-----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, JwBpPt8IxmsYxx9MCtlh+R6o4l6VaiE/2So12XAkv0etP6hRkRHXyCM2zoFy3Vqc 1B9sodrQpiQJk2vDmDdGKA== 0000893220-99-001258.txt : 19991115 0000893220-99-001258.hdr.sgml : 19991115 ACCESSION NUMBER: 0000893220-99-001258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14120 FILM NUMBER: 99750978 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19477 BUSINESS PHONE: 2154445051 MAIL ADDRESS: STREET 1: C/O WELSH & MCKEAN ROADS STREET 2: P.O. BOX 844 CITY: SPRING HOUSE STATE: PA ZIP: 19477-0844 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-Q 1 FORM 10-Q ADVANTA CORP. 1 Form 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1999 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission File Number 0-14120 Advanta Corp. (Exact name of registrant as specified in its charter) Delaware 23-1462070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477 (Address of Principal Executive Offices) (Zip Code) (215) 657-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Outstanding at November 3, 1999 Common Stock, $.01 par value 10,465,888 shares Class B Outstanding at November 3, 1999 Common Stock, $.01 par value 18,040,337 shares
1 2 TABLE OF CONTENTS PAGE PART I- FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Income Statements 4 Consolidated Condensed Statements of Changes in Stockholders' Equity 5-6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 PART II OTHER INFORMATION 41
2 3 ITEM 1. FINANCIAL STATEMENTS ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------- ASSETS (UNAUDITED) Cash $ 19,084 $ 16,267 Federal funds sold 371,000 267,400 Restricted interest-bearing deposits 81,767 80,028 Trading investments 0 501,563 Investments available for sale 952,908 521,410 Subordinated trust assets 382,928 291,942 Loan and lease receivables, net: Held for sale 473,928 527,644 Other 463,872 579,783 ----------- ----------- Total loan and lease receivables, net 937,800 1,107,427 Retained interest-only strip 157,093 209,096 Premises and equipment(at cost, less accumulated depreciation of $50,077 in 1999 and $38,377 in 1998) 87,236 84,396 Other assets 535,778 641,891 ----------- ----------- TOTAL ASSETS $ 3,525,594 $ 3,721,420 ----------- ----------- LIABILITIES Deposits: Noninterest-bearing $ 10,923 $ 4,324 Interest-bearing 1,693,253 1,745,466 ----------- ----------- Total deposits 1,704,176 1,749,790 Long-term debt 849,815 1,030,147 Other borrowings 10,581 36,301 Other liabilities 283,798 244,878 ----------- ----------- TOTAL LIABILITIES 2,848,370 3,061,116 ----------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of the Company 100,000 100,000 STOCKHOLDERS' EQUITY Class A preferred stock, $1,000 par value: Authorized, issued and outstanding - 1,010 shares in 1999 and 1998 1,010 1,010 Class B preferred stock, $.01 par value: Issued and outstanding- 0 shares in 1999, 14,211 shares in 1998 0 0 Class A voting common stock, $.01 par value: Authorized - 214,500,000 shares; Issued - 10,465,883 shares in 1999, and 10,375,489 shares in 1998 105 104 Class B non-voting common stock, $.01 par value; Authorized - 230,000,000 shares; Issued - 17,997,755 shares in 1999, and 16,294,825 in 1998 180 163 Additional paid-in capital 229,825 229,304 Deferred compensation (14,732) (17,214) Unearned ESOP shares (12,237) (12,550) Accumulated other comprehensive loss (7,667) (91) Retained earnings 407,209 382,092 Less: Treasury stock at cost, 405,000 Class A and 972,768 Class B common shares in 1999 and 55,000 Class A and 972,768 Class B common shares in 1998 (26,469) (22,514) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 577,224 560,304 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,525,594 $ 3,721,420 ----------- -----------
See Notes to Consolidated Condensed Financial Statements 3 4 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) REVENUES: Gain on sale of receivables, net $ 51,360 $ 50,489 $ 127,245 $ 112,699 Interest income 61,185 56,539 185,700 189,826 Servicing revenues 29,548 26,604 86,835 104,812 Consumer credit card securitization income 0 0 0 64,796 Gain on transfer of consumer credit card business 0 0 0 541,288 Other revenues, net 18,650 13,650 76,270 28,081 - ------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 160,743 147,282 476,050 1,041,502 - ------------------------------------------------------------------------------------------------------------------- EXPENSES: Salaries and employee benefits 44,951 41,908 133,795 136,822 Other operating expenses 37,751 36,111 117,519 150,523 Interest expense 41,935 39,165 128,529 142,935 Provision for credit losses 10,452 6,414 28,007 47,221 Minority interest in income of consolidated subsidiary 2,220 2,220 6,660 6,660 Unusual charges 0 0 6,713 125,072 - ------------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 137,309 125,818 421,223 609,233 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 