rates and charge-offs. As these estimates are influenced by factors outside of the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. NOTE 4. RESERVE FOR CREDIT LOSSES The reserve for credit losses for lending and leasing transactions is established to reflect losses anticipated from delinquencies that have already occurred. In estimating the reserve, management relies on historical experience by loan type adjusted for any known trends in the portfolio. As these estimates are influenced by factors outside of the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Any adjustments to the reserves (net of transfers between on- and off-balance sheet reserves) are reported in the Consolidated Income Statements in the periods they become known. During 1994, the Company initiated a mortgage loan repurchase program in which nonperforming mortgage loans were repurchased from the securitization trusts in order to lower the net funding costs on these managed assets. In accordance with this program, the Company transferred approximately $13 million of the off-balance sheet mortgage loan recourse reserves associated with these repurchased mortgages to on-balance sheet mortgage loan reserves (see discussion in Management's Discussion and Analysis under the caption "Provision for Credit Losses"). The following table displays five years of reserve history:
RESERVE FOR CREDIT LOSSES Year Ended December 31, - - ----------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - - ----------------------------------------------------------------------------------------------------------- Balance at January 1 $ 41,617 $ 31,227 $ 40,228 $ 36,355 $ 31,701 Provision for credit losses 53,326 34,198 29,802 47,138 55,461 Transfer of reserves from/(to) recourse reserves 1,100 11,485 (12,027) (3,300) 0 Gross credit losses: Credit cards (41,779) (28,646) (33,805) (46,477) (52,798) Mortgage loans (6,038) (11,731) (2,247) (1,488) (1,635) Leases (1,413) (1,053) (1,376) (1,930) (3,205) Other loans (38) (44) (93) (73) (155) - - ----------------------------------------------------------------------------------------------------------- Total credit losses (49,268) (41,474) (37,521) (49,968) (57,793) Recoveries: Credit cards 6,354 5,958 10,182 9,095 5,546 Mortgage loans 76 42 40 37 8 Leases 274 139 429 663 1,075 Other loans 15 42 94 208 357 - - ----------------------------------------------------------------------------------------------------------- Total recoveries 6,719 6,181 10,745 10,003 6,986 - - ----------------------------------------------------------------------------------------------------------- Net credit losses (42,549) (35,293) (26,776) (39,965) (50,807) Balance at December 31 $ 53,494 $ 41,617 $ 31,227 $ 40,228 $ 36,355 ===========================================================================================================
48 Advanta Corp. and Subsidiaries NOTE 5. INVESTMENTS AVAILABLE FOR SALE Investments available for sale consisted of the following:
December 31, - - ------------------------------------------------------------------------------------------------------------- 1995 1994 ------------------------------------------- ---------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Lesses Value Cost Gains Losses Value - - ------------------------------------------------------------- ---------------------------------------------- U.S. Treasury & other U.S. Government Securities $405,614 $ 70 $(286) $405,398 $192,994 $0 $ (4,509) $188,485 State and municipal securities 24,239 52 0 24,291 78,884 0 (1,676) 77,208 Collateralized mortgage obligations 8,066 0 (101) 7,965 8,584 0 (672) 7,912 Mortgage-backed securities 36,599 0 (103) 36,496 34,555 0 (2,829) 31,726 Equity securities: Venture capital investments 26,897 4,111 0 31,008 5,000 0 0 5,000 Other equity securities 10,963 196 (250) 10,909 8,056 0 (372) 7,684 Other 16,897 0 (1) 16,896 745 0 (1) 744 - - ------------------------------------------------------------------------------------------------------------- Total $529,275 $4,429 $(741) $532,963 $328,818 $0 $(10,059) $318,759 - - -------------------------------------------------------------------------------------------------------------
December 31, - - -------------------------------------------------------------- 1993 -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Lesses Value - - -------------------------------------------------------------- U.S. Treasury & other U.S. Government Securities $154,873 $ 225 $(177) $154,921 State and municipal securities 75,797 868 0 76,665 Collateralized mortgage obligations 21,288 42 (60) 21,270 Mortgage-backed securities 45,611 0 (42) 45,569 Equity securities: Venture capital investments 0 0 0 0 Other equity securities 6,947 0 0 6,947 Other 2,704 0 (50) 2,654 - - -------------------------------------------------------------- Total $307,220 $1,135 $(329) $308,026 ==============================================================
At December 31, 1995, investment securities with a book value of $4,139 were pledged as collateral for derivatives transactions. At December 31, 1994, investment securities with a book value of $106,582 were pledged as collateral for repurchase and derivatives transactions. At December 31, 1995, 1994 and 1993, investment securities with a book value of $6,281, $7,133 and $7,927, respectively, were deposited with insurance regulatory authorities to meet statutory requirements or held by a trustee for the benefit of primary insurance carriers. At December 31, 1995, $3,688 of net unrealized gains on securities was included in investments available for sale. During 1995, the net change in unrealized gains on available for sale securities included as a separate component of stockholders' equity was $6,258. Maturity of investments available for sale at December 31, 1995 was as follows:
Amortized Market Cost Value - - ----------------------------------------------------------------- Due in 1 year $422,907 $422,662 Due after 1 but within 5 years 5,881 5,946 Due after 5 but within 10 years 1,065 1,081 Due after 10 years 0 0 - - ----------------------------------------------------------------- Subtotal 429,853 429,689 Mortgage-backed CMO and MBS 44,665 44,461 Equity and other securities 54,757 58,813 - - ----------------------------------------------------------------- Total investments $529,275 $532,963 =================================================================
During 1995, proceeds from sales of available for sale securities were $1,689,000. Gross gains of $8,666 and losses of $320 were realized on these sales. Of the gross gains, $8,610 relates to an investment held by the Company's venture capital unit. Proceeds during 1994 were $624,000. Gross gains of $118 and losses of $596 were realized on these sales. Proceeds during 1993 were $841,000. Gross gains of $3,430 and losses of $888 were realized on these sales. The specific identification method was the basis used to determine the amortized cost in computing realized gains and losses. 49 Advanta Corp. and Subsidiaries NOTE 6. DEBT On December 11, 1995, $184 million of previously issued subordinated notes and RediReserve certificates were exchanged for senior notes and RediReserve certificates with similar interest rates and maturities. Total debt consisted of the following:
December 31, - - ----------------------------------------------------------------------------- 1995 1994 - - ----------------------------------------------------------------------------- SENIOR DEBT RediReserve certificates $ 4,203 $ 0 6 month senior notes 4,629 0 12 month senior notes 46,372 0 18 month senior notes (4.65%-7.00%) 6,534 0 24 month senior notes (4.88%-7.58%) 37,600 0 30 month senior notes (5.36%-7.14%) 16,730 0 48 month senior notes (5.60%-9.02%) 19,939 0 60 month senior notes (5.83%-10.44%) 55,604 0 5 1/8% notes due 1996 149,955 149,903 Medium-term notes, fixed (5.02%-8.36%) 289,735 264,735 Medium-term notes, floating 215,000 95,000 Short-term bank notes (5.97%) 24,999 84,977 Medium-term bank notes, fixed (5.86%-6.63%) 297,737 0 Medium-term bank notes, floating 24,970 0 Other senior notes 8,961 0 - - ----------------------------------------------------------------------------- Total senior debt $1,202,968 $ 594,615 SUBORDINATED DEBT RediReserve certificates $ 26 $ 4,829 6 month subordinated notes 65 5,422 12 month subordinated notes 552 34,082 18 month subordinated notes (4.65%-7.00%) 75 10,113 Two-, four-, and five year subordinated notes (4.88%-10.44%) 21,676 130,213 30 month subordinated notes (5.36%-7.14%) 2,878 37,858 7% subordinated bank notes due 2003 49,699 49,659 Other subordinated notes 1,251 10,003 - - ----------------------------------------------------------------------------- Total subordinated debt $ 76,222 $ 282,179 - - ----------------------------------------------------------------------------- Total debt $1,279,190 $ 876,794 Less short-term debt & certificates $ (691,313) $(210,761) - - ----------------------------------------------------------------------------- Long-term debt $ 587,877 $ 666,033 =============================================================================
The Company's senior floating rate notes were priced based on a factor of LIBOR or the Federal Funds effective rate. At December 31, 1995 the rates on these notes varied from 6.01% to 6.41%. The annual maturities of long-term debt at December 31, 1995 for the years ending December 31 are as follows: $316.1 million in 1997; $30.5 million in 1998; $17.9 million in 1999; $151.9 million in 2000; and $71.4 million thereafter. The average interest cost of the Company's debt during 1995, 1994 and 1993 was 6.92%, 6.23%, and 7.59%, respectively. NOTE 7. CAPITAL STOCK The number of shares of capital stock was as follows:
Issued and Outstanding - - ----------------------------------------------------------------------------- December 31, - - ----------------------------------------------------------------------------- 1995 1994 - - ----------------------------------------------------------------------------- (In thousands) Class A preferred -- $1,000 par value; Authorized, 1,010 1 1 ============================================================================= Class B preferred--$.01 par value; Authorized, 1,000,000 25 0 ============================================================================= Class A voting common stock -- $.01 par value; Authorized, 200,000,000 17,481 17,347 Class B non-voting common stock -- $.01 par value; Authorized, 200,000,000 24,007 23,132 - - ----------------------------------------------------------------------------- Total common stock 41,488 40,479 =============================================================================
The Class A Preferred Stock is entitled to 1/2 vote per share and a non-cumulative dividend of $140 per share per year, which must be paid prior to any dividend on the common stock. Dividends were declared on the Class A Preferred Stock for the first time in 1989 and have continued through 1995 as the Company paid dividends on its common stock. The redemption price of the Class A Preferred Stock is equivalent to the par value. The Class B Preferred Stock pays a 6 3/4% dividend per share per year (equal to $249.75 per share) and must be paid prior to any dividend on the common stock. NOTE 8. ISSUANCE OF PREFERRED STOCK On August 21, 1995, in a public offering, the Company sold 2,500,000 depositary shares each representing a one-hundredth interest in a share of Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995 (SAILS). On September 15, 1999, unless either previously redeemed by the Company or converted at the option of the holder, each share of the SAILS will automatically convert into 100 shares of Class B Common Stock. Proceeds from the offering, net of underwriting discount, were approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including financing the growth of its subsidiaries. NOTE 9. EXTRAORDINARY ITEM In April of 1993, the Company repurchased the remaining $33.2 million of its 12 3/4% Senior Subordinated Debentures at a price equal to 104% of par. This transaction resulted in an extraordinary loss of $1.3 million (net of a tax benefit of $.7 million) or $.03 per share for the year ended December 31, 1993. 50 Advanta Corp. and Subsidiaries NOTE 10. INCOME TAXES Income tax expense consisted of the following components:
Year Ended December 31, ---------------------------------------------------------------------------------------------------- 1995 1994 1993 ---------------------------------------------------------------------------------------------------- Current: Federal $55,184 $54,246 $40,736 State 4,943 4,948 4,184 ---------------------------------------------------------------------------------------------------- 60,127 59,194 44,920 ---------------------------------------------------------------------------------------------------- Deferred: Federal 14,316 (613) (1,829) State 783 563 2,244 ---------------------------------------------------------------------------------------------------- 15,099 (50) 415 ---------------------------------------------------------------------------------------------------- Total tax expense before extraordinary item $75,226 $59,144 $45,335 =====================================================================================================
Current taxes payable include the earnings of certain subsidiaries which are not included in the consolidated federal income tax return. The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
Year Ended December 31, ---------------------------------------------------------------------------------------------------- 1995 1994 1993 ---------------------------------------------------------------------------------------------------- Statutory federal income tax $74,166 $57,822 $43,139 State income taxes, net of federal income tax benefit 3,722 3,582 4,178 Nontaxable investment income (984) (1,149) (675) Other (1,678) (1,111) (1,307) ---------------------------------------------------------------------------------------------------- Consolidated tax expense before extraordinary item $75,226 $59,144 $45,335 ---------------------------------------------------------------------------------------------------- Tax benefit on loss from repurchase of debentures 0 0 (656) ---------------------------------------------------------------------------------------------------- Consolidated tax expense $75,226 $59,144 $44,679 ====================================================================================================
Deferred taxes are determined based on the estimated future tax effects of the differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. The net deferred tax asset/(liability) is comprised of the following:
December 31, ---------------------------------------------------------------------------- 1995 1994 ---------------------------------------------------------------------------- Deferred taxes: Gross assets $ 75,851 $ 78,602 Gross liabilities (59,445) (52,344) ---------------------------------------------------------------------------- Total deferred taxes $ 16,406 $ 26,258 ============================================================================
The Company concluded that a valuation allowance against the deferred tax asset at December 31, 1995 and 1994 is not necessary. Realization of the deferred tax asset is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows:
December 31, ------------------------------------------------------------------------------------------------------- 1995 1994 ------------------------------------------------------------------------------------------------------- SFAS 91 $(23,899) $(20,034) Loan losses 20,197 14,965 Mortgage banking income 9,767 10,174 Securitization income (35,546) (28,949) Leasing income 41,901 42,473 Other 3,986 7,629 ------------------------------------------------------------------------------------------------------- Net deferred tax assets/(liabilities) $ 16,406 $ 26,258 =======================================================================================================
NOTE 11. BENEFIT PlANS The Company has adopted several management incentive plans designed to provide incentives to participating employees to remain in the employ of the Company and devote themselves to its success. Under these plans, eligible employees were given the opportunity to elect to take portions of their anticipated or "target" bonus payments for future years in the form of restricted shares of common stock. To the extent that such elections were made (or, for executive officers, were required by the terms of such plans), restricted shares were issued to employees, with the number of shares granted to employees determined by dividing the amount of future bonus payments the employee had elected to receive in stock by the market price as determined under the incentive plans. The restricted shares are subject to forfeiture should the employee terminate employment with the Company prior to vesting. Restricted shares vest ten years from the date of grant, but with respect to the restricted shares issued under each plan, vesting was and will be accelerated annually with respect to one-third of the shares, to the extent that the employee and the Company met or meet their respective performance goals for a given plan performance year. When newly eligible employees elect to participate in a plan, the number of shares issued to them with respect to their "target" bonus payments for the relevant plan performance years is determined based on the average market price of the stock for the 90 days prior to eligibility. 51 Advanta Corp. and Subsidiaries The following table summarizes the Company's incentive plans:
Plan Original Performance Stock Shares Shares Years Covered Price Issued Vested ------------------------------------------------------------------------------------------------------------- AMIPWISE II 1993--1995 $ 4.75 1,017,127 618,429 KEIPWISE 1992--1995 $ 7.07 73,503 49,458 AMIPWISE III 1996--1998 $17.00 518,412 0 AMIPWISE IV 1999--2001 $25.00 450,321 0 =============================================================================================================
At December 31, 1995, a total of 1,396,764 shares issued under these and the predecessor plan to AMIPWISE II (for "target" bonuses for 1990--1992) were were subject to restrictions and were included in the number of shares outstanding. The Company has an Employee Stock Purchase Plan which allows employees employees and directors to purchase Class B common stock at a 15% discount from the market price without paying brokerage fees. The Company reports this 15% discount as compensation expense. During 1995, shares were issued under the plan from unissued stock or from treasury stock at the average market price on the day of purchase. The Company has two Stock Option Plans which together authorize the grant to employees and directors of options to purchase an aggregate of 6.5 million shares of common stock. The Company presently intends only to issue options to purchase Class B common stock. Beginning in 1992, options generally vest over a four-year period, and expire 10 years after the date of grant. Shares available for future grant aggregated 96,508 at December 31, 1995, and 1,362,508 at December 31, 1994. Transactions under the plans for the two years ended December 31, 1995, were as follows:
Number of Price Range Shares Per Share ------------------------------------------------------------------------------- (In thousands) Options outstanding at December 31, 1993 3,039 $ .98 -- $27.50 Options granted 762 $23.50 -- $35.00 Options exercised (313) $ .98 -- $24.67 Options terminated (73) $11.58 -- $27.38 ------------------------------------------------------------------------------- Options outstanding at December 31, 1994 3,415 $ .98 -- $35.00 Options granted 1,363 $29.00 -- $43.88 Options exercised (300) $ 1.00 -- $32.00 Options terminated (97) $12.33 -- $31.50 ------------------------------------------------------------------------------- Options outstanding at December 31, 1995 4,381 $ .98 -- $43.88 ===============================================================================
The Company also has outstanding options to purchase 581,500 shares of common stock at a price range of $1.52 to $4.75 per share, which were not issued pursuant to either of the Stock Option Plans. At December 31, 1995, 2,015,319 of the 4,381,000 outstanding options issued under the Stock Options Plans had vested and all 581,500 options issued outside the Plans had vested. The Company has a tax-deferred employee savings plan which provides employees savings and investment opportunities, including the ability to invest in the Company's Class B common stock. The employee savings plan provides for discretionary Company contributions equal to a portion of the first 5% of an employee's compensation contributed to the plan. For the three years ended December 31, 1995, 1994 and 1993, the Company contributions equaled 100% of the first 5% of participating employees' compensation contributed to the plan. The expense for this plan totaled $2,027, $1,565 and $1,189 in 1995, 1994 and 1993, respectively. All shares purchased by the plan for the three years ended December 31, 1995 were acquired from the Company at the market price on each purchase date or were purchased on the open market. NOTE 12. CREDIT CARD SALE In April 1994, the Company, through its subsidiary Colonial National, reached an agreement with NationsBank of Delaware, N.A., to sell certain credit card customer relationships which at that time represented approximately $150 million of securitized credit card receivables (less than 4% of the Company's managed credit card receivables as of June 30, 1994). In the second quarter of 1994, the Company recorded an $18.4 million pretax gain on the sale related to the value associated with the customer relationships. In addition, the Company deferred a portion of the proceeds related to the excess spread of the receivables to be generated over the remaining life of the securitization trust, which terminated in the second quarter of 1995. These proceeds were recognized as securitization income over the related period. 52 Advanta Corp. and Subsidiaries NOTE 13. COMMITMENTS AND CONTINGENCIES The Company leases office space in several states under leases accounted for as operating leases. Total rent expense for all of the Company's locations for the years ended December 31, 1995, 1994 and 1993 was $4.9 million, $5.4 million and $4.8 million, respectively. The future minimum lease payments of all non-cancelable operating leases are as follows:
Year Ended December 31, ------------------------------------------------------------------ 1996 $ 5,825 ------------------------------------------------------------------ 1997 5,521 ------------------------------------------------------------------ 1998 4,214 ------------------------------------------------------------------ 1999 3,105 ------------------------------------------------------------------ 2000 2,803 ------------------------------------------------------------------ Thereafter 10,856 ==================================================================
NOTE 14. OTHER BORROWINGS The Company had a revolving credit facility of $510 million and money market bid lines of $255 million at December 31, 1995. There is a quarterly facility fee of up to 1/2 of 1% of the unused portion of the revolving credit facility. There is no facility fee on the money market bid lines as they are uncommitted facilities. Under the revolving credit facility, the Company is subject to various loan covenants, including the maintenance of certain fixed financial ratios and conditions, limitations on mergers and acquisitions, and limitations on liens on property and other assets. The composition of other borrowings was as follows:
December 31, --------------------------------------------------------------------------- 1995 1994 --------------------------------------------------------------------------- Term fed funds $ 443,000 $309,000 Securities sold under repurchase agreements 0 86,455 Short-term debt 691,313 210,761 Lines of credit and term funding arrangements 0 50,000 Other borrowings 81,814 80,879 --------------------------------------------------------------------------- Total $1,216,127 $737,095 ===========================================================================
The following table displays information related to selected types of short-term borrowings:
1995 1994 - - ----------------------------------------------------------------- Amount Rate Amount Rate - - ----------------------------------------------------------------- At year end: Securities sold under repurchase agreements $ 0 0% $ 86,455 6.26% Term fed funds 443,000 5.83 309,000 6.13 - - ----------------------------------------------------------------- Total $443,000 5.83% $395,455 6.16% ================================================================= Average for the year: Securities sold under repurchase agreements $ 25,008 5.97% $ 14,111 5.07% Term fed funds and fed funds purchased 199,166 6.10 154,299 4.74 - - ----------------------------------------------------------------- Total $224,174 6.09% $168,410 4.77% ================================================================= Maximum month-end balance: Securities sold under repurchase agreements $ 29,813 $ 86,455 Term fed funds and fed funds purchased 455,250 309,000 =================================================================
The weighted average interest rates were calculated by dividing the interest expense for the period for such borrowings by the average amount of short-term borrowings outstanding during the period. NOTE 15. SELECTED INCOME STATEMENT INFORMATION
Noninterest Revenues Year Ended December 31, - - ---------------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------- Gain on sale of credit cards $ 0 $ 18,352 $ 0 Other noninterest revenues: Credit card securitization income 183,360 149,043 98,521 Credit card servicing income 117,369 68,960 41,593 Credit card interchange income 92,439 71,740 56,107 Income from mortgage banking activities 50,541 37,586 24,146 Leasing revenues, net 41,050 21,551 10,317 Insurance revenues, net 27,654 12,734 9,249 Equity securities gains 15,386 0 0 Other credit card revenues 14,230 14,209 11,545 Other 985 1,633 4,102 - - ---------------------------------------------------------------- Total other noninterest revenues $543,014 $377,456 $255,580 - - ---------------------------------------------------------------- Total noninterst revenues $543,014 $395,808 $255,580 ================================================================
53 Advanta Corp. and Subsidiaries
OPERATING EXPENSES Year Ended December 31, - - ---------------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------- Amortization of credit card deferred origination costs, net $ 72,258 $ 39,381 $ 6,566 Other operating expenses: Salaries and employee benefits 116,681 88,681 65,469 External processing 28,407 22,618 16,604 Marketing 25,374 32,339 18,742 Credit card fraud losses 20,029 16,654 13,779 Postage 18,518 12,732 9,818 Professional fees 14,937 10,985 10,761 Equipment expense 12,751 9,293 6,550 Telephone expense 11,959 8,615 5,402 Occupancy expense 9,254 8,425 6,247 Credit and collection expense 9,039 7,604 7,055 Other 11,478 9,457 14,174 - - ---------------------------------------------------------------- Total other operating expenses $278,427 $227,403 $174,601 - - ---------------------------------------------------------------- Total operating expenses $350,685 $266,784 $181,167 ================================================================
Note 16. SELECTED BALANCE SHEET INFORMATION
INTEREST-BEARING DEPOSITS December 31, - - ----------------------------------------------------------------- 1995 1994 - - ----------------------------------------------------------------- Amounts due from credit card trusts(A) $262,392 $174,147 Amounts due from mortgage trusts(A) 58,105 49,097 Amounts due from leasing trusts(A) 7,479 6,398 Other interest-bearing deposits 82,733 84,210 - - ----------------------------------------------------------------- Total interest-bearing deposits $410,709 $313,852 =================================================================
(A) Represents initial deposits and subsequent excess collections up to the required amount on each of the credit card, mortgage and leasing securitizations. Also includes amounts to be distributed to investors.