23,434 21,464 54,827 432,269 Income tax expense (benefit) 9,256 6,439 21,564 (11,013) - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 14,178 $ 15,025 $ 33,263 $ 443,282 - ------------------------------------------------------------------------------------------------------------------- Basic earnings per share Class A $ .56 $ .57 $ 1.28 $ 15.77 Class B .57 .58 1.33 15.82 Combined .57 .58 1.31 15.80 - ------------------------------------------------------------------------------------------------------------------- Diluted earnings per share Class A $ .54 $ .56 $ 1.26 $ 14.87 Class B .56 .58 1.31 14.89 Combined .55 .58 1.30 14.88 - ------------------------------------------------------------------------------------------------------------------- Basic weighted average shares outstanding Class A 8,984 10,316 9,078 11,780 Class B 14,429 14,166 14,143 16,100 Combined 23,413 24,482 23,221 27,880 - ------------------------------------------------------------------------------------------------------------------- Diluted weighted average shares outstanding Class A 9,030 10,320 9,110 11,790 Class B 14,960 14,194 14,410 17,986 Combined 23,990 24,514 23,520 29,776 - ------------------------------------------------------------------------------------------------------------------- Cash dividends declared Class A $ .063 $ .063 $ .187 $ .187 Class B .076 .076 .227 .227 - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements 4 5 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) ($ IN THOUSANDS)
CLASS A CLASS B CLASS A CLASS B ADDITIONAL COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON PAID-IN INCOME STOCK STOCK STOCK STOCK CAPITAL - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DEC. 31, 1997 $1,010 $0 $182 $266 $379,543 Net income $447,880 Other comprehensive income (loss): Foreign currency translation adjustment net of tax benefit (expense) of $109 (202) Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of ($33) 61 --------- Comprehensive income $447,739 ======== Tender Offer (79) (113) (160,861) Preferred and common cash dividends declared Exercise of stock options 1 2 3,102 Issuance of stock: Dividend reinvestment 89 Benefit plans 13 22,647 Amortization of deferred compensation Termination benefit- Benefit plans (5) (15,214) Stock buyback ESOP stock purchase ESOP shares committed to be released (2) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 31, 1998 $1,010 $0 $104 $163 $229,304 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $33,263 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $4,080 (7,576) -------- Comprehensive income $25,687 ======= Preferred and common cash dividends declared Exercise of stock options 20 Issuance of stock: Dividend reinvestment Benefit plans 1 6 7,476 Conversion of Class B Preferred Stock 14 (14) Amortization of deferred compensation Termination benefit- Benefit plans (3) (7,036) Stock buyback ESOP shares committed to be released 75 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1999 $1,010 $0 $105 $180 $229,825 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements 5 6 ($ IN THOUSANDS)
DEFERRED ACCUMULATED COMPENSATION OTHER TOTAL & UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DEC. 31, 1997 $(25,353) $ 50 $585,659 $(14,407) $926,950 Net income 447,880 447,880 Other comprehensive income (loss): Foreign currency translation adjustment net of tax benefit (expense) of $109 (202) (202) Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of ($33) 61 61 Comprehensive income Tender Offer (640,553) (801,606) Preferred and common cash dividends declared (10,894) (10,894) Exercise of stock options 3,105 Issuance of stock: Dividend reinvestment 89 Benefit plans (20,605) 2,055 Amortization of deferred compensation 8,193 8,193 Termination benefit- Benefit plans 20,551 (3,558) 1,774 Stock buyback (4,549) (4,549) ESOP stock purchase (12,569) (12,569) ESOP shares committed to be released 19 17 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DEC. 31, 1998 $(29,764) $ (91) $382,092 $(22,514) $560,304 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 33,263 33,263 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $4,080 (7,576) (7,576) Comprehensive income Preferred and common cash dividends declared (8,146) (8,146) Exercise of stock options 20 Issuance of stock: Dividend reinvestment 0 Benefit plans (7,483) 0 Conversion of Class B Preferred Stock 0 Amortization of deferred compensation 2,926 2,926 Termination benefit- Benefit plans 7,039 0 Stock buyback (3,955) (3,955) ESOP shares committed to be released 313 388 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1999 $(26,969) $(7,667) $407,209 $(26,469) $577,224 - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements 6 7 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED ($ IN THOUSANDS) SEPTEMBER 30, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income $ 33,263 $ 443,282 Adjustments