OTHER ASSETS December 31, ------------------------------------------------------------------ 1995 1994 ------------------------------------------------------------------ Excess mortgage servicing rights $ 96,194 $ 73,223 Prepaid assets 69,170 33,895 Accrued interest receivable 67,681 39,353 Deferred costs 20,670 9,500 Investments in operating leases 11,928 13,123 Excess servicing--leasing 11,813 5,949 Due from trustees--mortgage 8,095 6,295 Current and deferred federal income taxes 15,823 26,093 Goodwill 4,983 5,318 Other real estate(A) 3,333 4,564 Due from trustees--leasing 2,941 2,010 Other 62,346 21,202 ------------------------------------------------------------------ Total other assets $374,977 $240,525 ==================================================================
(A) Carried at the lower of cost or fair market value. At December 31, 1995 and 1994, the Company had $190.8 million and $144.5 million, respectively, of amounts due from credit card securitizations. These amounts include excess servicing, accrued interest receivable and other amounts related to these securitizations and are net of recourse reserves established.
OTHER LIABILITIES December 31, ------------------------------------------------------------------- 1995 1994 -------------------------------------------------------------------- Deferred fees and other reserves $ 46,058 $ 42,855 Accounts payable and accrued expenses 32,831 31,380 Accrued interest payable 29,012 10,640 Current and deferred state income taxes 9,026 6,813 Other 23,763 17,184 ------------------------------------------------------------------- Total other liabilities $140,690 $108,872 ===================================================================
NOTE 17. CASH, DIVIDEND AND LOAN RESTRICTIONS In the normal course of business, the Company and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in cash, debt and dividend restrictions. The Federal Reserve Act imposes various legal limitations on the extent to which banks that are members of the Federal Reserve System can finance or otherwise supply funds to certain of their affiliates. In particular, Colonial National and Advanta National are subject to certain restrictions on any extensions of credit to, or other covered transactions, such as certain purchases of assets, with the Company or its 54 Advanta Corp. and Subsidiaries affiliates. Such restrictions prevent both banks from lending to the Company and its affiliates unless such extensions of credit are secured by U.S. Government obligations or other specified collateral. Further, such secured extensions of credit by Colonial National and Advanta National are limited in amount: (a) as to the Company or any such affiliate, to 10 percent of each bank's capital and surplus, and (b) as to the Company and all such affiliates in the aggregate, to 20 percent of each bank's capital and surplus. Under certain grandfathering provisions of the Competitive Equality Banking Act of 1987, the Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so long as the Company and Colonial National continue to comply with certain restrictions on their activities. With respect to Colonial National, these restrictions include limiting the scope of its activities to those in which it was engaged prior to March 5, 1987. Since Colonial National was not making commercial loans at that time, it must continue to refrain from making commercial loans which would include any loans to the Company or any of its subsidiaries in order for the Company to maintain its grandfathered exemption under the BHCA. The Company has no present plans to register as a bank holding company under the BHCA. Colonial National and Advanta National are also subject to various legal limitations on the amount of dividends that can be paid to their parent, Advanta Corp. Each bank is eligible to declare a dividend provided that it is not greater than the current year's net profits plus net profits of the preceding two years, as defined. During 1995, Colonial National paid $63 million of dividends to Advanta Corp. while $24 million of dividends were paid during 1994. Advanta National, as a credit card bank, must also refrain from making commercial loans which would include any loans to the Company or any of its subsidiaries. The Office of the Comptroller of the Currency requires that Colonial National and Advanta National maintain risk-based capital ratios of at least 8%. At December 31, 1995, Colonial National's and Advanta National's risk-based capital ratios of 11.56% and 12.28%, respectively, were in excess of the required level and exceeded the minimum required capital level of 10% for designation as "well capitalized" depository institutions. NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
------------------------------------------------------------------------------------------------- 1995 1994 ----------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------------------------------- Financial assets: Cash $ 45,714 $ 45,714 $ 43,706 $ 43,706 Federal funds sold 146,375 146,375 39,050 39,050 Interest-bearing deposits 410,709 410,709 313,852 313,852 Investments available for sale 532,963 532,963 318,759 318,759 Loans, net of reserve for credit losses 2,779,249 2,846,166 1,979,454 2,019,418 Amounts due from credit card securitizations 190,819 236,483 144,483 210,107 Excess mortgage servicing rights 96,194 105,024 73,223 89,600 Financial liabilities: Demand and savings deposits $ 369,224 $ 369,224 $ 366,201 $ 366,201 Time deposits and debt 2,816,567 2,830,590 1,669,951 1,653,979 Other borrowings 524,814 525,246 526,334 526,441 Off-balance sheet financial instruments Asset/(Liability): Interest rate swaps $ 0 $ 3,198 $ 0 $ (21,818) Interest rate options: Caps purchased 1,228 1,211 3,297 6,032 Caps written (4,330) (1,703) (5,801) (5,767) Corridors/collars 66 (1,033) 0 785 Forward contracts 0 (1,294) 0 26 Intangibles: Credit card customer relationships -- on- and off-balance sheet $ 0 $1,841,900 $ 0 $1,135,200 ================================================================================================
55 Advanta Corp. and Subsidiaries The above values do not necessarily reflect the premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. In addition, these values, derived from the methods and assumptions described below, do not consider the potential income taxes or other expenses that would be incurred on an actual sale of an asset or settlement of a liability. With respect to the fair value of liabilities, the above table is prepared on the basis that the amounts necessary to discharge such liabilities represent fair value. The Company's off-balance sheet financial instruments relate to managing the interest rate sensitivity and foreign currency position as described in Note 20. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS For these short-term instruments, the carrying amount is a reasonable estimate of the fair value. INVESTMENTS For investment securities held to maturity and those available for sale, the fair values are based on quoted market prices, dealer quotes or estimated using quoted market prices for similar securities. LOANS, NET OF RESERVE FOR CREDIT LOSSES For credit card receivables and mortgage loans, the fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for credit card receivables and mortgage loans also includes the estimated value of the portion of the interest payments and fees which are not sold with the securities backed by these types of loans. The value of the retained interest payments (i.e., excess servicing) is estimated by discounting the future cash flows, adjusted for prepayments, net of anticipated charge-offs and allowing for the value of the servicing. The value of direct finance lease receivables and other loans is estimated based on the market prices of similar receivables with similar characteristics. AMOUNTS DUE FROM CREDIT CARD SECURITIZATIONS AND EXCESS MORTGAGE SERVICING RIGHTS The fair values of the excess servicing rights component of amounts due from credit card securitizations and excess mortgage servicing rights are estimated by discounting the future cash flows at rates which management believes to be reasonable. However, because there is no active market for these financial instruments, management has no basis to determine whether the fair values presented above would be indicative of the value negotiated in an actual sale. The future cash flows used to estimate the fair values of these financial instruments are adjusted for prepayments, net of anticipated charge-offs under recourse provisions, and allow for the value of servicing. For the other components of amounts due from credit card securitizations, the carrying amount is a reasonable estimate of the fair value. DEMAND AND SAVINGS DEPOSITS The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. This fair value does not include the benefit that results from the low cost of funding provided by these deposits compared to the cost of borrowing funds in the market. TIME DEPOSITS AND DEBT The fair value of fixed-maturity certificates of deposit and notes is estimated using the rates currently offered for deposits and notes of similar remaining maturities. OTHER BORROWINGS The other borrowings are all at variable interest rates and therefore the carrying value approximates a reasonable estimate of the fair value. INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS The fair value of interest rate swaps, options and forward contracts (used for managing interest rate and foreign currency risks) is the estimated amount that the Company 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. CREDIT CARD CUSTOMER RELATIONSHIPS (BOTH ON- AND OFF-BALANCE SHEET) The fair value of the credit card relationships, which are not financial instruments, is estimated using a credit card valuation model which considers the value of the existing receivables together with the value of new receivables and the associated fees generated from existing cardholders over the remaining life of the portfolio. 56 Advanta Corp. and Subsidiaries COMMITMENTS TO EXTEND CREDIT Although the Company had $23.3 billion of unused commitments to extend credit, there is no market value associated with these commitments, as any fees charged are consistent with the fees charged by other companies at the reporting date to enter into similar agreements. NOTE 19. CALCULATION OF EARNINGS PER COMMON SHARE The following table shows the calculation of earnings per common share for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 ------------------------------------------------------------------------------------------- Net income $136,677 $106,063 $76,647 less: Preferred 'A' dividends (141) (141) (141) ------------------------------------------------------------------------------------------- Net income available to common shares $136,536 $105,922 $76,506 Average common stock outstanding 39,723 38,877 37,170 Common stock equivalents: Restricted stock and options 2,206 2,169 2,607 Mandatorily convertible Preferred "B" stock (see Note 8) 741 0 0 ------------------------------------------------------------------------------------------- Weighted average shares outstanding 42,670 41,046 39,777 =========================================================================================== Earnings per common share $ 3.20 $ 2.58 $ 1.92 ===========================================================================================
NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS In managing its interest rate sensitivity and foreign currency positions, the Company may use derivative financial instruments. These instruments are used for the express purpose of managing its interest rate and foreign currency exposures and are not used for any trading or speculative activities. As of December 31, 1995 and 1994, all of the Company's derivatives were designated as hedges or synthetic alterations and were accounted for as such. The following table summarizes by notional amounts the Company's derivatives instruments as of December 31, 1995 and 1994:
1995 1994 ---------------------------------------------------------------------------------- Interest rate swaps $ 867,835 $ 459,735 Interest rate options: Caps written 1,360,000 1,100,000 Caps purchased 270,000 110,000 Corridors/collars 575,000 425,000 Forward contracts 190,652 39,000 ---------------------------------------------------------------------------------- $3,263,487 $2,133,735 ----------------------------------------------------------------------------------
The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of the Company's exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives contracts. Credit risk associated with derivatives arises from the potential for a counterparty to default on its obligations. The Company attempts to limit credit risk by only transacting with highly creditworthy counterparties and requiring master netting and collateral agreements for all interest rate swap and interest rate option contracts. All derivative counterparties are associated with organizations having securities rated as investment grade by independent rating agencies. The list of eligible counterparties, setting of counterparty limits, and monitoring of credit exposure is controlled by the Investment Committee, a management committee. The Company's credit exposure to derivatives, with the exception of caps written, is represented by contracts with a positive fair value without giving consideration to the value of any collateral exchanged see Note 18. For caps written, credit exposure does not exist since the counterparty has performed its obligation to pay the Company a premium payment. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. Based on its interest rate sensitivity analyses, the Company enters into interest rate swaps to more effectively manage the impact of fluctuating interest rates on its net interest income and noninterest revenues. The Company has used interest rate swaps to synthetically alter the cash flow characteristics on certain deposit, debt, and off-balance sheet credit card and leasing securitizations. As of December 31, 1995, the Company used interest rate swaps for the following purposes: $250 million to effectively convert certain variable rate deposits to a fixed rate, $204 million to effectively convert fixed rate debt to a LIBOR based variable rate, and $414 million to effectively convert certain off-balance sheet variable pass-through rate credit card and leasing securitizations to a fixed rate. As of December 31, 1994, the Company used $460 million in notional amounts of interest rate swaps to effectively convert certain fixed rate debt to a LIBOR based variable rate. In 1995, as part of its asset/liability risk management process, the Company elected to terminate $285.9 million of interest rate swaps which were effectively converting certain fixed rate debt to a variable rate based on LIBOR. Gains or losses resulting from these interest rate swap terminations are 57 Advanta Corp. and Subsidiaries deferred and amortized to interest expense over the remaining life of the underlying fixed rate debt. As of December 31, 1995, the remaining unamortized loss on interest rate swap terminations amounted to $1.3 million and the weighted average amortization period was 10 months. The following table summarizes by notional amounts the Company's interest rate swap activity by major category for the periods presented:
Receive Pay Fixed Rate Fixed Rate Total - - ------------------------------------------------------------------------------------------------ Balance at 1/01/93 $ 0 $ 500,000 $ 500,000 Additions 150,000 0 150,000 - - ------------------------------------------------------------------------------------------------ Balance at 12/31/93 150,000 500,000 650,000 Additions 309,735 0 309,735 Maturities 0 (500,000) (500,000) - - ------------------------------------------------------------------------------------------------ Balance at 12/31/94 459,735 0 459,735 Additions 30,000 625,962 655,962 Net accretion 0 38,038 38,038 Terminations (285,900) 0 (285,900) - - ------------------------------------------------------------------------------------------------ Balance st 12/31/95 $ 203,835 $ 664,000 $ 867,835 ================================================================================================
Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase or sell a financial instrument at a future date for a specified price from the writer of the option. Interest rate caps and floors are option-like contracts that require the seller (writer) to pay the purchaser at specified future dates the amount by which a specified market interest rate exceeds the cap rate or falls below the floor rate, multiplied against a notional amount. A corridor is also an option-like contract which is the simultaneous purchase and sale of separate interest rate caps where each cap is referenced to a different interest rate index. A collar is an option-like contract which is the simultaneous purchase of an interest rate cap and the sale of an interest rate floor using the same reference interest rate index. As part of managing its balance sheet and liquidity position, the Company periodically securitizes and sells credit card and lease receivables. For credit enhancement purposes, certain variable pass-through rate credit card and lease securitizations were issued with embedded or purchased interest rate caps. These rate caps, however, were not needed to satisfy asset/liability management strategies. In order to achieve its desired interest rate sensitivity structure and further reduce the effective pass-through rate of the securitization, the Company has synthetically altered the interest rate structure on certain off-balance sheet credit card and lease securitizations by writing interest rate caps to offset the embedded and purchased rate caps attached to them. The premiums received or paid for writing or purchasing such cap contracts are included in other assets and are amortized to noninterest revenues over the life of the contract. Any obligations which may arise under these contracts are recorded in noninterest revenues on an accrual basis. As of December 31, 1995, unamortized premiums for caps written and purchased amounted to $4.3 million and $1.2 million, respectively. The weighted average maturity for caps written and purchased was 2.9 years and 2.8 years, respectively. As of December 31, 1994, unamortized premiums for caps written and purchased amounted to $5.8 million and $3.3 million, respectively. The weighted average maturity for caps written and purchased was 3.8 years and 3.6 years, respectively. When the Company periodically securitizes and sells credit card receivables, the receivables sold to the securitization trust may carry rates which are indexed to the prime rate, whereas the securitization certificates issued from the trust may be priced at a spread over LIBOR. The Company is exposed to interest rate risk to the extent that these two rate indices react differently to changes in market interest rates. The Company may choose to hedge its excess servicing revenues from the risk of spread compression between the prime rate and LIBOR by entering into corridor transactions which effectively fix a prime/LIBOR spread. In addition, variable rate receivables sold to a variable pass-through rate securitization trust may contain introductory fixed rates which expose the Company to interest rate risk during the receivables' introductory period. The Company may choose to hedge the risk of interest rate spread compression by entering into collar transactions which effectively lock in a minimum interest rate spread in a changing interest rate environment. 58 Advanta Corp. and Subsidiaries Premiums paid or received for entering into corridor and collar transactions are included in other assets or other liabilities and are amortized to noninterest revenues over the life of the contract. Any obligations which may arise under these contracts are recorded to noninterest revenues on an accrual basis. As of December 31, 1995 and 1994, unamortized premiums received for corridor and collar transactions amounted to $66 thousand and $0, respectively. As of December 31, 1995 and 1994, the weighted average maturity of corridor and collar transactions was 8 months and 1.7 years, respectively. Forward contracts are commitments to either purchase or sell a financial instrument at a future date for a specified price and may be settled in cash or through delivery of the underlying financial instrument. The Company regularly securitizes and sells fixed rate mortgage loan receivables. The Company may choose to hedge the changes in the market value of its fixed rate loans and commitments designated for anticipated securitizations by selling U.S. Treasury securities for forward settlement. The maximum and average terms of hedges of anticipated mortgage loan sales is four and two months, respectively. Gains and losses from forward sales are deferred and included in the measurement of the dollar basis of the loans sold. Realized losses of $1.8 million, and $32 thousand were deferred as of December 31, 1995 and 1994, respectively. In addition, the Company periodically issues fixed pass-through rate credit card securitizations and fixed rate bank notes. The Company is exposed to interest rate risk to the extent that rates rise before the issuance of the anticipated fixed rate obligations. The Company may choose to hedge the interest costs associated with anticipated obligations by selling securities for forward settlement. Gains or losses resulting from these hedges are deferred and amortized to interest expense over the life of the underlying obligation. The maximum and average terms of these types of anticipatory hedges is two months. As of December 31, 1995, unamortized losses on hedges of anticipated fixed interest rate obligations amounted to $2.2 million and the remaining weighted average amortization period was 4.3 years. The Company also has foreign currency risk to the extent that its net investment in the joint venture with The Royal Bank of Scotland is not funded with local currency. The Company may choose to hedge its foreign exchange risk by selling foreign currency for forward settlement. The maximum and average terms of hedges of foreign currency exposure is thirty days. Losses from foreign currency forward contracts are included in stockholders' equity and amounted to $4 thousand as of December 31, 1995. The following table discloses the Company's interest rate swaps by major category, notional value, weighted average interest rates, and annual maturities for the periods presented.
Balances maturing in: Balance at ------------------------------------------------------------------------------- December 31, 1995 1996 1997 1998 1999 2000 2001 2002 - - ---------------------------------------------------------------------------------------------------------------------------------- Pay Fixed/Receive Variable: Notional Value $664,000 (A) $400,000 (A) $ 0 $ 0 $ 0 $65,528 $198,472 $ 0 Weighted Average Pay Rate 6.32% 6.57% 0.00% 0.00% 0.00% 5.72% 6.02% 0.00% Weighted Average Receive Rate 5.57% 5.38% 0.00% 0.00% 0.00% 5.86% 5.84% 0.00% Receive Fixed/Pay Variable: Notional Value $203,835 $ 26,000 $106,835 $16,000 $5,000 $ 0 $ 0 $50,000 Weighted Average Receive Rate 6.75% 5.02% 7.00% 7.05% 7.95% 0.00% 0.00% 6.90% Weighted Average Pay Rate 5.95% 5.94% 5.94% 5.94% 5.94% 0.00% 0.00% 5.97% Total Notional Value $867,835 $426,000 $106,835 $16,000 $5,000 $65,528 $198,472 $50,000 Total Weighted Average Rates on Swaps: Receive Rate 5.84% 5.36% 7.00% 7.05% 7.95% 5.86% 5.84% 6.90% Pay Rate 6.23% 6.53% 5.94% 5.94% 5.94% 5.72% 6.02% 5.97% ==================================================================================================================================
(A) Pay fixed swaps amounting to $250 million with a weighted average fixed rate of 7.16% were scheduled to mature on January 17, 1996. 59 Advanta Corp. and Subsidiaries Report of Independent Public Accountants TO THE STOCKHOLDERS OF ADVANTA CORP.: We have audited the accompanying consolidated balance sheets of Advanta Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanta Corp. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ----------------------------------- Philadelphia, PA January 22, 1996 Report of Management on Responsibility for Financial Reporting TO THE STOCKHOLDERS OF ADVANTA CORP.: The management of Advanta Corp. and its subsidiaries is responsible for the preparation, content, integrity and objectivity of the financial statements contained in this Annual Report. These financial statements have been prepared in accordance with generally accepted accounting principles and as such must, by necessity, include amounts based upon estimates and judgments made by management. The other financial information in the Annual Report was also prepared by management and is consistent with the financial statements. Management maintains a system of internal controls that provides reasonable assurance as to the integrity and reliability of the financial statements. This control system includes: (1) organizational and budgetary arrangements which provide reasonable assurance that errors or irregularities would be detected promptly, (2) careful selection of personnel and communications programs aimed at assuring that policies and standards are understood by employees, (3) a program of internal audits, and (4) continuing review and evaluation of the control program itself. The financial statements in this Annual Report have been audited by Arthur Andersen LLP, independent public accountants. Their audits were conducted in accordance with generally accepted auditing standards and considered the Company's system of internal controls to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Their report is printed herewith. /s/ RICHARD A. GREENAWALT /s/ DAVID D. WESSELINK /s/ JOHN J. CALAMARI - - ------------------------- --------------------------- --------------------- Richard A. Greenawalt David D. Wesselink John J. Calamari President and Chief Senior Vice President Vice President, Operating Officer and Chief Financial Officer Finance 60 Advanta Corp. and Subsidiaries Supplemental Schedules MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands) December 31, 1995 - - -------------------------------------------------------------------- Maturity: 3 months or less $254,623 Over 3 months through 6 months 98,448 Over 6 months through 12 months 156,112 Over 12 months 431,444 - - -------------------------------------------------------------------- Total $940,627 ====================================================================
COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market(SM) under the symbols ADVNB (non- voting common stock) and ADVNA (voting common stock). Following are the high, low and closing sale prices and cash dividends declared for the last two years as they apply to each class of stock:
Cash Dividends Quarter Ended: High Low Close Declared - - -------------------------------------------------------- March 1994 $33.25 $26.00 $29.25 $ .06 June 1994 37.50 28.75 32.25 .06 September 1994 34.75 26.50 29.25 .06 December 1994 30.50 23.25 25.25 .08 March 1995 32.25 24.50 31.25 .08 June 1995 38.75 30.75 37.75 .08 September 1995 42.50 36.00 42.50 .08 December 1995 45.00 35.13 36.38 .108 - - -------------------------------------------------------- Class A: - - -------------------------------------------------------- March 1994 $36.00 $26.50 $31.50 $ .05 June 1994 41.75 30.50 35.63 .05 September 1994 37.50 28.25 30.13 .05 December 1994 33.50 24.25 26.25 .067 March 1995 34.75 25.50 33.50 .067 June 1995 42.50 33.00 41.69 .067 September 1995 46.25 39.50 45.00 .067 December 1995 48.88 37.50 38.25 .09 ========================================================
At December 31, 1995, the Company had approximately 930 and 700 holders of record of Class B and Class A common stock, respectively. 61 Advanta Corp. and Subsidiaries Quarterly Data (Unaudited)
(In thousands, except per share data) 1995 - - -------------------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, - - -------------------------------------------------------------------------------------------------------------- Interest income $ 74,487 $ 56,482 $ 48,557 $ 59,406 Interest expense 50,829 41,522 35,571 38,110 ----------------------------------------------------- Net interest income 23,658 14,960 12,986 21,296 Provision for credit losses 25,215 10,603 8,583 8,925 ----------------------------------------------------- Net interest income after provision for credit losses (1,557) 4,357 4,403 12,371 Noninterest revenues 161,721 136,221 130,849 114,223 Operating expenses 102,377 86,296 83,871 78,141 ----------------------------------------------------- Income before income taxes 57,787 54,282 51,381 48,453 - - -------------------------------------------------------------------------------------------------------------- Net income $ 37,580 $ 34,914 $ 33,400 $ 30,783 ============================================================================================================== Earnings per common share $ 0.85 $ 0.81 $ 0.80 $ 0.74 ============================================================================================================== Weighted average common shares outstanding 44,349 43,133 41,772 41,438 ==============================================================================================================
(In thousands, except per share data) 1994 - - -------------------------------------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, - - -------------------------------------------------------------------------------------------------------------- Interest income $ 45,765 $ 39,350 $ 39,345 $ 40,679 Interest expense 29,804 22,619 21,580 20,755 ----------------------------------------------------- Net interest income 15,961 16,731 17,765 19,924 Provision for credit losses 6,185 5,750 15,434 6,829 ----------------------------------------------------- Net interest income after provision for credit losses 9,776 10,981 2,331 13,095 Noninterest revenues: Gain on sale of credit cards 0 0 18,352 0 Other noninterest revenues 111,320 97,202 89,154 79,780 ----------------------------------------------------- Total noninterest revenues 111,320 97,202 107,506 79,780 Operatng expenses 77,721 66,030 69,224 53,809 ----------------------------------------------------- Income before income taxes 43,375 42,153 40,613 39,066 - - -------------------------------------------------------------------------------------------------------------- Net income $ 28,615 $ 26,767 $ 25,757 $ 24,924 ============================================================================================================== Earnings per common share $ 0.70 $ 0.65 $ 0.63 $ 0.61 ============================================================================================================== Weighted average common shares outstanding 40,802 41,192 41,173 40,941 ==============================================================================================================
62 Advanta Corp. and Subsidiaries Supplemental Schedules ALLOCATION OF RESERVE FOR CREDIT LOSSES
($ in thousands) December 31, - - ------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 -------------- -------------- -------------- --------------- ------------- Amount % Amount % Amount % Amount % Amount % - - ------------------------------------------------------------------------------------------------------------------------------ Credit cards $36,889 69% $27,486 66% $25,859 83% $35,743 89% $31,193 86% Mortgage loans 3,360 6 5,164 12 2,706 9 2,926 7 2,447 7 Leases 977 2 1,076 3 1,826 6 1,442 4 1,119 3 Other 12,268 23 7,891 19 836 2 117 - 1,596 4 - - ----------------------------------------------------------------------------------------------------------------------------- Total $53,494 100% $41,617 100% $31,227 100% $40,228 100% $36,355 100% =============================================================================================================================
COMPOSITION OF GROSS RECEIVABLES
($ in thousands) December 31, - - ------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 ----------------- ----------------- ----------------- ---------------- ---------------- Amount % Amount % Amount % Amount % Amount % - - ------------------------------------------------------------------------------------------------------------------------------ Credit cards $2,338,280 85% $1,730,176 88% $1,131,367 89% $737,485 74% $1,048,325 82% Mortgage loans 321,711 12 142,874 7 91,340 7 212,273 21 186,820 15 Leases 93,660 3 86,157 5 51,008 4 46,712 5 36,510 3 Other loans 9,276 - 5,237 - 3,590 - 1,774 - 1,765 - - - ----------------------------------------------------------------------------------------------------------------------------- Total $2,762,927 100% $1,964,444 100% $1,277,305 100% $998,244 100% $1,273,420 100% =============================================================================================================================
YIELD AND MATURITY OF SELECTED INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1995
($ in thousands) Maturing - - --------------------------------------------------------------------------------------------------------------------------------- After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years --------------- ------------------- ---------------- ------------------ Amount Yield Amount Yield Amount Yield Amount Yield - - --------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government securities $401,621 5.05% $ 3,777 5.90% $ 0 0.00% $ 0 0.00% State and municipal securities(A) 21,041 5.57 2,169 6.50 1,081 8.07 0 0.00 Other (B) 1,898 3.75 16,567 5.95 9,707 6.30 18,206 6.37 - - ------------------------------------------------------------------------------------------------------------------------------- Total $424,560 5.07% $22,513 5.99% $10,788 6.48% $18,206 6.37% ===============================================================================================================================
(A) Yield computed on a taxable equivalent basis using a statutory rate of 35%. (B) Equity investments and other securities without a stated maturity are excluded from this table. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 63 23 Advanta Corp. and Subsidiaries PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The text of the Proxy Statement under the caption "Election of Directors" and the last paragraph under the caption "Security Ownership of Management" are hereby incorporated by reference, as is the text in Part I of this Report under the caption, "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. The text of the Proxy Statement under the captions "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Election of Directors -- Committees, Meetings and Compensation of the Board of Directors, -- Compensation Committee Interlocks and Insider Participation in Compensation Decisions and -- Other Matters" are hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The text of the Proxy Statement under the captions "Security Ownership of Certain Benefical Owners" and "Security Ownership of Management" are hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The text of the Proxy Statement under the captions "Election of Directors -- Compensation Committee Interlocks and Insider Participation in Compensation Decisions and -- Other Matters" are hereby incorporated herein by reference. 64 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. The following Financial Statements, Schedules, and Other Information of the Registrant and its subsidiaries are included in this Form 10-K: (a) (1) Financial Statements 1. Consolidated Balance Sheets at December 31, 1995 and 1994. 2. Consolidated Income Statements for each of the three years in the period ended December 31, 1995. 3. Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1995. 4. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995. 5. Notes to Consolidated Financial Statements. (a) (2) Schedules 1. Schedule I -- Condensed Financial Information of Registrant. 2. Schedule II -- Valuation and Qualifying Accounts. 3. Report of Independent Public Accountants on Supplemental Schedules. Other statements and schedules are not being presented either because they are not required or the information required by such statements and schedules is presented elsewhere in the financial statements. (a) (3) Exhibits. 3-a Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 33-53475), filed June 10, 1994) , as amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 3-b By-laws of the Registrant, as amended (filed herewith). 4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including Form of Debenture. 4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992). 65 4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993). 4-d Specimen of 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-e Deposit Agreement, dated as of August 15, 1995, among Advanta Corp. and Mellon Securities Trust Company and the Holders from Time to Time of the Depositary Receipts Described Therein in Respect of the 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (with form of Depositary Receipt as an exhibit thereto) (incorporated by reference to Exhibit 4.10 to the Company's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-f Senior Trust Indenture, dated as of October 23, 1995, between the Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-62601), filed September 13, 1995). 9 Inapplicable. 10-a Registrant's Stock Option Plan, as amended (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). + 10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 20, 1995).+ 10-c Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of May 1, 1991 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-40368), filed with Amendment No.1 thereto on May 21, 1991). 10-d Advanta Management Incentive Plan (incorporated by reference to Exhibit 10-n to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991). + 10-e* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983. 10-f* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983. 10-g* Indenture of Trust dated May 11, 1984 between Linda M. Ominsky, as settlor, and Dennis Alter, as trustee. 66 10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda A. Ominsky, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File 33-58660), filed February 23, 1993). 10-h Agreement dated as of January 21, 1994 between the Registrant and Alex W. Hart (incorporated by reference to Exhibit 10-h to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994). + 10-i Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (No. 33-33350), filed February 21, 1990). + 10-j Advanta Corp. Executive Deferral Plan (filed herewith).+ 10-k Advanta Corp. Non-Employee Directors Deferral Plan (filed herewith).+ 10-l Advanta Management Incentive Plan With Stock Election II (incorporated by reference to Exhibit 10-o to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991). + 10-m Amended and Restated Master Pooling and Servicing Agreement between Colonial National Bank USA and Chemical Bank, as Trustee, dated as of April 1, 1992 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-49602), filed with Amendment No. 1 thereto on August 19, 1992). 10-n Advanta Management Incentive Plan With Stock Election III (incorporated by reference to Exhibit 10-s to the Registrant's Registration Statement on Form S-3 (File No. 33-58660), filed February 23, 1993).+ 10-o Life Insurance Benefit for Certain Key Executives and Directors (filed herewith). + 10-p $510,000,000 Unsecured Revolving Credit Agreement dated as of May 4, 1995 among the Registrant, Advanta National Bank USA, and Mellon Bank, N.A. as Agent and the several bank parties thereto (incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter year ended March 31, 1995, filed May 12, 1995). 10-q Advanta Management Incentive Plan With Stock Election IV, as amended (incorporated by reference to Exhibit 10-t to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 20, 1995). + 10-r Agreement of Limited Partnership of Advanta Partners LP, dated as of May 6, 1994 (incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994). 10-s Employment Agreement by and between Advanta Partners LP and Anthony P. Brenner, made as of May 6, 1994 (incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994). 67 10-t Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated December 1, 1993, as amended May 23, 1994 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-3 (No. 33-79986), filed June 8, 1994) 10-u Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (filed herewith). + 11 Inapplicable. 12 Inapplicable. 13 Inapplicable. 16 Inapplicable. 18 Inapplicable. 21 Subsidiaries of the Registrant (filed herewith). 22 Inapplicable. 23 Consent of Independent Public Accountants (filed herewith). 24 Powers of Attorney (included on the signature page hereof). 27 Financial Data Schedule (filed herewith). 28 Inapplicable. 99 Inapplicable. * Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985. + Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K 1. A Report on Form 8-K was filed by the Registrant on October 18, 1995 regarding consolidated earnings of the Registrant and its subsidiaries for the fiscal quarter ended September 30, 1995. Summary earnings and balance sheet information as of that date were filed with such report. 2. A Report on Form 8-K was filed by the Registrant on January 23, 1996 regarding consolidated earnings for the Registrant and its subsidiaries for the fiscal quarter and fiscal year ended December 31, 1995. Summary earnings and balance sheet information as of that date were filed with such report. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 28, 1996 By: /s/ Richard A. Greenawalt --------------- ---------------------------------- Richard A. Greenawalt, President, Chief Operating Officer and Director KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby constitute and appoint Dennis Alter, Richard Greenawalt, Alex W. Hart, John J. Calamari, David D. Wesselink and Gene S. Schneyer, or any of them (with full power to each of them to act alone), his or her true and lawful attorney- in-fact and agent, with full power of substitution, for him or her and on his or her behalf to sign, execute and file an Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1995 relating to the Advanta Corp. and any or all amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 28th day of March, 1996.
Name Title - - --------- ----- /s/ Dennis Alter Chairman of the Board - - ------------------------------------------- Dennis Alter /s/ Alex W. Hart Chief Executive Officer - - ------------------------------------------- and Director Alex W. Hart /s/ Richard A. Greenawalt President, Chief Operating - - ------------------------------------------- Officer and Director Richard A. Greenawalt /s/ William A. Rosoff Vice Chairman and Director - - ------------------------------------------- William A. Rosoff /s/ David D. Wesselink Senior Vice President and - - ------------------------------------------- Chief Financial Officer David D. Wesselink
69
Name Title - - --------- ----- /s/ John J. Calamari Vice President, Finance and - - ------------------------------------------- Chief Accounting Officer John J. Calamari /s/ Arthur P. Bellis Director - - ------------------------------------------- Arthur P. Bellis /s/ Max Botel Director - - ------------------------------------------- Max Botel /s/ Richard J. Braemer Director - - ------------------------------------------- Richard J. Braemer /s/ Anthony P. Brenner Director - - ------------------------------------------- Anthony P. Brenner /s/ William C. Dunkelberg Director - - ------------------------------------------- William C. Dunkelberg /s/ Robert C. Hall Director - - ------------------------------------------- Robert C. Hall /s/ Warren Kantor Director - - ------------------------------------------- Warren Kantor /s/ James E. Ksansnak Director - - ------------------------------------------- James E. Ksansnak /s/ Ronald J. Naples Director - - ------------------------------------------- Ronald J. Naples /s/ Phillip A. Turberg Director - - ------------------------------------------- Phillip A. Turberg
70 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULES To Advanta Corp.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated January 22, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedules listed in Item 14(a)(2) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Philadelphia, PA January 22, 1996 71 ADVANTA Corp. & Subsidiaries December 31, 1995 Schedule I - Condensed Financial Information of Registrant Parent Company Only CONDENSED BALANCE SHEETS (Dollars in thousands)
December 31, ---------------------------- 1995 1994 ----------- ----------- ASSETS Cash $ 81,337 $ 28,821 Investments available for sale 107,451 199,771 Other assets, principally investments in and advances to wholly owned subsidiaries 1,371,524 1,066,860 ----------- ----------- Total assets $1,560,312 $1,295,452 =========== =========== LIABILITIES Accrued expenses and other liabilities $ 5,563 $ 8,628 Subordinated debt and other borrowings 881,785 845,134 ----------- ----------- Total liabilities 887,348 853,762 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock 1,010 1,010 Common stock 415 404 Other stockholders' equity 671,539 440,276 ----------- ----------- Total stockholders' equity 672,964 441,690 ----------- ----------- Total liabilities and stockholders' equity $1,560,312 $1,295,452 =========== ===========
72 Schedule I (cont'd) Parent Company Only CONDENSED STATEMENTS INCOME (Dollars in thousands)
Year Ended December 31, -------------------------------------- 1995 1994 1993 -------- -------- --------- Income: Interest $ 53,745 $ 23,983 $ 8,545 Other 27,130 15,724 4,163 -------- -------- -------- Total Income 80,875 39,707 12,708 -------- -------- -------- Expenses: General and administrative 59,129 42,948 57,051 Interest 69,105 34,787 21,544 -------- -------- -------- Total Expenses 128,234 77,735 78,595 -------- -------- -------- Loss before income taxes, equity in subsidiaries, and extraordinary item (47,359) (38,028) (65,887) Benefit for income taxes 20,469 16,419 25,147 -------- -------- -------- Loss before equity in subsidiaries and extraordinary item (26,890) (21,609) (40,740) Equity in net profit of subsidiaries 163,567 127,672 118,660 -------- -------- -------- Net income before extraordinary item 136,677 106,063 77,920 Extraordinary item, net 0 0 (1,273) -------- -------- -------- Net income $136,677 $106,063 $ 76,647 ======== ======== ========
73 Schedule I (Cont'd) Parent Company Only Statements of Cash Flows
Year Ended December 31, ------------------------------------- 1995 1994 1993 ---------- ------------- ---------- OPERATING ACTIVITIES Net Income $ 136,677 $ 106,063 $ 76,647 Adjustments to reconcile net income to net cash used by operating activities: Depreciation 964 414 335 Change in other assets (254,766) (130,495) (101,210) Change in accrued liabilities 8,387 7,865 1,955 Loss on repurchase of senior subordinated debentures 0 0 1,928 - - ------------------------------------------------------------------------------------------------ Net cash used by operating activities (108,738) (16,153) (20,345) INVESTING ACTIVITIES Net change in premises & equipment (1,901) (2,810) (454) Purchase of investments available for sale (637,917) (1,161,420) (291,548) Proceeds from sales of investments available for sale 340,177 295,196 186,051 Proceeds from maturing investments available for sale 373,410 797,233 31,715 Dividends received from subsidiaries 7,600 39,000 61,986 Change in interest-bearing deposits 0 0 24,350 - - ------------------------------------------------------------------------------------------------ Net cash provided/(used) by investing activities 81,369 (32,801) 12,100 FINANCING ACTIVITIES Change in lines of credit (50,000) 50,000 0 Proceeds from issuance of subordinated/senior debt 147,200 39,398 85,380 Payments on redemption of subordinated/senior debt (172,626) (58,618) (103,480) Change in repurchase agreements (52,975) 52,975 0 Increase in affiliate borrowings (35,444) (389,949) (156,915) Redemption of senior subordinated debt 0 0 (36,404) Proceeds from issuance of medium-term notes 165,052 344,787 164,851 Cash dividends paid (15,501) (9,877) (7,298) Issuance of stock 94,179 4,498 93,542 - - ------------------------------------------------------------------------------------------------ Net cash provided by financing activities 79,885 33,214 39,676 - - ------------------------------------------------------------------------------------------------ Net increase/(decrease) in cash 52,516 (15,740) 31,431 Cash at beginning of year 28,821 44,561 13,130 Cash at end of year $ 81,337 $ 28,821 $ 44,561 ================================================================================================
74 Schedule II Advanta Corp. & Subsidiaries Valuation & Qualifying Accounts (Dollars in thousands)
Column A Column B Column C Column D Column E ------------------ -------------- Additions -------------- -------------- ---------------------- Year Balance Charged Charged to Balance Ended at to Other at December Beginning Costs and Accounts Deductions End 31, Description of Period Expenses (Describe) (Describe) of Period - - ---------------------------------------------------------------------------------------------------------- 1995 Reserve for losses on securitized credit cards 74,471 0 250,689 (1) 157,735 (5) 167,425 Reserve for credit losses and prepayments on securitized HEL 19,767 0 24,933 (1) 14,094 (2) (5) 30,606 Reserve for losses on securitized Leases 9,671 0 10,338 (1) 4,707 (5) 15,302 Reserve for uncollectable receivables & unbillable fees 0 0 0 0 0 1994 Reserve for losses on securitized credit cards 96,377 0 70,624 (1) 92,530 (5) 74,471 Reserve for credit losses and prepayments on securitized HEL 40,513 0 15,441 (1) 36,187 (3) (5) 19,767 Reserve for losses on securitized Leases 5,298 0 7,420 (1) 3,047 (5) 9,671 Reserve for uncollectable receivables & unbillable fees 23 16 0 (1) 39 (5) 0 1993 Reserve for losses on securitized credit cards 108,756 0 69,964 (1) 82,343 (5) 96,377 Reserve for credit losses and prepayments on securitized HEL 17,861 0 34,436 (1) (4) 11,784 (5) 40,513 Reserve for losses on securitized Leases 3,100 0 4,010 (1) 1,812 (5) 5,298 Reserve for uncollectable receivables & unbillable fees 97 170 0 (1) 244 (5) 23
(1) Amounts netted against securitization income. (2) Includes $1.0 million transferred from off-balance sheet reserves to on-balance sheet reserves. (3) Includes $12.8 million transferred from off-balance sheet to on-balance sheet reserves. (4) Includes $11.0 million transferred from on-balance sheet unallocated reserves. (5) Relates to net charge-offs. 75 EXHIBIT INDEX 3-a Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 33-53475), filed June 10, 1994) , as amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 3-b By-laws of the Registrant, as amended (filed herewith). 4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including Form of Debenture. 4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992). 4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993). 4-d Specimen of 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-e Deposit Agreement, dated as of August 15, 1995, among Advanta Corp. and Mellon Securities Trust Company and the Holders from Time to Time of the Depositary Receipts Described Therein in Respect of the 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (with form of Depositary Receipt as an exhibit thereto) (incorporated by reference to Exhibit 4.10 to the Company's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-f Senior Trust Indenture, dated as of October 23, 1995, between the Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-62601), filed September 13, 1995). 9 Inapplicable. 76 10-a Registrant's Stock Option Plan, as amended (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). + 10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 20, 1995).+ 10-c Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of May 1, 1991 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-40368), filed with Amendment No.1 thereto on May 21, 1991). 10-d Advanta Management Incentive Plan (incorporated by reference to Exhibit 10-n to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991). + 10-e* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983. 10-f* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983. 10-g* Indenture of Trust dated May 11, 1984 between Linda M. Ominsky, as settlor, and Dennis Alter, as trustee. 10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda A. Ominsky, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File 33-58660), filed February 23, 1993). 10-h Agreement dated as of January 21, 1994 between the Registrant and Alex W. Hart (incorporated by reference to Exhibit 10-h to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed March 29, 1994). + 10-i Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (No. 33-33350), filed February 21, 1990). + 10-j Advanta Corp. Executive Deferral Plan (filed herewith).+ 10-k Advanta Corp. Non-Employee Directors Deferral Plan (filed herewith).+ 10-l Advanta Management Incentive Plan With Stock Election II (incorporated by reference to Exhibit 10-o to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991). + 77 10-m Amended and Restated Master Pooling and Servicing Agreement between Colonial National Bank USA and Chemical Bank, as Trustee, dated as of April 1, 1992 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-49602), filed with Amendment No. 1 thereto on August 19, 1992). 10-n Advanta Management Incentive Plan With Stock Election III (incorporated by reference to Exhibit 10-s to the Registrant's Registration Statement on Form S-3 (File No. 33-58660), filed February 23, 1993).+ 10-o Life Insurance Benefit for Certain Key Executives and Directors (filed herewith). + 10-p $510,000,000 Unsecured Revolving Credit Agreement dated as of May 4, 1995 among the Registrant, Advanta National Bank USA, and Mellon Bank, N.A. as Agent and the several bank parties thereto (incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter year ended March 31, 1995, filed May 12, 1995). 10-q Advanta Management Incentive Plan With Stock Election IV, as amended (incorporated by reference to Exhibit 10-t to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed March 20, 1995). + 10-r Agreement of Limited Partnership of Advanta Partners LP, dated as of May 6, 1994 (incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994). 10-s Employment Agreement by and between Advanta Partners LP and Anthony P. Brenner, made as of May 6, 1994 (incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994). 10-t Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated December 1, 1993, as amended May 23, 1994 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-3 (No. 33-79986), filed June 8, 1994) 10-u Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (filed herewith). + 11 Inapplicable. 12 Inapplicable. 13 Inapplicable. 16 Inapplicable. 18 Inapplicable. 78 21 Subsidiaries of the Registrant (filed herewith). 22 Inapplicable. 23 Consent of Independent Public Accountants (filed herewith). 24 Powers of Attorney (included on the signature page hereof). 27 Financial Data Schedule (filed herewith). 28 Inapplicable. 99 Inapplicable. * Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985. + Management contract or compensatory plan or arrangement. EX-3.B 2 BY-LAWS OF THE REGISTRANT, AS AMEMNDED 1 EXHIBIT 3-b BY-LAWS OF ADVANTA CORP. ------------------------------- ARTICLE I - OFFICES Section 1-1. Registered Office and Registered Agent. The Corporation shall maintain a registered office and registered agent within the State of Delaware, which may be changed by the Board of Directors from time to time. Section 1-2. Other Offices. The Corporation may also have offices at such other places, within or without the State of Delaware, as the Board of Directors may from time to time determine. ARTICLE II - STOCKHOLDERS' MEETINGS Section 2-1. Place of Stockholders' Meetings. Meetings of stockholders may be held at such place, either within or without the State of Delaware, as may be designated by the Board of Directors from time to time. If no such place is designated by the Board of Directors, meetings of the stockholders shall be held at the registered office of the Corporation in the State of Delaware. Section 2-2. Annual Meeting. A meeting of the stockholders of the Corporation shall be held in each calendar year on the date specified by resolution of the Board of Directors, such resolution to be within six months after the end of the previous fiscal year of the Company. At such annual meeting, there shall be held an election for a Board of Directors to serve for the term provided in the Corporation's Certificate of Incorporation and until their respective successors are elected and qualified, or until their earlier resignation or removal. Unless the Board of Directors shall deem it advisable, financial reports of the Corporation's business need not be sent to the stockholders and need not be presented at the annual meeting. If any report is deemed advisable by the Board of Directors, such report may contain such information as the Board of Directors shall determine and need not be certified by a Certified Public Accountant unless the Board of Directors shall so direct. 2 Section 2-3. Special Meetings. Except as otherwise specifically provided by law, special meetings of the stockholders may be called at any time: (a) By a majority of the Board of Directors; or (b) By the Chairman of the Board of Directors, or if no person is then serving as Chairman of the Board of Directors, then by the President. Upon the written request of any person entitled to call a special meeting, which request shall set forth the purpose for which the meeting is desired, it shall be the duty of the Secretary to give prompt written notice of such meeting to be held at such time as the Secretary may fix, subject to the provisions of Section 2-4 hereof. If the Secretary shall fail to fix such date and give notice within ten (10) days after receipt of such request, the person or persons making such request may do so. Section 2-4. Notice of Meetings and Adjourned Meetings. Written notice stating the place, date and hour of any meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice is given when deposited in the United States Mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Such notice may be given in the name of the Board of Directors, Chairman of the Board of Directors, President, Vice President, Secretary or Assistant Secretary. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than thirty (30) days, of if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 2-5. Quorum. Unless the Certificate of Incorporation provides otherwise, the presence, in person or by proxy, of the holders of a majority of the outstanding shares entitled to vote shall constitute a quorum but in no even shall a quorum consist of less than one-third (1/3) of the shares entitled to vote at a meeting. The stockholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. If a meeting cannot be organized because of the absence of a quorum, those present may, except as otherwise provided by law, adjourn the meeting to such time and place as they may determine. In the case of any meeting for the election of Directors, those stockholders who attend the second of such adjourned meetings, although less than a quorum as fixed in this Section, shall nevertheless constitute a quorum for the purpose of electing Directors. 3 Section 2-6. Voting List; Proxies. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Upon the willful neglect or refusal of the Directors to produce such a list at any meeting for the election of Directors, they shall be ineligible to any office at such meeting. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy. All proxies shall be executed in writing and shall be filed with the Secretary of the Corporation not later than the day on which exercised. No proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Except as otherwise specifically provided by law, all matters coming before the meting shall be determined by a vote by shares. All elections of Directors shall be by written ballot unless otherwise provided in the Certificate of Incorporation and Stockholder shall not be entitled to cumulate their vote. Except as otherwise specifically provided by law, all other votes may be taken by voice unless a stockholder demands that it be taken by ballot, in which latter event the vote shall be taken by written ballot. ARTICLE III - BOARD OF DIRECTORS Section 3-1. Number. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three nor more than fifteen Directors, such Directors to be elected pursuant to the provisions of the Company's Certificate of Incorporation. No person (other than a person nominated by or on behalf of the Board of Directors) shall be eligible for election as a Director at any annual or special meeting of stockholders unless a written request that his or her name be placed in nomination is received from a stockholder of record by the Secretary of the Company not less than 30 days prior to the date fixed for the meeting, together with the written consent of such person to serve as a Director. 4 Section 3-2. Place of Meeting. Meetings of the Board of Directors may be held at such place either within or without the State of Delaware, as a majority of the Directors may from time to time designate or as may be designated in the notice calling the meeting. Section 3-3. Regular Meetings. A regular meeting of the Board of Directors shall be held annually, immediately following the annual meeting of stockholders, at the place where such meeting of the stockholders is held or at such other place, date and hour as a majority of the newly elected Directors may designate. At such meeting the Board of Directors shall elect officers of the Corporation. In addition to such regular meeting, the Board of Directors shall have the power to fix, by resolution, the place, date and hour of other regular meetings of the Board. Section 3-4. Special Meetings. Special meetings of the Board of Directors shall be held whenever ordered by the Chairman of the Board, by a majority of the members of the executive committee, if any, or by a majority of the Directors in office. Section 3-5. Notices of Meetings of Board of Directors. (a) Regular Meetings. No notice shall be required to be given of any regular meeting, unless the same be held at other than the time or place for holding such meetings as fixed in accordance with Section 3-3 of these By-Laws, in which even one (1) day's notice shall be given of the time and place of such meeting. (b) Special Meetings. At least one (1) day's notice shall be given of the time, place and purpose for which any special meeting of the Board of Directors is to be held. Section 3-6. Quorum. A majority of the total number of Directors shall constitute a quorum for the transaction of business, and the vote of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. If there is less than a quorum present, a majority of those present may adjourn the meeting from time to time and place to place and shall cause notice of each such adjourned meeting to be given to all absent Directors. Section 3-7. Informal Action by the Board of Directors. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3-8. Powers. (a) General Powers. The Board of Directors shall have all powers necessary or appropriate to the management of the business and affairs of the 5 Corporation, and, in addition to the power and authority conferred by these By-Laws, may exercise all powers of the Corporation and do all such lawful acts and things as are not by statute, these By-Laws or the Certificate of Incorporation directed or required to be exercised or done by the stockholders. Notwithstanding anything in these By-Laws to the contrary, except to the extent prohibited by law, the Board of Directors shall have the right (which, to the extent exercised, shall be exclusive) to establish the rights, powers, duties, rules and procedures that from time to time shall govern the Board of Directors and each of its members, including without limitation, the vote required for any action by the Board of Directors, and that from time to time shall affect the Directors' power to manage the business and affairs of the Company; and no By-Law shall be adopted by stockholders which shall impair or impede the implementation of the foregoing. (b) Specific Powers. Without limiting the general powers conferred by the last preceding clause and the powers conferred by the Certificate of Incorporation and By-Laws of the Corporation, it is hereby expressly declared that the Board of Directors shall have the following powers: (i) To confer upon any officer or officers of the Corporation the power to choose, remove or suspend assistant officers, agents or servants. (ii) To appoint any person, firm or corporation to accept and hold in trust for the Corporation any property belonging to the Corporation or in which it is interested, and to authorize any such person, firm or corporation to execute any documents and perform any duties that may be requisite in relation to any such trust. (iii) To appoint a person or persons to vote shares of another corporation held and owned by the Corporation. (iv) By resolution adopted by a majority of the full Board of Directors, to designate one (1) or more of its number to constitute an executive committee which, to the extent provided in such resolution, shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed. (v) By resolution passed by a majority of the whole Board of Directors, to designate one (1) or more additional committees, each to consist of one (1) or more Directors, to have such duties, powers and authority as the Board of Directors shall determine. All committees of the Board of Directors, including the executive committee, shall have the authority to adopt their own rules of procedure. Absent the adoption of specific procedures, the procedures applicable to the Board of Directors shall also apply to committees thereof. 6 (vi) To fix the place, time and purpose of meetings of stockholders. (vii) To purchase or otherwise acquire for the Corporation any property, rights or privileges which the Corporation is authorized to acquire, at such prices, on such terms and conditions and for such consideration as it shall from time to time see fit, and, at its discretion, to pay any property or rights acquired by the Corporation, either wholly or partly in money or in stocks, bonds, debentures or other securities of the Corporation. (viii) To create, make and issue mortgages, bonds, deeds of trust, trust agreements and negotiable or transferable instruments and securities, secured by mortgage or otherwise, and to do every other act and thing necessary to effectuate the same. (ix) To appoint and remove or suspend such subordinate officers, agents or servants, permanently or temporarily, as it may from time to time think fit, and to determine their duties, and fix, and from time to time change, their salaries or emoluments, and to require security in such instances and in such amounts as it thinks fit. (x) To determine who shall be authorized on the Corporation's behalf to sign bills, notes, receipts, acceptances, endorsements, checks, releases, contracts and documents. Section 3-9. Compensation of Directors. Compensation of Directors and reimbursement of their expenses incurred in connection with the business of the Corporation, if any, shall be as determined from time to time by resolution of the Board of Directors. Section 3-10. Removal of Directors by Stockholders. The entire Board of Directors or any individual Director may be removed from office for cause by a majority vote of the holders of the outstanding shares entitled to vote. Section 3-11. Resignations. Any Director may resign at any time by submitting his written resignation to the Corporation. Such resignation shall take effect at the time of its receipt by the Corporation unless another time be fixed in the resignation, in which case it shall become effective at the time so fixed. The acceptance of a resignation shall not be required to make it effective. Section 3-12. Participation by Conference Telephone. Directors may participate in regular or special meetings of the Board by telephone or similar communications equipment by means of which all other persons at the meeting can hear each other, and such participation shall constitute presence at the meeting. 7 ARTICLE IV - OFFICERS Section 4-1. Election and Office. The Corporation shall have a Chairman of the Board, a Chief Executive Officer, a President, a Secretary and a Treasurer who shall be elected by the Board of Directors. The Board of Directors may elect such additional officers as it may deem proper, including one or more Vice Chairmen of the Board of Directors, one or more Vice Presidents, and one or more assistant or honorary officers. Any number of offices may be held by the same person. Section 4-2. Term. Each officer elected by the Board of Directors shall hold his or her office at the pleasure of the Board of Directors until a successor to such office is elected and qualified, or until such officer's earlier resignation or removal by the Board of Directors. Section 4-3. Powers and Duties of the Chairman of the Board of Directors. The Chairman of the Board of Directors (also referred to in these By-Laws as the Chairman of the Board) shall preside at all meetings of Directors and shall preside at all meetings of stockholders at which he is present. If the Chairman of the Board is not the Chief Executive Officer, he shall, when appropriate, represent the Board of Directors in the Board's dealings with the Chief Executive Officer and President, recommend Board committee membership and chairmen, and serve as chairman of the Nominating Committee. He shall have such other powers and perform such further duties as may be assigned to him by the Board of Directors. In the event the Chairman of the Board is not the Chief Executive Officer and if the Chief Executive Officer suffers a physical or mental incapacity which prevents such person from fulfilling his duties, the Chairman of the Board shall serve as an interim Chief Executive Officer until the Board of Directors has determined what actions to take as a result of such incapacity. Section 4-4. Powers and Duties of the Chief Executive Officer. The Chief Executive Officer shall perform the usual duties and exercise the general powers of a chief executive officer, except to the extent that the Board of Directors determines otherwise. In the absence of the Chairman of the Board, he shall preside at all meetings of Directors and all meetings of stockholders at which he is present. He shall also do and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 4-5. Powers and Duties of the President. Unless otherwise determined by the Board of Directors, the President shall have the usual duties of the chief operating officer with general supervision over and direction of the affairs of the Corporation including the power to delegate certain of his responsibilities hereunder. In the exercise of these duties and subject to the limitations of the laws of the State of Delaware, these By-Laws, and the actions of the Board of Directors, he may appoint, suspend and discharge employees and agents. He shall also do and perform such other duties as from 8 time to time may be assigned to him by the Chief Executive Officer or by the Board of Directors. If the President also holds the office of Chief Executive Officer, he may delegate any or all of the duties of chief operating officer to one or more Vice Presidents. The President shall have the authority, at his sole discretion, to appoint and remove assistant officers provided that any such appointment or removal shall be in writing and shall be filed with the minutes of meetings of the Board of Directors. Unless otherwise determined by the Board of Directors, the President shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of the stockholders of any corporation in which the Corporation may hold stock, and, at any such meeting, shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Corporation might have possessed and exercised. Section 4-6 Powers and Duties of the Secretary. Unless otherwise determined by the Board of Directors, the Secretary shall record all proceedings of the meetings of the Corporation, the Board of Directors and all committees, in books to be kept for that purpose, and shall attend to the giving and serving of all notices for the Corporation. He shall have charge of the corporate seal, the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct. He shall perform all other duties ordinarily incident to the office of Secretary and shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. Section 4-7. Powers and Duties of the Treasurer. Unless otherwise determined by the Board of Directors, the Treasurer shall have charge of all the funds and securities of the Corporation which may come into his hands. When necessary or proper, unless otherwise ordered by the Board of Directors, he shall endorse for collection on behalf of the Corporation checks, notes and other obligations, and shall deposit the same to the credit of the Corporation in such banks or depositories as the Board of Directors may designate (or as may be designated pursuant to authority delegated by the Board of Directors) and shall sign all receipts and vouchers for payments made to the Corporation. He shall sign all checks made by the Corporation, except to the extent that the Board of Directors shall authorize other officers of the Corporation to sign such checks. He shall at all reasonable times exhibit the books and accounts of the Corporation to any Director of the Corporation, upon application at the office of the Corporation during business hours. He shall have such other powers and shall perform such other duties as may be assigned to him from time to time by the Board of Directors. He shall give such bond, if any, for the faithful performance of his duties as shall be required by the Board of Directors and any such bond shall remain in the custody of the President. Section 4-8. Powers and Duties of Vice President and Assistant Officers. Unless otherwise determined by the Board of Directors, each Vice President and each assistant officer shall have the powers and perform the duties of his respective superior officer. Vice Presidents and assistant officers shall have such rank as shall be designated 9 by the Board of Directors and each, in order of rank, shall act for such superior officer in his absence, or upon his disability or when so directed by such superior officer or by the Board of Directors. Vice Presidents may be designated as having responsibility for a specific aspect of the Corporation's affairs, in which event each such Vice President shall be superior to the other Vice Presidents in relation to matters within his aspect. The President shall be the superior officer of the Vice Presidents. The Treasurer and the Secretary shall be the superior officers of the Assistant Treasurers and Assistant Secretaries, respectively. Section 4-9. Delegation of Office. The Board of Directors may delegate the powers or duties of any officer of the Corporation to any other officer or to any Director from time to time. Section 4-10. Vacancies. The Board of Directors shall have the power to fill any vacancies in any office occurring from whatever reason. Section 4-11. Resignations. Any officer may resign at any time by submitting his written resignation to the Corporation. Such resignation shall take effect at the time of its receipt by the Corporation, unless another time be fixed in the resignation, in which case it shall become effective at the time so fixed. The acceptance of a resignation shall not be required to make it effective. ARTICLE V - CAPITAL STOCK Section 5-1. Stock Certificates. Shares of the Corporation shall be represented by certificates signed by or in the name of the Corporation by (a) the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and (b) the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form. If such certificate is countersigned (i) by a transfer agent other than the Corporation or its employee, or (ii) by a registrar other than the Corporation or its employee, the signatures of the officers of the Corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 5-2. Determination of Stockholders of Record. The Board of Directors may fix, in advance, a record date to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. Such date shall be not more than sixty (60) nor less than ten (10) days 10 before the date of any such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If no record date is fixed, the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5-3. Transfer of Shares. Transfer of shares shall be made on the books of the Corporation only upon surrender of the share certificate, duly endorsed and otherwise in proper form for transfer, which certificate shall be canceled at the time of the transfer. No transfer of shares shall be made on the books of this Corporation if such transfer is in violation of a lawful restriction noted conspicuously on the certificate. Section 5-4. Lost, Stolen or Destroyed Share Certificates. The Corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of lost, stolen, or destroyed certificate, or his legal representative to give the Corporation a bond sufficient to indemnify it against claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. ARTICLE VI - NOTICES Section 6-1. Contents of Notice. Whenever any notice of a meeting is required to be given pursuant to these By-Laws or the Certificate of Incorporation or otherwise, the notice shall specify the place, day and hour of the meeting and, in the case of a special meeting or where otherwise required by law, the general nature of the business to be transacted at such meeting. Section 6-2. Method of Notice. All notices shall be given to each person entitled thereto, either personally or by sending a copy thereof through the mail or by telegraph, 11 charges prepaid, to his address as it appears on the records of the Corporation, or supplied by him to the Corporation for the purpose of notice. If notice is sent by mail or telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States Mail or with the Telegraph office for transmission. If no address for a stockholder appears on the books of the Corporation and such stockholder has not supplied the Corporation with an address for the purpose of notice, notice deposited in the United States Mail addressed to such stockholder care of General Delivery in the city in which the principal office of the Corporation is located shall be sufficient. Section 6-3. Waiver of Notice. Whenever notice is required to be given under any provision of law or of the Certificate of Incorporation or By-Laws of the Corporation, a written waiver, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of Directors need be specified in any written waiver of notice unless so required in any written waiver of notice unless so required by the Certificate of Incorporation or applicable law. ARTICLE VII - INDEMNIFICATION OF DIRECTORS AND OFFICERS AND OTHER PERSONS Section 7-1. Indemnification. The Corporation shall indemnify any Director, officer, employee or agent of the Corporation against expenses (including legal fees), judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement, actually and reasonably incurred by him, to the fullest extent now or, if greater, hereafter permitted by law in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, brought or threatened to be brought against him by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an "indemnitee"). The Board of Directors, by resolution adopted in each specific instance, may similarly indemnify any person other than a Director, officer, employee or agent of the Corporation for liabilities incurred by him in connection with services rendered by him for or at the request of the Corporation, its parent or any of its subsidiaries. The provisions of this Section shall be applicable to all actions, suits or proceedings commenced after its adoptions, whether such arise out of acts or omissions 12 which occurred prior to subsequent to such adoption and shall continue as to a person who has ceased to be a Director, officer, employee or agent or to render services for or at the request of the Corporation or, as the case may be, its parent or subsidiaries, and shall inure to the benefit of the heirs, executors and administrators of such a person. The rights to indemnification provided for herein shall not be deemed exclusive of any other rights to which any Director, officer, employee or agent of the Corporation may be entitled under these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 7-2. Advances. Expenses incurred by any officer or Director of the Corporation or any of its wholly-owned subsidiaries in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors upon receipt of an undertaking, by or on behalf of such Director or officer, to repay such amount if it shall ultimately be determined (by final judicial decision from which there is no further right to appeal) that he is not entitled to be indemnified by the Corporation. Such expenses incurred by other employees and agents may be paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. Section 7-3. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify hi against such liability under law. Section 7-4. Right of Indemnitee to Bring Suit. If a claim under Section 7-1 or Section 7-2 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation 13 (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses under this Article or otherwise shall be on the Corporation. ARTICLE VIII - SEAL The form of the seal of the Corporation, called the corporate seal of the Corporation, shall be as impressed adjacent hereto. ARTICLE IX - FISCAL YEAR The Board of Directors shall have the power by resolution to fix the fiscal year of the Corporation. If the Board of Directors shall fail to do so, the President shall fix the fiscal year. ARTICLE X - AMENDMENTS The original or other By-Laws may be adopted, amended or repealed by the stockholders entitled to vote thereon at any regular or special meeting or, if the Certificate of Incorporation so provides, by the Board of Directors. The fact that such power has been so conferred upon the Board of Directors shall not divest the stockholders of the power nor limit their power to adopt, amend or repeal By-Laws. ARTICLE XI - INTERPRETATION OF BY-LAWS All words, terms and provisions of these By-Laws shall be interpreted and defined by and in accordance with the General Corporation Law of the State of Delaware, as amended, and as amended from time to time hereafter. EX-10.J 3 ADVANTA CORP. EXECUTIVE DEFERRAL PLAN 1 EXHIBIT 10-j ADVANTA CORP. EXECUTIVE DEFERRAL PLAN ADVANTA CORP., a Delaware corporation, (the "Company"), hereby establishes this Executive Deferral Plan (the "Plan"), effective January 1, 1993, for the purpose of attracting high quality executives and promoting in its executives increased efficiency and an interest in the successful operation of the Company by providing selected executives with benefits upon retirement, death or other termination of employment. The benefits provided under the Plan shall be provided in consideration for services to be performed after the effective date of the Plan, but prior to the executive's retirement. ARTICLE 1 DEFINITIONS 1.1 ADMINISTRATIVE COMMITTEE shall mean the Executive Deferred Benefits Committee appointed by the Board of Directors of the Company to administer the Plan pursuant to Article 13 of the Plan. 1.2 SAVINGS PLAN shall mean the Advanta Corp. Employee Savings Plan, as amended and restated, effective January 1, 1989, and as subsequently amended. 1.3 ANNUAL DEFERRAL shall mean the amount of Base Compensation and/or Bonuses which the Participant elects to defer under the Deferral Commitment in each Plan Year of the Deferral Contribution Period pursuant to Article 3.1 of the Plan. 1.4 BASE COMPENSATION shall mean the Participant's annual basic rate of pay from the Company (excluding Bonuses, commissions and other non- regular forms of compensation) before reductions for deferrals under the Plan or the Savings Plan. 1.5 BENEFICIARY shall mean the person or persons or entity designated as such in accordance with Article 14 of the Plan. 1.6 BONUSES shall mean amounts paid in cash to the Participant by the Company annually in the form of an incentive bonus before reductions for deferrals under the Plan. 1.7 CHANGE IN CONTROL shall mean either: (i) the dissolution or liquidation of the Company; (ii) a reorganization, merger or consolidation of the Company with one or more 2 corporations as a result of which the Company is not the surviving corporation; (iii) approval by the stockholders of the Company of any sale, lease, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company; (iv) approval by the stockholders of the Company of any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own fifty percent (50%) or more of the outstanding voting shares of the continuing or surviving corporation immediately after such merger or consolidation; or (v) a change of twenty-five percent (25%) (rounded to the next whole person) in the membership of the Board of Directors of the Company within a twelve-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of eighty-five percent (85%) (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the twelve-month period. 1.8 CREDITING RATE shall mean an effective annual yield equal to one hundred twenty-five percent (125%) of the one hundred twenty (120) month rolling average of the Ten-Year United States Treasury Note as determined by the Administrative Committee on September 30 of the preceding year or such other rate as determined by the Administrative Committee. Notwithstanding the preceding sentence, with respect to the first Plan Year, the Crediting Rate shall be determined as of the date the Plan is adopted by the Company. 1.9 DEFERRAL ACCOUNT shall mean the account established for a particular Deferral Commitment pursuant to paragraph 5.1 of the Plan. 1.10 DEFERRAL COMMITMENT shall mean the agreement to defer Base Compensation and/or Bonuses made by the Participant pursuant to Articles 2 and 3 of the Plan. 1.11 DEFERRAL CONTRIBUTION PERIOD shall mean the period of one (1) or four (4) Plan Years, as selected by the Participant for a particular Deferral Commitment, over which the Participant has elected to defer in each Plan Year in the period Base Compensation and/or Bonuses pursuant to Article 3 of the Plan. 1.12 DISABILITY shall mean any long term disability as defined under the Company's long term disability plan. The Administrative Committee, in its complete and sole discretion, shall determine a Participant's Disability. The Administrative Committee may require that the Participant submit to an examination on an annual basis, at the expense of the Company, by a competent physician or medical clinic selected by the -2- 3 Administrative Committee to confirm Disability. On the basis of such medical evidence, the determination of the Administrative Committee as to whether or not a condition of Disability exists or continues shall be conclusive. 1.13 EARLY RETIREMENT DATE shall mean the date on which the Participant has both attained at least age fifty-five (55) and completed at least ten (10) Years of Service. 1.14 ELIGIBLE EXECUTIVE shall mean an employee of the Company or any of its subsidiaries, as may be designated by the Administrative Committee to be eligible to participate in the Plan. 1.15 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.16 FINANCIAL HARDSHIP shall mean an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence as determined by the Administrative Committee. Cash needs arising from foreseeable events such as the purchase of a residence or education expenses for children shall not, alone, be considered a Financial Hardship. 1.17 IN-SERVICE DISTRIBUTION shall mean a distribution elected by the Participant pursuant to Article 11 of the Plan. 1.18 MATCHABLE ANNUAL DEFERRAL shall mean that portion of the Annual Deferral on which a Matching Credit is based pursuant to paragraph 4.1 of the Plan. 1.19 MATCHING CREDIT shall mean the amount credited to the Participant's Company Match Account as a result of the Participant making a Matchable Annual Deferral pursuant to paragraph 4.2 of the Plan. 1.20 NORMAL RETIREMENT DATE shall mean the date on which the Participant reaches age sixty-two (62) on or before Termination of Employment. 1.21 PARTICIPANT shall mean an Eligible Executive who has elected to participate and has completed a Participation Agreement pursuant to Article 3 of the Plan. 1.22 PARTICIPATION AGREEMENT shall mean a written agreement between the Company and the Participant, entered into pursuant to paragraph 2.1 of the Plan, by which the Participant elects to participate in the Plan and make a Deferral Commitment. -3- 4 1.23 PLAN YEAR shall mean the calendar year. The first Plan Year shall be the 1993 calendar year commencing January 1, 1993. 1.24 REDUCED CREDITING RATE shall mean an effective annual yield equal to ninety percent (90%) of the one hundred twenty (120) month rolling average of the Ten-Year United States Treasury Note as determined by the Administrative Committee on September 30 of the preceding year. Notwithstanding the preceding sentence, with respect to the first Plan Year, the Reduced Crediting Rate shall be determined as of the date the Plan is adopted by the Company. 1.25 SCHEDULED WITHDRAWAL shall mean a distribution of all or a portion of a Participant's Deferred Account at the date specified for such distribution in accordance with the provisions of paragraph 2.1 of this Plan in accordance with the applicable provisions of Article 11 of this Plan. 1.26 SURVIVOR CREDITING RATE shall mean the interest rate offered by Colonial National Bank on short term investments having a maturity of six (6) months, as determined by the Administrative Committee on October 1 of each Plan Year. 1.27 TERMINATION OF EMPLOYMENT shall mean the date of the cessation of the Participant's employment with the Company for any reason whatsoever, whether voluntary or involuntary, other than as a result of the Participant's death or to the extent provided in Article 9 of the Plan, the Participant's Disability. 1.28 UNSCHEDULED WITHDRAWAL shall mean a distribution of all or a portion of the entire amount credited to the Participant's Deferred Accounts requested by the Participant pursuant to the provisions of Article 11 of the Plan. 1.29 VALUATION DATE shall mean the first day of the month following the month in which a Participant has a Termination of Employment, dies or becomes disabled. 1.30 YEARS OF SERVICE shall mean the cumulative years of continuous full-time employment with the Company, beginning on the date the Participant first began service, and each anniversary thereof. -4- 5 ARTICLE 2 PARTICIPATION 2.1 PARTICIPATION AGREEMENT. Any Eligible Executive may elect to participate in the Plan and to make a Deferral Commitment by submitting a Participation Agreement to the Administrative Committee prior to the December 15 immediately preceding the beginning of the Deferral Contribution Period. The Participant shall be required to submit a separate Participation Agreement for each subsequent Deferral Commitment. Except as otherwise provided in this Plan, the Participant's Deferral Commitment shall be irrevocable. If a Participant wishes to receive a Scheduled Withdrawal, the Participant shall designate in the applicable Participation Agreement the Plan Year for such Scheduled Withdrawal and the portion of such Participant's Deferral Account to be distributed in such Plan Year. The Plan Year designated for such Scheduled Withdrawal must be a Plan Year which begins at least four (4) years from the first day of the Plan Year in which amounts are deferred under the applicable Participation Agreement. Notwithstanding anything to the contrary contained herein, an election by an Eligible Executive to defer Bonuses earned in 1992 and payable in 1993 may be made as part of the Participation Agreement for such Participant under this paragraph 2.1 which is effective as of the start of the first Plan Year. 2.2 CONTINUATION OF PARTICIPATION. An executive who has elected to participate in the Plan by making a Deferral Commitment shall continue as a Participant in the Plan for purposes of such Deferral Commitment even though in any calendar year after such Deferral Commitment such executive ceases to be an Eligible Executive. However, a Participant shall not be eligible to make a new Deferral Commitment unless the Participant is an Eligible Executive in the calendar year in which the election is made. 2.3 NEW HIRES. An Eligible Executive who is hired during a Plan Year shall be permitted to make a Deferral Commitment with respect to his Bonus, if any, earned during the Plan Year in which such Eligible Executive is hired, but which is otherwise payable during the subsequent Plan Year, as part of such Eligible Executive's Participation Agreement which is effective under the terms of the Plan for the Plan Year subsequent to the Plan Year in which such Eligible Executive is hired. -5- 6 ARTICLE 3 FORM OF DEFERRAL COMMITMENTS 3.1 DEFERRAL CONTRIBUTION PERIOD. The Participant may elect in the Participation Agreement to defer receipt of income to be earned in excess of the old age, survivor and disability insurance wage base under Social Security during a Deferral Contribution Period of either one (1) or four (4) years, beginning with the Plan Year immediately following such election. 3.2 DEFERRAL COMMITMENT. A Participant may elect in the Participation Agreement to defer in each year of the Deferral Contribution Period an amount equal to a specified dollar amount of Base Compensation and Bonuses in excess of the old age, survivor and disability insurance wage base under Social Security to be earned by such Participant during the Deferral Contribution Period. The Participant may also elect to defer either a specified percentage or a specified dollar amount of Bonuses to be earned during the Deferral Contribution Period and may also specify that such portion be determined only with respect to the portion of such Bonuses that is in excess of some other specified dollar amount. 3.3 MINIMUM DEFERRAL COMMITMENT. Each Deferral Commitment must defer a total of at least two thousand dollars ($2,000) for each year in the Deferral Contribution Period and at least eight thousand dollars ($8,000) over the Deferral Contribution Period, from either Base Compensation or Bonuses or a combination of Base Compensation and Bonuses. Where a Participant elects to defer a specified percentage of Bonuses, the determination of whether the Participant's Deferral Commitment is at least eight thousand dollars ($8,000) shall be made by estimating the amount of the deferral by multiplying the applicable elected percentages of Bonuses to be deferred by the Participant's Bonuses in the Plan Year immediately preceding the Deferral Contribution Period times the number of years in the Deferral Contribution Period. The Administrative Committee may, in its sole discretion, permit Participants to elect to defer amounts in the form of a percentage based on anticipated future Bonuses. 3.4 INCOMPLETE DEFERRAL COMMITMENTS. If the Participant has not or will not actually defer the amount specified in such Participant's Participation Agreement, the amount deferred shall be credited retroactively and prospectively with interest at the Reduced Crediting Rate instead of the Crediting Rate. This Section 3.4 shall only apply to -6- 7 determinations regarding the amount of the actual deferral amounts made prior to July 13, 1995. 3.5 ACCELERATION OF DEFERRAL COMMITMENT. If the Participant selected a four-year Deferral Contribution Period, prior to the beginning of the second or third year of the Deferral Contribution Period, the Participant may elect, by written notice to the Administrative Committee prior to the first day of the last month preceding the applicable year of the Deferral Contribution Period, to accelerate satisfaction of a Deferral Commitment by increasing the Annual Deferral in the second or third year of the Deferral Contribution Period. However, any such acceleration shall not increase the cumulative amount to be deferred under the Participation Agreement. If the Participant's Deferral Commitment is in the form of a percentage of Base Compensation or Bonuses, the Participant shall be permitted to elect to accelerate the deferral of income under the Plan in a manner determined by the Committee to result in an accelerated deferral of an amount equivalent to the cumulative amount which would have been deferred under the Participation Agreement without regard to such acceleration. In doing this, the Committee may permit an adjustment of the applicable elected percentages based on the Base Compensation and Bonuses earned by the Participant in the Plan Year of the acceleration election under this paragraph. ARTICLE 4 MATCHING CREDIT 4.1 MATCHABLE ANNUAL DEFERRALS. The Matchable Annual Deferral shall be that portion of the Annual Deferral which is equal to the difference, if any, between the Company matching contributions that would have been made under Section 4(d) of the Savings Plan if the Participant had not elected to make a Deferral Commitment covering a plan year of the Savings Plan and the actual amount of Company matching contributions under Section 4(d) of the Savings Plan credited to the Participant's account for such year. 4.2 MATCHING CREDIT. After the end of each Plan Year, the Participant's Deferral Account shall be credited with a Matching Credit equal in value to the Matchable Annual Deferral for that Plan Year. 4.3 VESTING. The Participant's right to receive Matching Credits credited to the Participant's Deferral Account in the event of Termination of Employment prior to the Early Retirement Date or the Normal Retirement Date shall vest to the -7- 8 same extent Company matching contributions would be vested under the Savings Plan. ARTICLE 5 DEFERRAL ACCOUNTS 5.1 DEFERRAL ACCOUNTS. Solely for record keeping purposes, a Deferral Account shall be maintained for each separate Deferral Commitment of Base Compensation or Bonuses and shall be credited with the Annual Deferrals at the time such amounts would otherwise have been paid to the Participant and any Matching Credit attributable to such Deferral Commitment. Deferral Accounts shall, except as otherwise provided in the Plan, be credited with interest at the Crediting Rate, in effect for each Plan Year, from the date of deferral through the earlier of death or the Valuation Date. 5.2 STATEMENT OF ACCOUNTS. The Administrative Committee shall provide periodically to each Participant a statement setting forth the balance of each Deferral Account maintained for such Participant. ARTICLE 6 RETIREMENT BENEFITS 6.1 DEFERRAL ACCOUNTS. Upon Termination of Employment on or after the Early Retirement Date or the Normal Retirement Date, the Company shall pay to the Participant, for each Deferral Commitment, a retirement benefit in the form provided in paragraph 6.2 of the Plan, based on the balance of the Deferral Account for such Deferral Commitment on Termination of Employment. If paid as a lump sum at that time, the retirement benefit shall be equal to such balance. If paid in installments, the installments shall be paid in amounts that will amortize such balance with interest credited at the Crediting Rate over the period of time benefits are to be paid. 6.2 FORM OF RETIREMENT BENEFITS. The retirement benefit attributable to a particular Deferral Commitment shall be paid monthly over a period of one hundred eighty (180) months or the number of months required to result in a monthly benefit of $1,000, if less. Notwithstanding anything herein to the contrary, the Participant may elect in the Participation Agreement to have the retirement benefit for such Deferral Commitment paid in a lump sum or in installments paid monthly over a period not to exceed one hundred eighty (180) months. -8- 9 Payments shall begin on the last day of the month next following the date 45 days after the Committee has received notice of Termination of Employment unless the Participant elects in the Participation Agreement for payments to begin on January 1 of a later year. However, in all events payments shall commence on or before the Participant attains age seventy and one-half (70 1/2). Notwithstanding anything to the contrary contained in this paragraph 6.2, the undistributed retirement benefit of a Participant shall continue to be credited with interest at the Crediting Rate. Participants may elect an alternative form of payout as available under this paragraph 6.2 in writing at least thirteen (13) months prior to the date benefit payments commence. 6.3 SMALL BENEFIT EXCEPTION. Notwithstanding any of the foregoing, in the event the sum of all benefits payable to the Participant is less than or equal to five thousand dollars ($5,000), the Company may, in its sole discretion, elect to pay such benefits in a single lump sum payable on the last day of the month in which such benefits first become payable. ARTICLE 7 TERMINATION BENEFITS 7.1 DEFERRAL ACCOUNTS. Upon Termination of Employment prior to the Early Retirement Date or the Normal Retirement Date, the Company shall pay to the Participant a termination benefit equal to the vested balance on Termination of Employment of each Deferral Account. 7.2 FORM OF TERMINATION BENEFITS. The termination benefits shall be paid in a single lump sum on the last day of the month following the date 45 days after the Committee has received notice of Termination of Employment. However, except following a Change in Control the Company may, in its sole discretion, elect to pay the termination benefits over a period of three (3) years in equal annual installments, in which event, interest shall be credited on the unpaid balance of the Deferral Account after the Valuation Date at the Reduced Crediting Rate. ARTICLE 8 SURVIVOR BENEFITS 8.1 PRE-RETIREMENT SURVIVOR BENEFIT. If the Participant dies prior to Termination of Employment, for each Deferral Commitment, the Company shall pay to the Participant's Beneficiary the greater of (a) or (b): -9- 10 a. a benefit equal to forty percent (40%) of the total of all of the Participant's Annual Deferrals made or required to be made under the terms of the Participant's Participation Agreement as of the date of the Participant's death to be paid annually for ten years starting as soon as practicable following the date of death, or b. a benefit equal to the balance of the Participant's Deferral Account as of the Participant's date of death; such account balance to be paid in approximately equal monthly installments starting as soon as practicable following the date of death over a ten year period computed by including interest on the unpaid balance at a rate equal to the Survivor Crediting Rate in effect as of the date of death. For purposes of determining the greater benefit, 8.1.a shall be paid if the present value of the benefit provided under 8.1.a., discounted at the Survivor Crediting Rate, exceeds the Deferral Account at the time of death. Notwithstanding the foregoing, the Committee in its sole discretion shall make an appropriate adjustment to the pre-retirement survivor benefits payable with respect to any Deferral Account from which the Participant has previously received a distribution under the Plan. 8.2 POST-TERMINATION SURVIVOR BENEFIT. If the Participant dies after Termination of Employment, the Company shall pay to the Participant's Beneficiary an amount equal to the remaining benefits payable to the Participant under the Plan over the same period such benefits would have been paid to the Participant. 8.3 SMALL BENEFIT PAYMENT. Notwithstanding any of the foregoing, in the event the sum of all benefits payable to the Beneficiary is less than or equal to five thousand dollars ($5,000), the Company may, in its sole discretion, elect to pay such benefits in a single lump sum payable on the last day of the month in which such benefits first become payable. ARTICLE 9 DISABILITY If a Participant incurs a Disability, the Participant shall, effective as of the date such Participant is no longer -10- 11 paid his Base Compensation by the Company, cease deferrals under the Plan and the Company shall complete the Participant's Deferral Commitment on the Participant's behalf. The Participant's Deferral Commitment shall continue to be credited with interest at the Crediting Rate until such time as the Participant's benefits under the Plan are distributed. The amount distributed shall be reduced by an amount equal to the amount of the deferral completed by the Company plus interest credited on such amounts at a rate equal to the Survivor Crediting Rate in effect as of the date the Participant incurred a Disability and for each subsequent Plan year the rate in effect as of the first day of such Plan year. For purposes of calculating benefits, under the Plan, Disability shall not be treated as a Termination of Employment unless such Disability continues to the Normal Retirement Date. The amount of this reduction may be deducted, dollar for dollar, from the first distribution or distributions made in accordance with the provisions of the Plan, or, at the discretion of the Company, from only a portion of each such distribution. ARTICLE 10 CHANGE IN CONTROL 10.1 ELECTION. At the time the Participant is making his Deferral Commitment election, the Participant may elect that, in the event of a Change in Control, the Participant (or after the Participant's death the Participant's Beneficiary) shall receive a lump sum payment of the vested balance of each Deferral Account within thirty (30) days of the Change of Control. 10.2 BENEFIT REDUCTION ON WITHDRAWAL. If a Participant has not made the election described in Section 10.1 above and the Participant (or Beneficiary) elects, within thirty (30) days of a Change of Control, the withdrawal described in paragraph 11.2 herein, the lump sum payment shall be reduced by an amount equal to five percent (5%) of the total vested balance of such Deferral Accounts. If a Participant (or Beneficiary) elects such a withdrawal, any ongoing deferrals shall cease and the Participant may not elect to participate in the Plan until the first day of the second Plan Year following the Plan Year in which such withdrawal was made. ARTICLE 11 SCHEDULED AND UNSCHEDULED WITHDRAWALS -11- 12 11.1 PAYMENT OF SCHEDULED WITHDRAWAL. No later than the last day of February of the Plan year designated in the applicable Participation Agreement for a Scheduled Withdrawal, the Company shall pay to the Participant in a lump sum, four approximately equal annual installments, or a combination of an initial lump sum payment followed by four approximately equal annual installments of the entire or a portion of the vested balance in the Participant's Deferral Account attributable to the Participation Agreement in which such designation was made. In the case of annual installments under this Section 11.1, each such installment shall be made no later than the last day of February of the applicable year. 11.2 ELECTION. A Participant may request an Unscheduled Withdrawal of all or any portion of the entire amount credited to his Deferred Accounts, which shall be paid in a single lump sum. 11.3 WITHDRAWAL PENALTY. There shall be a penalty deducted from the Deferral Account prior to an Unscheduled Withdrawal from such Deferral Account equal to ten percent (10%) of the Unscheduled Withdrawal. If a Participant elects to make an Unscheduled Withdrawal, any ongoing deferrals shall cease the Participant may not elect to participate in the Plan until the first day of the second Plan Year following the Plan Year in which such withdrawal was made. ARTICLE 12 CONDITIONS RELATED TO BENEFITS 12.1 NONASSIGNABILITY. The benefits provided under the Plan may not be alienated, assigned, transferred, pledged or hypothecated by or to any person or entity, at any time or any manner whatsoever. These benefits shall be exempt from the claims of creditors of any Participant or other claimants and from all orders, decrees, levies, garnishment or executions against any Participant to the fullest extent allowed by law. 12.2 FINANCIAL HARDSHIP DISTRIBUTION. Upon a finding that the Participant or the Beneficiary has suffered a Financial Hardship, the Administrative Committee may in its sole discretion, accelerate distributions of benefits under the Plan in the amount reasonably necessary to alleviate such Financial Hardship. If a distribution is to be made to a Participant on account of Financial Hardship, the Participant may not make deferrals under the Plan until the first day of the third Plan Year following the Plan Year in which a distribution based on Financial Hardship was made. All Deferral Commitments in effect -12- 13 at the time such distribution is made under this section shall thenceforth be null and void. 12.3 NO RIGHT TO COMPANY ASSETS. The benefits paid under the Plan shall be paid from the general funds of the Company, and the Participant and any Beneficiary shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder. 12.4 PROTECTIVE PROVISIONS. The Participant shall cooperate with the Company by furnishing any and all information requested by the Administrative Committee, in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Administrative Committee may deem necessary and taking such other actions as may be requested by the Administrative Committee. If the Participant refuses to cooperate, the Company shall have no further obligation to the Participant under the Plan. In the event of a Participant's suicide during the first two (2) years of participation in the Plan, or if the Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits shall be payable to the Participant or the Participant's Beneficiary or estate under the Plan, except that all of the Participant's Annual Deferrals actually deferred shall be paid to the Participant, the Participant's Beneficiary or the Participant's estate with interest at the Survivor Crediting Rate. 12.5 WITHHOLDING. The Participant or the Beneficiary shall make appropriate arrangements with the Company for satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employee tax requirements applicable to the payment of benefits under the Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. ARTICLE 13 ADMINISTRATION OF PLAN The Administrative Committee shall administer the Plan and interpret, construe and apply its provisions in accordance with its terms. The Administrative Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Administrative Committee shall be final and binding. The individuals serving on the Committee shall, except -13- 14 as prohibited by law, be indemnified and held harmless by the Company from any and all liabilities, costs, and expenses (including legal fees), to the extent not covered by liability insurance arising out of any action taken by any member of the Committee with respect to the Plan, unless such liability arises from the individual's own gross negligence or willful misconduct. ARTICLE 14 BENEFICIARY DESIGNATION The Participant shall have the right, at any time, to designate any person or persons as Beneficiary (both primary and contingent) to whom payment under the Plan shall be made in the event of the Participant's death. The Beneficiary designation shall be effective when it is submitted in writing to the Administrative Committee during the Participant's lifetime on a form prescribed by the Administrative Committee. The submission of a new Beneficiary designation shall cancel all prior Beneficiary designations. Any finalized divorce or marriage (other than a common law marriage) of a Participant subsequent to the date of a Beneficiary designation shall revoke such designation, unless in the case of divorce the previous spouse was not designated as Beneficiary and unless in the case of marriage the Participant's new spouse has previously been designated as Beneficiary. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of a Beneficiary other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if the Beneficiary designation is revoked by marriage, divorce, or otherwise without execution of a new designation, or if every person designated as Beneficiary predeceases the Participant or dies prior to complete distribution of the Participant's benefits, then the Administrative Committee shall direct the distribution of such benefits to the Participant's estate. ARTICLE 15 AMENDMENT AND TERMINATION OF PLAN 15.1 AMENDMENT OF PLAN. The Company may at any time amend the Plan in whole or in part, provided, however, that such amendment (i) shall not decrease the vested balance of the Participant's Deferral Accounts at the time of such amendment and (ii) shall not retroactively decrease the applicable crediting -14- 15 rates of the Plan prior to the time of such amendment. The Company may amend the crediting rates of the Plan prospectively. If the Company amends the formula for determining the crediting rates under the Plan, the Company shall notify the Participant of such amendment in writing within thirty (30) days of such amendment. Within thirty (30) days of receipt of the notice of an amendment to the formula for determining the applicable crediting rate, the Participant may elect by written notice to the Administrative Committee to terminate an incomplete Deferral Commitment. 15.2 TERMINATION OF PLAN. The Company may at any time terminate the Plan. If the Company terminates the Plan, the date of such termination shall be treated as the date of Termination of Employment for the purpose of calculating Plan benefits. The Company shall pay to the Participant the benefits the Participant is entitled to receive under the Plan in monthly installments over a thirty-six (36) month period. Interest at the Reduced Crediting Rate will be credited prospectively commencing as of the date of the Plan's termination to the Participant's Deferred Accounts until distribution under this section is completed. 15.3 AMENDMENT OR TERMINATION AFTER CHANGE IN CONTROL. Notwithstanding the foregoing, the Company shall not amend or terminate the Plan without the prior written consent of affected Participants for a period of two calendar years following a Change in Control and shall not thereafter amend or terminate the Plan in any manner which affects any Participant (or Beneficiary of a deceased Participant) who commences receiving payment of benefits under the Plan prior to the end of such two year period following a Change in Control. 15.4 CONSTRUCTIVE RECEIPT TERMINATION. In the event the Committee determines that amounts deferred under the Plan have been constructively received by Participants and must be recognized as income for federal income tax purposes, the Plan shall terminate and distributions shall be made to Participants in accordance with the provisions of paragraph 15.2. The determination of the Committee under this paragraph 15.4 shall be binding and conclusive. ARTICLE 16 MISCELLANEOUS 16.1 SUCCESSORS OF THE COMPANY. The rights and obligations of the Company under the Plan shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. -15- 16 16.2 ERISA PLAN. The Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for "a select group of management or highly compensated employees" within the meaning of Sections 201, 301 and 401 of ERISA and therefore to be exempt from Parts 2, 3 and 4 of Title I of ERISA. 16.3 TRUST. The Company shall be responsible for the payment of all benefits under the Plan. At its discretion, the Company may establish one or more grantor trusts for the purposes of providing for payment of benefits under the Plan. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. Benefits paid to the Participant from any such trust shall be considered paid by the Company for purposes of meeting the obligations of the Company under the Plan. 16.4 EMPLOYMENT NOT GUARANTEED. Nothing contained in the Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Participant any right to continued employment with the Company. 16.5 GENDER, SINGULAR AND PLURAL. All pronouns and variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 16.6 CAPTIONS. The captions of the articles and paragraphs of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.7 VALIDITY. In the event any provision of the Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provisions of the Plan. 16.8 WAIVER OF BREACH. The waiver by the Company of any breach of any provision of the Plan by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. 16.9 APPLICABLE LAW. The Plan shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania except where the laws of the Commonwealth of Pennsylvania are preempted by ERISA. 16.10 NOTICE. Any notice or filing required or permitted to be given to the Company under the Plan shall be -16- 17 sufficient if in writing or hand-delivered, or sent by registered or certified mail, return receipt requested, to the principal office of the Company, directed to the attention of the Administrative Committee. Such notice shall be deemed given as of the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 16.11 ARBITRATION. Any claim, dispute or other matter in question of any kind relating to this Plan shall be settled by Arbitration in accordance with the Rules of the American Arbitration Association. Notice of demand for arbitration shall be made in writing to the opposing party and to the American Arbitration Association within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall a demand for arbitration be made after the date when the applicable statute of limitations would bar the institution of a legal or equitable proceeding based on such claim, dispute or other matter in question. The decision of the arbitrators shall be final and may be enforced in any court of competent jurisdiction. The Company shall pay all of the Participant's reasonable fees and expenses incurred in the arbitration unless the arbitration award or a judgment by a court finds that (i) the Company did not breach any provision of this plan in connection with the claim, dispute or other matter in question that was the subject of the arbitration, and (ii) the Participant acted in bad faith in bringing the arbitration, or, if the arbitration was brought by the Company, the Participant acted in bad faith in breaching the Plan. -17- EX-10.K 4 ADVANTA CORP. NON-EMPLOYEE DIRECTORS PLAN 1 EXHIBIT 10-k ADVANTA CORP. NON-EMPLOYEE DIRECTORS DEFERRAL PLAN ADVANTA CORP., a Delaware corporation, (the "Company"), hereby establishes this Non-employee Directors Deferral Plan (the "Plan"), effective January 1, 1993, for the purpose of attracting high quality members of its Board of Directors ("Directors") and promoting in its Directors increased efficiency and an interest in the successful operation of the Company by providing its Directors with benefits upon retirement, death or other termination of service as Directors. The benefits provided under the Plan shall be provided in consideration for services to be performed after the effective date of the Plan, but prior to the Director's retirement. ARTICLE 1 DEFINITIONS 1.1 ADMINISTRATIVE COMMITTEE OR COMMITTEE shall mean the Executive Deferred Benefits Committee appointed by the Board of Directors of the Company to administer the Plan pursuant to Article 11 of the Plan. 1.2 ANNUAL DEFERRAL shall mean the amount of Base Compensation which the Participant elects to defer under the Deferral Commitment in each Plan Year of the Deferral Contribution Period pursuant to Article 3.1 of the Plan. 1.3 BASE COMPENSATION shall mean the Director's annual compensation for his service as a Director. 1.4 BENEFICIARY shall mean the person or persons or entity designated as such in accordance with Article 14 of the Plan. 1.5 CHANGE IN CONTROL shall mean either: (i) the dissolution or liquidation of the Company; (ii) a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation; (iii) approval by the stockholders of the Company of any sale, lease, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company; (iv) approval by the stockholders of the Company of any merger or consolidation of the Company in which the holders of voting stock of the Company immediately before the merger or consolidation will not own fifty percent (50%) or more of the outstanding voting shares of the continuing or surviving 2 corporation immediately after such merger or consolidation; or (v) a change of twenty-five percent (25%) (rounded to the next whole person) in the membership of the Board of Directors of the Company within a twelve-month period, unless the election or nomination for election by stockholders of each new director within such period was approved by the vote of eighty-five percent (85%) (rounded to the next whole person) of the directors then still in office who were in office at the beginning of the twelve-month period. 1.6 CREDITING RATE shall mean an effective annual yield equal to one hundred twenty-five percent (125%) of the one hundred twenty (120) month rolling average of the Ten-Year United States Treasury Note as determined by the Administrative Committee on September 30 of the preceding year or such other rate as determined by the Administrative Committee. 1.7 DEFERRAL ACCOUNT shall mean the account established for a particular Deferral Commitment pursuant to paragraph 5.1 of the Plan. 1.8 DEFERRAL COMMITMENT shall mean the agreement to defer Base Compensation made by the Director pursuant to Articles 2 and 3 of the Plan. 1.9 DEFERRAL CONTRIBUTION PERIOD shall mean the period of one (1) or four (4) Plan Years, as selected by the Director for a particular Deferral Commitment, over which the Director has elected to defer in each Plan Year in the period Base Compensation pursuant to Article 3 of the Plan. 1.10 DIRECTOR shall mean a non-employee member of the Board of Directors of the Company. 1.11 FINANCIAL HARDSHIP shall mean an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence as determined by the Administrative Committee. Cash needs arising from foreseeable events such as the purchase of a residence or education expenses for children shall not, alone, be considered a Financial Hardship. 1.12 IN-SERVICE DISTRIBUTION shall mean a distribution elected by the Participant pursuant to Article 11 of the Plan. 1.13 PARTICIPANT shall mean a Director who has elected to participate and has completed a Participation Agreement pursuant to Article 3 of the Plan. -2- 3 1.14 PARTICIPATION AGREEMENT shall mean a written agreement between the Company and the Participant, entered into pursuant to paragraph 2.1 of the Plan, by which the Participant elects to participate in the Plan and make a Deferral Commitment. 1.15 PLAN YEAR shall mean the calendar year. The first Plan Year shall be the 1993 calendar year commencing January 1, 1993. 1.16 SCHEDULED WITHDRAWAL shall mean a distribution of all or a portion of a Participant's Deferred Account at the date specified for such distribution in accordance with the provisions of paragraph 2.1 of this Plan in accordance with the applicable provisions of Article 11 of this Plan. 1.17 SURVIVOR CREDITING RATE shall mean the interest rate offered by Colonial National Bank U.S.A., or such other bank as determined by the Administrative Committee, on short term investments having a maturity of six (6) months, as determined by the Administrative Committee on October 1 of each Plan Year. 1.18 TERMINATION OF SERVICE shall mean the date of the cessation of the Participant's service with the Company as a Director for any reason whatsoever, whether voluntary or involuntary, other than as a result of the Participant's death. 1.19 UNSCHEDULED WITHDRAWAL shall mean a distribution of all or a portion of the entire amount credited to the Participant's Deferred Accounts requested by the Participant pursuant to the provisions of Article 11 of the Plan. 1.20 VALUATION DATE shall mean the first day of the month following the month in which a Participant has a Termination of Service, dies or becomes disabled. ARTICLE 2 PARTICIPATION 2.1 PARTICIPATION AGREEMENT. Any Director may elect to participate in the Plan and to make a Deferral Commitment by submitting a Participation Agreement to the Administrative Committee prior to the December 15 immediately preceding the beginning of the Deferral Contribution Period. The Participant shall be required to submit a separate Participation Agreement for each subsequent Deferral Commitment. Except as otherwise provided in this Plan, the Participant's Deferral Commitment shall be irrevocable. If a Participant wishes to receive a Scheduled Withdrawal, the Participant shall designate in the -3- 4 applicable Participation Agreement the date for such Scheduled Withdrawal and the portion of such Participant's Deferral Account to be distributed on such date. The date designated for such Scheduled Withdrawal must be at least four (4) years from the first day of the Plan Year in which amounts are deferred under the applicable Participation Agreement. ARTICLE 3 FORM OF DEFERRAL COMMITMENTS 3.1 DEFERRAL CONTRIBUTION PERIOD. Any Director may elect in the Participation Agreement to defer receipt of all or a portion of income to be earned for services rendered as a Director during a Deferral Contribution Period of either one (1) or four (4) years, beginning with the Plan Year immediately following such election. 3.2 DEFERRAL COMMITMENT. A Participant may elect in the Participation Agreement to defer in each year of the Deferral Contribution Period an amount equal to a specified percentage or dollar amount of Base Compensation to be earned by such Participant during the Deferral Contribution Period. 3.3 MINIMUM DEFERRAL COMMITMENT. Each Deferral Commitment must defer a total of at least two thousand dollars ($2,000) for each year in the Deferral Contribution Period and at least eight thousand dollars ($8,000) over the Deferral Contribution Period from Base Compensation. Where a Participant elects to defer a specified percentage of Base Compensation, the determination of whether the Participant's Deferral Commitment is at least eight thousand dollars ($8,000) shall be made by multiplying the applicable elected percentage of Base Compensation to be deferred by the Participant's Base Compensation in the Plan Year immediately preceding the Deferral Contribution Period times the number of years in the Deferral Contribution Period. The Administrative Committee may, in its sole discretion, permit Participants to elect to defer amounts in the form of a percentage based on anticipated future Base Compensation. 3.4 ACCELERATION OF DEFERRAL COMMITMENT. If the Participant selected a four-year Deferral Contribution Period, prior to the beginning of the second, third, or fourth year of the Deferral Contribution Period, the Participant may elect, by written notice to the Administrative Committee prior to the first day of the last month preceding the applicable year of the Deferral Contribution Period, to accelerate satisfaction of a -4- 5 Deferral Commitment by increasing the Annual Deferral in the second or third year of the Deferral Contribution Period. However, any such acceleration shall not increase the cumulative amount to be deferred under the Participation Agreement. If the Participant's Deferral Commitment is in the form of a percentage of Base Compensation, the Participant shall be permitted to elect to accelerate the deferral of income under the Plan in a manner determined by the Committee to result in an accelerated deferral of an amount equivalent to the cumulative amount which would have been deferred under the Participation Agreement without regard to such acceleration. In doing this, the Committee may permit an adjustment of the applicable elected percentages based on the Base Compensation earned by the Participant in the Plan Year of the acceleration election under this paragraph. ARTICLE 4 DEFERRAL ACCOUNTS 4.1 DEFERRAL ACCOUNTS. Solely for record keeping purposes, a Deferral Account shall be maintained for each separate Deferral Commitment of Base Compensation and shall be credited with the Annual Deferrals at the time such amounts would otherwise have been paid to the Participant. Deferral Accounts shall, except as otherwise provided in the Plan, be credited with interest at the Crediting Rate from the date of deferral through the earlier of death or the Valuation Date. 4.2 STATEMENT OF ACCOUNTS. The Administrative Committee shall provide periodically to each Participant a statement setting forth the balance of each Deferral Account maintained for such Participant. ARTICLE 5 RETIREMENT BENEFITS 5.1 DEFERRAL ACCOUNTS. Upon Termination of Service, the Company shall pay to the Participant, for each Deferral Commitment, a retirement benefit in the form provided in paragraph 5.2 of the Plan, based on the balance of the Deferral Account for such Deferral Commitment on Termination of Service. If paid as a lump sum at that time, the retirement benefit shall be equal to such balance. If paid in installments, the installments shall be paid in amounts that will amortize such balance with interest credited at the Crediting Rate, in effect for each Plan Year, over the period of time benefits are to be paid. -5- 6 5.2 FORM OF RETIREMENT BENEFITS. The retirement benefit attributable to a particular Deferral Commitment shall be paid monthly over a period of one hundred eighty (180) months or the number of months required to result in a monthly benefit of $1,000, if less. Notwithstanding anything herein to the contrary, the Participant may elect in the Participation Agreement to have the retirement benefit for such Deferral Commitment paid in a lump sum or in installments paid monthly over a period not to exceed one hundred eighty (180) months. Payments shall begin on the last day of the month next following the date 45 days after the Committee has received notice of Termination of Service unless the Participant elects in the Participation Agreement for payments to begin on January 1 of a later year. However, in all events payments shall commence on or before the Participant attains age seventy and one-half (70 1/2). Notwithstanding anything to the contrary contained in this paragraph 5.2, the undistributed retirement benefit of a Participant shall continue to be credited with interest at the Crediting Rate. Participants may elect an alternative form of payout available under this paragraph 6.2 in writing at least thirteen (13) months prior to the date benefit payments commence. 5.3 SMALL BENEFIT EXCEPTION. Notwithstanding any of the foregoing, in the event the sum of all benefits payable to the Participant is less than or equal to five thousand dollars ($5,000), the Company may, in its sole discretion, elect to pay such benefits in a single lump sum payable on the last day of the month in which such benefits first become payable. ARTICLE 6 SURVIVOR BENEFITS 6.1 PRE-RETIREMENT SURVIVOR BENEFIT. If the Participant dies while still serving as a Director, for each Deferral Commitment, the Company shall pay to the Participant's Beneficiary the greater of (a) or (b): a. a benefit equal to forty percent (40%) of the total of all of the Participant's Annual Deferral made or required to be made under the terms of the Participant's Participation Agreement as of the date of the Participant's death to be paid annually for ten years starting as soon as practicable following the date of death, or b. a benefit equal to the balance of the Participant's Deferral Accounts as of the Participant's date of death, payable in equal -6- 7 monthly installments starting as soon as practicable following the date of death over a ten year period computed by including interest on the unpaid balance at a rate equal to the Survivor Crediting Rate in effect as of the date of death. For purposes of determining the greater benefit, 6.1.a shall be paid if the present value of the benefit provided under 6.1.a., discounted at the Survivor Crediting Rate, exceeds the Deferral Account at the time of death. Notwithstanding the foregoing, the Committee in its sole discretion shall make an appropriate adjustment to the pre-retirement survivor benefits payable with respect to any Deferral Account from which the Participant has previously received a distribution under the Plan. 6.2 POST-TERMINATION SURVIVOR BENEFIT. If the Participant dies after Termination of Service, the Company shall pay to the Participant's Beneficiary an amount equal to the remaining benefits payable to the Participant under the Plan over the same period such benefits would have been paid to the Participant. 6.3 SMALL BENEFIT PAYMENT. Notwithstanding any of the foregoing, in the event the sum of all benefits payable to the Beneficiary is less than or equal to five thousand dollars ($5,000), the Company may, in its sole discretion, elect to pay such benefits in a single lump sum payable on the last day of the month in which such benefits first become payable. ARTICLE 7 CHANGE IN CONTROL 7.1 ELECTION. In the event of a Change in Control, the Participant (or after the Participant's death the Participant's Beneficiary) may elect to receive an immediate lump sum payment of the vested balance of each Deferral Account. 7.2 BENEFIT REDUCTION ON WITHDRAWAL. If the Participant (or Beneficiary) elects the withdrawal described in paragraph 8.2 herein, the lump sum payment shall be reduced by an amount equal to five percent (5%) of the total vested balance of such Deferral Accounts. If a Participant elects such a withdrawal, the Participant may not elect to participate in the Plan until the first day of the second Plan Year following the Plan Year in which such withdrawal was made. -7- 8 ARTICLE 8 SCHEDULED AND UNSCHEDULED WITHDRAWALS 8.1 PAYMENT OF SCHEDULED WITHDRAWAL. On the date designated in the applicable Participation Agreement for a Scheduled Withdrawal, the Company shall pay to the Participant in a lump sum the vested balance in the Participant's Deferral Account attributable to the Participation Agreement in which such designation was made. 8.2 ELECTION. A Participant may request an Unscheduled Withdrawal of all or any portion of the entire amount credited to his Deferred Accounts. 8.3 WITHDRAWAL PENALTY. There shall be a penalty deducted from the Deferral Account prior to an Unscheduled Withdrawal from such Deferral Account equal to ten percent (10%) of the Unscheduled Withdrawal. If a Participant elects to make an Unscheduled Withdrawal, the Participant may not elect to participate in the Plan until the first day of the second Plan Year following the Plan Year in which such withdrawal was made. -8- 9 ARTICLE 9 CONDITIONS RELATED TO BENEFITS 9.1 NONASSIGNABILITY. The benefits provided under the Plan may not be alienated, assigned, transferred, pledged or hypothecated by or to any person or entity, at any time or any manner whatsoever. These benefits shall be exempt from the claims of creditors of any Participant or other claimants and from all orders, decrees, levies, garnishment or executions against any Participant to the fullest extent allowed by law. 9.2 FINANCIAL HARDSHIP DISTRIBUTION. Upon a finding that the Participant or the Beneficiary has suffered a Financial Hardship, the Administrative Committee may in its sole discretion, accelerate distributions of benefits under the Plan in the amount reasonably necessary to alleviate such Financial Hardship. If a distribution is to be made to a Participant on account of Financial Hardship, the Participant may not make deferrals under the Plan until the first day of the third Plan Year following the Plan Year in which a distribution based on Financial Hardship was made. All Deferral Commitments in effect at the time such distribution is made under this section shall thenceforth be null and void. 9.3 NO RIGHT TO COMPANY ASSETS. The benefits paid under the Plan shall be paid from the general funds of the Company, and the Participant and any Beneficiary shall be no more than unsecured general creditors of the Company with no special or prior right to any assets of the Company for payment of any obligations hereunder. 9.4 PROTECTIVE PROVISIONS. The Participant shall cooperate with the Company by furnishing any and all information requested by the Administrative Committee, in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Administrative Committee may deem necessary and taking such other actions as may be requested by the Administrative Committee. If the Participant refuses to cooperate, the Company shall have no further obligation to the Participant under the Plan. In the event of a Participant's suicide during the first two (2) years of participation in the Plan, or if the Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits shall be payable to the Participant or the Participant's Beneficiary or estate under the Plan, except that all of the Participant's Annual Deferrals actually deferred shall be returned to the Participant, the Participant's Beneficiary or the Participant's estate with interest at the Survivor Crediting Rate. -9- 10 9.5 WITHHOLDING. The Participant or the Beneficiary shall make appropriate arrangements with the Company for satisfaction of any federal, state or local income tax withholding requirements and Social Security or other tax requirements applicable to the payment of benefits under the Plan. If no other arrangements are made, the Company may provide, at its discretion, for such withholding and tax payments as may be required. ARTICLE 10 ADMINISTRATION OF PLAN The Administrative Committee shall administer the Plan and interpret, construe and apply its provisions in accordance with its terms. The Administrative Committee shall further establish, adopt or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan. All decisions of the Administrative Committee shall be final and binding. The individuals serving on the Administrative Committee shall, except as prohibited by law, be indemnified and held harmless by the Company from any and all liabilities, costs, and expenses (including legal fees), to the extent not covered by liability insurance arising out of any action taken by any member of the Administrative Committee with respect to the Plan, unless such liability arises from the individual's own gross negligence or willful misconduct. ARTICLE 11 BENEFICIARY DESIGNATION The Participant shall have the right, at any time, to designate any person or persons as Beneficiary (both primary and contingent) to whom payment under the Plan shall be made in the event of the Participant's death. The Beneficiary designation shall be effective when it is submitted in writing to the Administrative Committee during the Participant's lifetime on a form prescribed by the Administrative Committee. The submission of a new Beneficiary designation shall cancel all prior Beneficiary designations. Any finalized divorce or marriage (other than a common law marriage) of a Participant subsequent to the date of a Beneficiary designation shall revoke such designation, unless in the case of divorce the previous spouse was not designated as Beneficiary and unless in the case of marriage the Participant's new spouse has previously been designated as Beneficiary. The spouse of a married Participant -10- 11 domiciled in a community property jurisdiction shall join in any designation of a Beneficiary other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if the Beneficiary designation is revoked by marriage, divorce, or otherwise without execution of a new designation, or if every person designated as Beneficiary predeceases the Participant or dies prior to complete distribution of the Participant's benefits, then the Administrative Committee shall direct the distribution of such benefits to the Participant's estate. ARTICLE 12 AMENDMENT AND TERMINATION OF PLAN 12.1 AMENDMENT OF PLAN. The Company may at any time amend the Plan in whole or in part, provided, however, that such amendment (i) shall not decrease the vested balance of the Participant's Deferral Accounts at the time of such amendment and (ii) shall not retroactively decrease the applicable crediting rates of the Plan prior to the time of such amendment. The Company may amend the crediting rates of the Plan prospectively. If the Company amends the formula for determining the crediting rates under the Plan, the Company shall notify the Participant of such amendment in writing within thirty (30) days of such amendment. Within thirty (30) days of receipt of the notice of an amendment to the formula for determining the applicable crediting rate, the Participant may elect by written notice to the Administrative Committee to terminate an incomplete Deferral Commitment. 12.2 TERMINATION OF PLAN. The Company may at any time terminate the Plan. If the Company terminates the Plan, the date of such termination shall be treated as the date of Termination of Service for the purpose of calculating Plan benefits. The Company shall pay to the Participant the benefits the Participant is entitled to receive under the Plan in monthly installments over a thirty-six (36) month period. Interest at the Reduced Crediting Rate will be credited to the Participant's Deferred Accounts until distribution under this section is completed. 12.3 AMENDMENT OR TERMINATION AFTER CHANGE IN CONTROL. Notwithstanding the foregoing, the Company shall not amend or terminate the Plan without the prior written consent of affected Participants for a period of two calendar years following a Change in Control and shall not thereafter amend or terminate the Plan in any manner which affects any Participant (or Beneficiary of a deceased Participant) who commences receiving payment of -11- 12 benefits under the Plan prior to the end of such two year period following a Change in Control. 12.4 CONSTRUCTIVE RECEIPT TERMINATION. In the event the Committee determines that amounts deferred under the Plan have been constructively received by Participants and must be recognized as income for federal income tax purposes, the Plan shall terminate and distributions shall be made to Participants in accordance with the provisions of paragraph 15.2. The determination of the Committee under this paragraph 15.4 shall be binding and conclusive. ARTICLE 13 MISCELLANEOUS 13.1 SUCCESSORS OF THE COMPANY. The rights and obligations of the Company under the Plan shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. 13.2 TRUST. The Company shall be responsible for the payment of all benefits under the Plan. At its discretion, the Company may establish one or more grantor trusts for the purposes of providing for payment of benefits under the Plan. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. Benefits paid to the Participant from any such trust shall be considered paid by the Company for purposes of meeting the obligations of the Company under the Plan. 13.3 SERVICE NOT GUARANTEED. Nothing contained in the Plan nor any action taken hereunder shall be construed as giving any Participant any right to continued service as a Director with the Company. 13.4 GENDER, SINGULAR AND PLURAL. All pronouns and variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 13.5 CAPTIONS. The captions of the articles and paragraphs of the Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 13.6 VALIDITY. In the event any provision of the Plan is held invalid, void or unenforceable, the same shall not -12- 13 affect, in any respect whatsoever, the validity of any other provisions of the Plan. 13.7 WAIVER OF BREACH. The waiver by the Company of any breach of any provision of the Plan by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. 13.8 APPLICABLE LAW. The Plan shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania, except where the laws of the Commonwealth of Pennsylvania are preempted by federal law. 13.9 NOTICE. Any notice or filing required or permitted to be given to the Company under the Plan shall be sufficient if in writing or hand- delivered, or sent by registered or certified mail, return receipt requested, to the principal office of the Company, directed to the attention of the Administrative Committee. Such notice shall be deemed given as of the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 13.10 Claims. If, pursuant to the provisions of the Plan, the Committee denies the claim of a Member for benefits under the Plan, the Committee shall provide written notice, within ninety (90) days after receipt of the claim, setting forth in a manner calculated to be understood by the claimant: a. the specific reasons for such denial; b. the specific reference to the Plan provisions on which the denial is based; c. a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is needed; and d. an explanation of the Plan's claim review procedure and the time limitations of this subsection applicable thereto. The Member whose claim for benefits has been denied may request review by the Committee of the denied claim by notifying the Committee in writing within sixty (60) days after receipt of the notification of claim denial. As part of said review procedure, the claimant or his authorized representative may review pertinent documents and submit issues and comments to the Committee in writing. The Committee shall render its decision to -13- 14 the claimant in writing in a manner calculated to be understood by the claimant not later than sixty (60) days after receipt of the request for review, unless special circumstances require an extension of time, in which case decision shall be rendered as soon after the sixty-day period as possible, but not later than one hundred and twenty (120) days after receipt of the request for review. The decision on review shall state the specific reasons therefor and the specific Plan reference on which it is based. 13.11 ARBITRATION. Any claim, dispute or other matter in question of any kind relating to this Plan not settled through the claims procedures established by the Committee in accordance with the provisions of Section 13.10 of the Plan shall be settled by Arbitration in accordance with the Rules of the American Arbitration Association. Notice of demand for arbitration shall be made in writing to the opposing party and to the American Arbitration Association within a reasonable time after the claim, dispute or other matter in question has arisen. In no event shall a demand for arbitration be made after the date when the applicable statute of limitations would bar the institution of a legal or equitable proceeding based on such claim, dispute or other matter in question. The decision of the arbitrators shall be final and may be enforced in any court of competent jurisdiction. The Company shall pay all of the Participant's reasonable fees and expenses incurred in the arbitration unless the arbitration award or a judgment by a court finds that (i) the Company did not breach any provision of this plan in connection with the claim, dispute or other matter in question that was the subject of the arbitration, and (ii) the Participant acted in bad faith in bringing the arbitration, or, if the arbitration was brought by the Company, the Participant acted in bad faith in breaching the Plan. -14- EX-10.O 5 LIFE INSURANCE BENEFIT FOR EXECUTIVES AND DIRECTOR 1 EXHIBIT 10-O As a taxable executive benefit, the Company pays the premiums for life insurance policies on the lives of non-employee Directors and certain key executives. The executive or Board member has the right to designate the beneficiary under the applicable life insurance policy. Messrs. Alter and Hart are each covered by a $5,000,000 policy. Mr. Greenawalt is covered by a $3,000,000 policy. Messrs. Lindenberg, Marshall, Wesselink and Riseman are each covered by a $1,000,000 policy, and each non-employee Director is covered by a $500,000 policy. All of the life insurance policies are owned by the Company, with the exception of the policy providing coverage for Mr. Riseman which is owned by him. Upon termination of employment, each executive (other than Mr. Riseman) is entitled to acquire the insurance policy from the Company, upon payment to the Company of an amount equal to the cash value of the policy at that time. The policies insuring the non-employee Directors are term life insurance policies, on which there is no build-up in cash value. EX-10.U 6 AGREEMENT BETWEEN REGISTRANT AND WILLIAM A. ROSOFF 1 EXHIBIT 10-u [ADVANTA CORP. LETTERHEAD] January 15, 1996 William A. Rosoff 721 Bryn Mawr Ave. Penn Valley, PA 19072 Dear Bill: This letter, when signed by you and us, shall confirm and constitute the agreement between you and Advanta Corp. ("we", "us" or the "Company") as follows: 1. We hereby engage you and you hereby accept such engagement to render services to us in accordance with the terms of this letter. 2. You shall have such responsibilities and authority as you and we mutually determine. Currently, we would expect that in addition to contributing to our current lines of business, you will (i) help us set and implement strategic policy; and (ii) oversee Legal Department and legal activities. Obviously, we may mutually agree to different and/or additional responsibilities in the future. 3. You will be accorded the title of Vice Chairman of the Company, and will serve as a member of the Office of the Chairman. 4. You shall be elected by the Board to be a member of the Board until the 1997 Annual Meeting and the Board shall nominate you to be elected by the shareholders for a three year term as director at the Company's 1997 Annual Meeting. We shall at all times maintain officers' and directors' liability insurance in an amount not less than $5 million. 5. You shall receive a base salary ("Base Salary") of Four Hundred Seventy-Five Thousand Dollars ($475,000) per twelve (12) month period, which shall be payable in accordance with our customary payroll policies. The Board shall review and consider increasing your Base Salary at least once annually. It is specifically agreed that at no time will your Base Salary be less than Four Hundred Seventy Five Thousand Dollars ($475,000). 6. During 1996, you shall receive a supplemental guaranteed cash bonus, payable bi-weekly at the same time as your base salary is payable, at the rate of Two Hundred Seventy-Five Thousand Dollars ($275,000) per twelve (12) month period. Each year after 1996, the Board of Directors will consider paying you a supplemental annual cash bonus, and will determine in its own discretion whether to do so for that year; provided, however, that the combination of your annual Base Salary and the supplemental annual cash bonus applicable to each year will, in no event, be less than Seven Hundred Fifty Thousand Dollars ($750,000) and the supplemental cash bonus shall be payable at the same time and in the 2 same proportions as your Base Salary is payable. 7. By signing this letter, you acknowledge that on December 29, 1995, you were paid a one-time bonus of Nine Hundred Fifty Thousand ($950,000) Dollars. 8. We hereby grant and convey to you one hundred thousand (100,000) shares of Class B restricted stock (the "Grant Shares"). The Grant Shares shall vest (i.e., become free of restrictions) at the rate of twenty-five thousand (25,000) shares on each of the first four anniversaries of the date of this letter. You will receive non-preferential cash dividends (so long as the Company is paying dividends on Class B Shares) on all of the Grant Shares both before and after they vest. While any Grant Shares remain restricted, the restricted Grant Shares (as well as any securities received as a dividend or distribution with respect to such restricted Grant Shares) may not be sold, transferred, pledged or hypothecated by you (other than to a family member or family trust to facilitate your estate planning goals, in which case such restrictions will apply to the Grant Shares held by such family member or family trust). While Grant Shares remain restricted, the stock certificates for such shares shall be held by the Company, and copies thereof shall be delivered to you (as is our practice with respect to all restricted shares under the AMIP bonus plan). Such restricted shares shall bear a restrictive legend indicating that they are subject to the restrictions described above and, in certain circumstances (as more fully set forth below) to forfeiture and return to the Company without the payment to you of any consideration therefor. As Grant Shares vest, certificates for the vested shares (and for any securities received as a dividend or distribution with respect thereto), free of the restrictive legend described in the preceding sentences shall be delivered to you. All of the Grant Shares shall vest immediately and entirely upon the occurrence of any of the following events: (i) change of control of the Company (as such is defined in the Stock Option Agreement attached hereto as Exhibit A); (ii) upon your death, disability, retirement or departure from the Company except for a voluntary departure by you (not solicited by us) to seek or engage in other employment; or (iii) upon our termination of your employment for any reason other than "proper cause" as defined below. In the event you voluntarily depart from the Company (without our solicitation to do so) to seek or engage in other employment, or we terminate your employment for "proper cause", any Grant Shares which have not at that time already vested shall be forfeited by you and returned to the Company without payment of any consideration. Except as indicated by the preceding sentence, it is specifically understood that the Grant Shares shall vest without regard to your personal performance or the performance of the Company during the term of your services. 9. You will execute an 83(b) election to pay ordinary income tax on the Grant Shares, only if requested to do so by the Company and if the Company so requests, the Company will file such election on your behalf with the Internal Revenue Service within 30 days of the date of the award. The Company will make a loan or loans to you equal to the federal, state and local taxes based on income or wages due (with respect to years prior to 2000) on the Grant Shares and any other payments made to you under this paragraph at such time or times as the income subject to tax is recognized by you for such tax purposes, with the principal amount of the loan(s) being remitted by the Company to the Internal Revenue 2 3 Service and other taxing authorities to cover the taxes due. All such loans will be non-interest bearing and you will not bear any tax liability resulting from any tax costs attributable to the imputation of interest for tax purposes. The loan(s) will only be repayable as set forth below. If additional taxes are determined to be due for a particular period after an initial decision as to the amount of the taxes owed is made, an additional loan or loans shall be made to you, on the foregoing terms to fund such taxes, any interest or penalty on such taxes, and on any taxes due on payments made pursuant to this sentence. On January 15, 2000, the fair market value of the Grant Shares will be determined. We will assume that the 100,000 Grant Shares are sold at the fair market value on that date and that you recognize the income for tax purposes that would be recognized as a result of such a sale. To the extent that the after tax proceeds from the assumed sale of the Grant Shares exceeds Four Million Dollars ($4,000,000), you will repay the outstanding loan balances, up to the full amount of principal within ninety (90) days. To the extent that the after tax proceeds from the assumed sale of the Grant Shares are insufficient to repay the loan balances pursuant to the preceding sentence, the Company will forgive the outstanding loan balances and the Company will remit an additional payment to you to cover any federal, state and local taxes based on income or wages due on the amount of loan forgiveness, any tax due on income recognized by you from the Grant Shares in the year 2000, and any payments made pursuant to this paragraph at the time the income subject to tax is recognized by you for such tax purposes. In addition the Company will make a supplemental payment to you equal to the difference between Four Million Dollars ($4,000,000) and the proceeds from the assumed sale of the Grant Shares, which supplemental payment shall be grossed up for federal, state and local taxes due. Any supplemental payment due pursuant to the preceding sentence shall be paid in cash or in unrestricted freely tradeable Advanta Class B stock and will be paid on or before April 15, 2000. The tax rates used in these calculations will be the maximum marginal tax rates that would be applicable to the assumed sale described above and those applicable to the other amounts described in this paragraph subject to tax. If you should cease to be employed by the company prior to January 15, 2000, all of the foregoing provisions shall continue to apply except that the shares sold in the assumed sale on January 15, 2000 shall be prorated based on the number of shares that become vested and the $4,000,000 figure wherever used shall be adjusted to the proportion of vested shares, e.g., if only 50,000 shares become vested hereunder, 50,000 shares shall be assumed sold, and $2,000,000 shall be substituted for $4,000,000 each place in this paragraph it appears. In determining the after tax proceeds of the sale on January 15, 2000 for purposes of this paragraph, the Federal, state and local taxes on any income required to be recognized by you in the year 2000 from the receipt of Grant Shares, shall be included as well as such taxes on the sale itself. 10. You will join Dennis Alter, Pete Hart and Rich Greenawalt in the "A" compensation category and you shall be eligible to receive an annual bonus (the "AMIP Bonus") under the terms of the Advanta Management Incentive Plan ("AMIP"). It is understood that your target bonus will be at least seventy-five (75%) percent of your Base Salary (set initially at $475,000) and that actual bonus awards will be based upon both your personal performance and the performance of the Company. Currently, AMIP calls for annual 3 4 payment of any amount up to your initial target bonus to be paid in shares of Class B common stock and any amounts in excess of such initial target bonus (whether such are the result of a bonus in excess of target due to your or the Company's performance, or the result of a higher target bonus due to an increase in your Base Salary) to be paid in cash. Generally, your AMIP Bonus will be determined in February with respect to the previous calendar year and shall be paid in February or March. However, in no event will total annual compensation, comprised of Base Salary, supplemental cash bonus payable pursuant to paragraph 6 and AMIP award, be less than $1,000,000. Without limiting any other provision of this agreement, it is understood that the AMIP bonus is in addition to the supplemental cash bonus set foth in paragraph 6. 11. In connection with the delivery of this letter, the Stock Option Committee under the Company's 1992 Stock Option Plan has granted to you, effective upon the signing of this letter, an option to purchase fifty thousand (50,000) shares of Class B common stock (the "Original Options") in accordance with the Advanta Corp. 1992 Stock Option Plan ("ACSOP"). The price of these shares shall be equal to the closing sale price on January 16, 1996. This option grant is subject, however, to stockholder ratification of an increase in the number of options available for grant under ACSOP at the Company's 1996 Annual Meeting. Your right to exercise the Original Options shall, in the ordinary course, vest twenty-five (25%) percent per year on each of the first four (4) anniversaries of the date of this letter. However, your right to exercise the Original Options shall vest immediately and entirely upon the occurrence of any of the events listed in (i) through (iii) in paragraph 8 above. In the event that unvested Grant Shares are forfeited pursuant to the penultimate sentence of paragraph 8 then to the extent that the Original Options have not at that time already vested and been exercised, they shall be forfeited and terminated without payment of any consideration. Upon termination of your employment for other than the circumstances described in the penultimate sentence of paragraph 8 you or your Estate's time to exercise the Original Options shall be two (2) years, commencing as of the date of your departure from the Company, after which two year period the Original Options shall expire, unless in any case a longer period of time to exercise is customarily accorded to senior management executives, in which case you shall also be accorded such longer time to exercise. Shortly after the mutual signing of this letter, we will furnish to you a Stock Option Agreement in the form attached hereto as Exhibit A. 12. The Company shall also award you additional options in accordance with ACSOP on an annual basis, subject to Board discretion. Generally, these grants are made in February of each year, so we contemplate that additional options may be granted in or around February 1997 recognizing that option grants for all senior executives are ultimately determined by the Stock Option Committee of the Board of Directors. The terms and conditions of such annual option grants shall be the same as the terms and conditions of the annual options granted to other senior executives of the Company. 13. You shall receive such medical and other benefits (except life insurance 4 5 benefits paid for by the Company which are governed by Paragraph 15) at the levels Dennis Alter, Pete Hart and Rich Greenawalt enjoy such benefits, including disability insurance coverage and participation in any pension program we may establish. Currently, our disability plan provides for coverage at the rate of sixty (60%) percent of an employee's base salary and target AMIP bonus (subject to a maximum benefit of $25,000 per month, or a base salary and target AMIP bonus maximum of $500,000) until the age of sixty-five (65). We shall furnish to you an automobile and related expenditures consistent with those accorded to other senior management and we shall pay your initiation fee and annual dues to belong to the country club of your choice. We shall also furnish to you certain financial planning services consistent with other senior management, at no cost to you (other than applicable taxes on this benefit). You shall be entitled to annual vacations, which may be taken at any time mutually agreed to by you and us. 14. Your services shall be performed primarily in the Philadelphia, Pennsylvania metropolitan region, subject to reasonable domestic and overseas travel on our behalf. We will pay or reimburse you for all transportation, hotel and other expenses incurred by you on business trips outside the metropolitan Philadelphia area and for all other ordinary out-of-pocket expenses incurred by you in the context of business on our behalf, on submission of appropriate expenses documentation in accordance with normal Company practice. 15. During the period of your employment, we shall maintain in effect, at our sole expense (except for taxes on the bonus payments equal to your share of split dollar premiums) one or more insurance policies on your life aggregating One Million Dollars($1,000,000) of life insurance, as to which your designee shall be the beneficiary. 16. The start date of your actual services in Horsham, Pennsylvania shall be January 16, 1996. Your Base Salary and guaranteed bonus shall be payable and your AMIP Bonus shall accrue as of the date you actually commence services with us in Horsham. 17. In the event of your death, permanent disability or retirement, we shall pay to you or to the legal representative of your estate (within thirty (30) days after we are notified of the appointment thereof) all Base Salary and any supplemental cash bonus due up to the date of such event, and when such becomes payable, if at all, your AMIP Bonus, pro-rated through the last day of the month of such event, and any amount payable to provide for your total minimum annual cash and incentive compensation shall be prorated through the last day of the month of such event.. 18. While either you or we may terminate your services at any time upon thirty (30) days prior written notice to the other, you and we are entering into this agreement with the hope and expectation that this will be a multi-year partnership. We may, by notice to you, terminate your employment for "proper cause" or without cause. As used herein, "proper cause" shall mean: (a) your willful refusal or failure to perform a material and substantial part of your duties hereunder, it being understood that "proper cause" shall not exist unless and until you have received written notice from us detailing the alleged willful 5 6 refusal or failure, and you have been accorded at least thirty (30) days to cure; or (b) your commission of a felony, or of any act of fraud, misappropriation or criminal conduct involving or relating in any material way to the Company, or of personal dishonesty materially injurious to the Company. If we terminate your employment for "proper cause," you shall be entitled to receive your Base Salary and any supplemental cash bonus payable pursuant to paragraph 6 until the date of termination and your AMIP Bonus, pro-rated through the date of termination, which AMIP Bonus shall be subject to the discretion of the Board, and any amount payable to provide for your total minimum annual cash and incentive compensation shall be prorated through the date of termination.. If your employment is terminated by us without cause, we agree that, as set forth above, any unvested Grant Shares and Original Options shall immediately and entirely vest. A termination by us for no reason, or for any reason other than "proper cause" shall be deemed a termination without cause. In the event you elect to terminate your employment because of a change of control of the Company, such shall be treated as a termination without cause by us. 19. Notices to be furnished hereunder shall be in writing, and shall be deemed given when delivered personally, sent by electronic means or mailed by registered or certified mail, return receipt requested, addressed to the addresses set forth above or such other addresses as may be provided hereafter. 20. This letter agreement sets forth the entire agreement between you and us, and cannot be modified except in a writing signed by both parties. This agreement is made in accordance with the laws of the State of Pennsylvania, applicable to agreements made and to be wholly performed therein. We are pleased you are joining Advanta and look forward to a long and mutually beneficial relationship. Sincerely, Advanta Corp. By: /s/ DENNIS ALTER ------------------------------- DENNIS ALTER Chairman By: /s/ PETE HART ------------------------------- PETE HART Chief Executive Officer 6 7 ACCEPTED AND AGREED: /s/ WILLIAM A. ROSOFF - - ---------------------------------- WILLIAM A. ROSOFF 7 8 EXHIBIT A ADVANTA CORP. NON-QUALIFIED STOCK OPTION THIS NON-QUALIFIED STOCK OPTION (the "Option") is granted as of January 16, 1996 by ADVANTA Corp., a Delaware corporation (the "Company"), to William A. Rosoff (the "Optionee"), pursuant to the Company's 1992 Stock Option Plan (the "Plan"). W I T N E S S E T H: 1. Grant. The Company hereby grants to the Optionee an Option to purchase, subject to the terms and conditions hereinafter set forth, all or any part of an aggregate of Fifty Thousand (50,000) Shares of the Company's Class B Common Stock, par value $0.01 per share (the "Option Shares"), at the purchase price of $34.00 per share (the "Option Price"). This Option is not intended to be an "incentive stock option" within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Term. The Option granted hereunder shall expire at 5:00 p.m. (local Philadelphia, Pennsylvania time) on the earliest to occur of the following: (a) January 15, 2006 (the "Expiration Date"); (b) The last day of the Optionee's employment or service with the Company or its Affiliates, where such employment or service is terminated (i) by the Optionee's voluntary resignation to seek or engage in other employment and such resignation has not been solicited by the Company, or (ii) by the Company for "proper cause" as defined in paragraph 18 of that certain letter agreement (the "Letter Agreement") between the Company and the Optionee dated January 16, 1996; or 9 (c) Expiration of two (2) years from the date the Optionee's employment or service with the Company or its Affiliates terminates for other than the circumstances described in subparagraph 2(b) above, unless at the time of such termination of service a longer post-termination exercise period is customarily accorded in such circumstances to senior management executives of the Company, in which case such longer post-termination exercise period shall apply. 3. Vesting. This Option shall vest over a period of four years, beginning from the date first written above (the "Date of Grant"). This Option may be exercised only to the extent that it has vested. Beginning on the first anniversary of the Date of Grant, 25% of the Option shall vest (i.e., 25% of the Option Shares covered by the Option shall become eligible for purchase). Beginning on each of the second through fourth anniversaries of the Date of Grant, an additional 25% of the Option shall vest, so that on the fourth anniversary of the Date of Grant, this Option shall be 100% vested. Notwithstanding the foregoing, in the event of: (i) a Change in Control of the Company (as defined in Section 8); or (ii) upon Optionee's death, disability, retirement or departure from the Company except for voluntary departure by Optionee as described in subparagraph 2(b)(i) above; or (iii) upon the Company's termination of Optionee's employment for any reason other than "proper cause" as defined in paragraph 18 of the Letter Agreement, then in any such event the Option shall be 100% vested. 4. General Rules. To the extent otherwise exercisable, this Option may be exercised in whole or in part except that this Option may in no event be exercised (a) with respect to fractional shares or (b) after the expiration of the Option term set forth under paragraph 2 hereof. 5. Transfers. The Option is not transferable by the Optionee otherwise than by will or pursuant to the laws of descent and distribution in the event of the Optionee's death, in which event the Option may be exercised by the heirs or legal 10 representatives of the Optionee. The Option may be exercised during the lifetime of the Optionee only by the Optionee. Any attempt at assignment, transfer, pledge or disposition of the Option contrary to the provisions hereof or the levy of any execution, attachment or similar process upon the Option shall be null and void and without effect. Notwithstanding the foregoing, the Option may be transferred pursuant to the terms of a "qualified domestic relations order," within the meaning of Sections 401(a)(13) and 414(p) of the Code or within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended. Any exercise of the Option by a person other than the Optionee shall be accompanied by appropriate proofs of the right of such person to exercise the Option. 6. Method of Exercise and Payment. (a) When exercisable under Paragraphs 2, 3 and 4, the Option may be exercised by written notice, pursuant to Paragraph 9, to the Company's Secretary specifying the number of Option Shares to be purchased and, unless the Option Shares are covered by a then current registration statement or a Notification under Regulation A under the Securities Act of 1933 (the "Act"), containing the Optionee's acknowledgment, in form and substance satisfactory to the Company, that (i) such Option Shares are being purchased for investment and not for distribution or resale (other than a distribution or resale which, in the opinion of counsel satisfactory to the Company, may be made without violating the registration provisions of the Act), (ii) the Optionee has been advised and understands that (A) the Option Shares have not been registered under the Act and are "restricted securities" within the meaning of Rule 144 under the Act and are subject to restrictions on transfer and (B) the Company is under no obligation to register the Option Shares under the Act or to take any action which would make available to the Optionee any exemption from such registration, (iii) such Option Shares may not be transferred without compliance with all applicable federal and state securities laws, and 11 (iv) an appropriate legend referring to the foregoing restrictions on transfer and any other restrictions imposed under the Option may be endorsed on the certificates. Notwithstanding the foregoing, if the Company determines that issuance of the Option Shares should be delayed pending (A) registration under federal or state securities laws, (B) the receipt of an opinion that an appropriate exemption from such registration is available, (C) the listing or inclusion of the Option Shares on any securities exchange or an automated quotation system or (D) the consent or approval of any governmental regulatory body whose consent or approval is necessary in connection with the issuance of such Shares, the Company may defer exercise of any Option granted hereunder until any of the events described in this Subsection 6(a) has occurred. (b) The notice shall be accompanied by payment of the aggregate Option Price of the Option Shares being purchased (i) in cash, (ii) by certified or cashier's check payable to the order of the Company, or (iii) by such other mode of payment as the Committee may approve. Such exercise shall be effective upon the actual receipt by the Company's Secretary of such written notice and payment. (c) The Company shall have the right to require the Optionee to remit or otherwise make available to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for Option Shares. The Company's obligation to make any delivery or transfer of Option Shares shall be conditioned on the Optionee's compliance with any withholding requirement to the Company's satisfaction. 7. Adjustments Upon Changes in Common Stock. In the event that, prior to the delivery by the Company of all of the Option Shares in respect of which the Option is granted, there shall be a stock dividend, stock split, recapitalization or other change in the number or class of issued and outstanding equity securities of the Company resulting from a subdivision or consolidation of the Common Stock and/or, if appropriate, other 12 outstanding equity securities or a recapitalization or other capital adjustment affecting the Common Stock which is effected without receipt of consideration by the Company, the Committee designated under the Plan shall make appropriate adjustments with respect to the aggregate number of shares and class or classes of shares issuable upon exercise of the Option in lieu of the remaining number of Option Shares and with respect to the Option Price hereunder. The Committee shall have the authority to determine the adjustments to be made pursuant to this Section, and any such determination by the Committee shall be final, binding and conclusive. 8. Definition of "Change of Control". A "Change of Control" shall be deemed to have occurred upon the earliest to occur of the following events: (i) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated, or (ii) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) approve a definitive agreement to sell or otherwise dispose of substantially all of the assets of the Company, or (iii) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) and the stockholders of the other constituent corporation (or its Board of Directors, if stockholder action is not required) have approved a definitive agreement to merge or consolidate the Company with or into such other corporation, other than, in either case, a merger or consolidation of the Company in which holders of shares of the Company's Class A Common Stock immediately prior to the merger or consolidation will have at least a majority of the voting power of the surviving corporation's voting securities immediately after the merger or consolidation, which voting securities are to be held in the same proportion as such holders' ownership of Class A Common Stock of the Company immediately before the merger or consolidation, or (iv) the date any entity, person or group, within the meaning of Section 13(d)(3) or Section 14(d)(2) of the 13 Securities Exchange Act of 1934, as amended, (other than (A) the Company or any of its subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (B) any person who, on the date the Plan is effective, shall have been the beneficial owner of or have voting control over shares of Common Stock of the Company possessing more than twenty-five percent (25%) of the aggregate voting power of the Company's Common Stock) shall have become the beneficial owner of, or shall have obtained voting control over, more than twenty five percent (25%) of the outstanding shares of the Company's Class A Common Stock, or (v) the first day after the date this Plan is effective when directors are elected such that a majority of the Board of Directors shall have been members of the Board of Directors for less than two (2) years, unless the nomination for election of each new director who was not a director at the beginning of such two (2) year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 9. Administration. This Option has been granted pursuant to the Company's 1992 Stock Option Plan, and is subject to the terms and provisions thereof, as well as to the ratification by the Company's stockholders of an increase in the number of options available for grant thereunder at the Company's 1996 Annual Meeting. Capitalized terms herein which are not otherwise defined have the meaning specified in the Plan. All questions of interpretation and application of the Plan and this Option shall be determined by the Committee designated under the Plan, and such determination shall be final, binding and conclusive. 10. Notices. Any notice to be given to the Company shall be addressed to the Secretary of the Company at its principal operating office, and any notice to be given to the Optionee shall be addressed to the Optionee at the address then appearing on the records of the Company, or at such other address as either party hereafter may designate 14 in writing to the other. Any such notice shall be deemed to have been duly given only when actually received by the Company. 11. Continued Service. Nothing herein contained shall affect the right of the Company to terminate the Optionee's employment or the Optionee's services, responsibilities, duties, or authority to represent the Company as a member of its Board of Directors, or to discontinue the Optionee's services to the Company in any capacity at any time for any reason whatsoever. IN WITNESS WHEREOF, the Company has granted this Option as of the day and year first above written. ADVANTA CORP. By /s/ DENNIS ALTER ----------------------------------- Dennis Alter, Chairman Attest /s/ GENE S. SCHNEYER -------------------------------- Gene S. Schneyer, Secretary EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 CURRENT LIST OF SUBSIDIARIES OF REGISTRANT Advanta Corp. (DE) Advanta Residual Holding Corp. (DE) Colonial National Corp. (DE) Colonial National Bank USA Colonial Mortgage Management Corp. (CA) Advanta Financial Corp. (UT)* Advanta National Bank Advanta GP Corp. (DE) Advanta 101 GP Corp. (DE) Advanta Investment Corp. (DE) Advanta Investment Corp. II (DE) Advanta International Corporation I (DE) Advanta International Corporation II (DE) Advanta UK (Scotland)** Advanta Leasing Holding Corp. (DE) Advanta Business Services Corp. (DE)*** Advanta Leasing Receivables Corp. (DE) Advanta Leasing Receivables Corp. II (DE) Mt. Vernon Leasing, Inc. (NJ) Advanta Service Corp. (DE) Advanta Life Insurance Company (AZ) Advanta Insurance Company (AZ) TSO National Life Insurance Company (AZ) Direct National Life Insurance Company (AZ) AICM, Inc. (AZ) Advanta Name Corp. (DE) Advanta Advertising, Inc. (DE) ADVANTENNIS Corp. (DE) Colonial National Automotive Financial Corp. (DE) Advanta Mortgage Holding Company (DE) Advanta Auto Finance Corporation (NV) Advanta Mortgage Corp. USA (DE) Advanta Finance Corp. (NV) Advanta Mortgage Corp. Midatlantic (PA) Advanta Mortgage Corp. Midatlantic II (PA) Advanta Mortgage Corp. New Jersey (NJ) Advanta Mortgage Corp. Northeast (NY) Advanta Mortgage Corp. Midwest (PA) Advanta Financial Investments, Inc. (PA) Advanta Nominee Services, Inc. (DE) Advanta Mortgage Conduit Services, Inc. (DE) Advanta Mortgage Receivables, Inc. (DE) * Formerly Colonial National Financial Corp. ** Advanta International Corp. I and Advanta International Corp. II each owns 50% of Advanta UK. *** Formerly Advanta Leasing Corp. EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements; File No. 33-7615, No. 33-12510, No. 33-19290, No. 33-31456, No. 33-32969, No. 33-33350, No. 33-39331, No. 33-47308, No. 33-47305, No. 33-50256, No. 33-50254, No. 33-50258, No. 33-55492, No. 33-57516, No. 33- 53205, No. 33-53475, No. 33-54991, No. 33-58029, No. 33-59219, No. 33-61555, No. 33-62601, No. 33-60419, No. 33-01681 and No. 33-01833. Arthur Andersen LLP Philadelphia, PA March 25, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1995 DEC-31-1995 45,714 410,709 146,375 0 532,963 0 0 2,832,743 53,494 4,524,259 1,906,601 1,216,127 140,690 587,877 0 1,010 415 671,539 4,524,259 189,983 48,949 0 238,932 72,812 166,032 72,900 53,326 8,346 350,685 211,903 136,677 0 0 136,677 3.20 3.20 2.80 21,856 17,399 0 0 41,617 49,268 6,719 53,494 41,226 0 12,268
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