to reconcile net income to net cash provided by operating activities: Equity securities (gains) losses (29,781) 42,470 Noncash charges associated with exit of auto finance business 16,900 0 Depreciation and amortization 13,754 15,797 Provision for credit losses, excluding auto 23,107 47,219 Gain on transfer of consumer credit card business 0 (541,288) Noncash expense associated with unusual charges 0 25,539 Investment in subordinated trust assets, net (95,158) (67,551) Proceeds from sale of trading investments 185,042 0 Origination of loans and leases held for sale (2,533,678) (4,202,775) Proceeds from sales of loans and leases held for sale 2,831,799 5,085,744 Change in other assets and other liabilities 12,909 (50,696) Change in retained interest-only strip, excluding auto charge 44,175 (29,248) ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 502,332 768,493 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Change in federal funds sold and interest- bearing deposits (105,339) (206,538) Purchase of investments available for sale (12,160,787) (42,261,460) Proceeds from sales of investments available for sale 621,660 1,226,360 Proceeds from maturing investments available for sale 11,451,104 41,500,657 Purchase of loan and lease portfolios 0 (23,136) Principal collected on Advanta Mortgage loans and leases not held for sale 125,649 105,476 Origination of Advanta Mortgage loans and leases not held for sale (143,191) (499,763) Change in business card receivables and other loans not held for sale, excluding sales (8,493) (18,851) Change in consumer card receivables not held for sale, excluding sales/transfers 0 (121,845) Purchases of premises and equipment, net (16,371) (30,502) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (235,768) (329,602) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Change in demand and savings deposits 97,015 (379,914) Proceeds from sales of time deposits 539,584 1,143,128 Payments for maturing time deposits (682,213) (403,256) Proceeds from issuance of long-term debt 83,452 18,584 Payments on redemption of long-term debt (270,987) (239,840) Change in warehouse facility borrowings (18,517) 3,857 Change in notes payable 0 216,058 Stock Tender Offer 0 (801,606) Stock buy back (3,955) (6,380) Proceeds from issuance of stock 20 5,244 Cash dividends paid (8,146) (8,231) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (263,747) (452,356) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 2,817 (13,465) Cash at beginning of period 16,267 27,736 - ----------------------------------------------------------------------------------------------------------------------------------- Cash at end of period $ 19,084 $ 14,271 - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Condensed Financial Statements 7 8 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) SEPTEMBER 30, 1999 (UNAUDITED) NOTE 1) BASIS OF PRESENTATION The consolidated condensed financial statements included herein have been prepared by Advanta Corp. (collectively with its subsidiaries, "Advanta" or "the Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Advanta has condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include only normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. See Notes 8 and 13 related to unusual transactions during the periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto included in Advanta's latest annual report on Form 10-K. The results of operations through February 20, 1998 include the results of operations of Advanta's consumer credit card business (see Note 8). The results of operations for the interim periods are not necessarily indicative of the results for the full year. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for gain on sale of receivables and the retained interest-only strips, contractual mortgage servicing rights, the allowance for credit losses and income taxes, among others. Actual results could differ from those estimates. Certain prior period balances have been reclassified to conform to the current period presentation. NOTE 2) RECENT ACCOUNTING PRONOUNCEMENTS The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" in March 1998. SOP 98-1 is effective for fiscal years beginning after December 15, 1998 and specifies that direct costs incurred when developing computer software for internal use should be capitalized once certain capitalization criteria are met. Advanta adopted this SOP on January 1, 1999. The adoption of SOP 98-1 did not have a material effect on Advanta's financial statements. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000 and cannot be applied retroactively. 8 9 Advanta will adopt SFAS No. 133 effective January 1, 2001. Advanta anticipates that the adoption of SFAS No. 133 will not have a material effect on the results of operations. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65." SFAS No. 134 amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. Prior to the issuance of SFAS No. 134, Advanta was required to account for resulting mortgage-backed securities or other retained interests as trading securities. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. Advanta adopted SFAS No. 134 on January 1, 1999, and reclassified approximately $315 million of retained mortgage-backed securities related to mortgage loan securitizations from trading to available-for-sale securities based on Advanta's intent with respect to these securities. Advanta continues to classify its retained interest-only strips and subordinated trust assets from mortgage loan securitizations as trading securities. The adoption of SFAS No. 134 did not have a material effect on Advanta's financial statements. NOTE 3) RETAINED INTEREST-ONLY STRIP, CONTRACTUAL MORTGAGE SERVICING RIGHTS AND SUBORDINATED TRUST ASSETS The following reflects activity in the Advanta Mortgage retained interest-only ("IO") strip and contractual mortgage servicing rights ("CMSR"):
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Beginning balance IO Strip $ 209,096 $ 183,306 Beginning balance CMSR $ 74,425 $ 24,546 IO activity: Retained IO on sales, net 51,764 181,425 Interest income 15,934 21,674 Cash received and used to acquire subordinated trust assets (87,393) (96,455) Cash released to Advanta (25,760) (29,874) Fair value adjustments 0 (50,980) Fair value adjustment related to auto exit (7,828) 0 Other 1,280 0 CMSR activity: Servicing rights retained 45,771 71,131 Amortization, net (28,216) (12,977) Valuation provision (3,522) (8,275) Ending Balance IO Strip $ 157,093 $ 209,096 Ending Balance CMSR $ 88,458 $ 74,425 ========= =========
In the first quarter of 1999, Advanta reclassified $25.3 million from IO strip to CMSR. In the second quarter of 1999, Advanta reclassified from IO strip, $10.7 million as subordinated trust assets and $3.6 million as Due from Trustee, as these amounts had already been collected by the Trust. There was no earnings impact from these reclassifications. The 1998 balances have been reclassified to conform to this presentation. 9 10 The following table presents activity in subordinated trust assets related to Advanta Mortgage loan securitizations:
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------ ------------ Beginning balance $ 291,942 $ 178,469 Initial collateral deposits 35,050 38,907 Subordinated trust assets acquired with excess cash flows 87,393 96,455 Interest earned 19,172 10,270 Valuation adjustment related to auto loans (4,172) 0 Excess cash flows released to Advanta (46,041) (46,141) Net change in subordinated trust assets associated with off- balance sheet warehouse facilities (416) 13,982 --------- --------- Ending Balance $ 382,928 $ 291,942 ========= =========
NOTE 4) LOAN AND LEASE RECEIVABLES Loan and lease receivables on the balance sheet, including those held for sale, consisted of the following:
SEPTEMBER 30, DEC. 31, 1999 1998 -------------- ----------- Advanta Mortgage loans $ 625,350 $ 829,819 Business cards 191,051 150,022 Leases 129,080 122,657 Other loans 17,478 17,862 ----------- ----------- Gross loan and lease receivables 962,959 1,120,360 ----------- ----------- Add: Unamortized purchase premiums and deferred origination costs, net of deferred fees 10,169 20,504 Less: Allowance for credit losses Advanta Mortgage loans (16,480) (20,092) Leases (3,368) (2,695) Business cards (10,784) (6,916) Other loans (4,696) (3,734) ----------- ----------- Total allowance for credit losses (35,328) (33,437) ----------- ----------- Net loan and lease receivables $ 937,800 $ 1,107,427 ----------- -----------
Receivables sold and now serviced for others consist of the following:
SEPTEMBER 30, DEC. 31, 1999 1998 ------------ ---------- Advanta Mortgage loans $7,736,595 $7,447,502 Business cards 738,958 664,712 Leases 651,573 547,583 ---------- ---------- Total $9,127,126 $8,659,797 ---------- ----------
"Advanta Mortgage loans" include mortgage and auto loans and exclude mortgage loans which were never owned by Advanta, but which Advanta services for a fee ("contract servicing" or "subservicing"). Contract servicing receivables were $10.5 billion at September 30, 1999, and $8.3 billion at December 31, 1998. 10 11 NOTE 5) ALLOWANCE FOR CREDIT LOSSES The following table shows the changes in the allowance for credit losses for the periods presented:
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DEC. 31, 1999 1998 ------------- ---------- Beginning balance $ 33,437 $ 137,773 Provision for credit losses 28,007 67,193 Allowance on receivables sold (6,690) (118,420) Gross charge-offs: Advanta Mortgage loans (12,039) (14,313) Business cards (8,735) (11,126) Leases (2,949) (4,992) Consumer credit cards 0 (30,999) Other loans (38) 0 --------- --------- Total gross charge-offs (23,761) (61,430) Recoveries: Advanta Mortgage loans 2,239 3,007 Business cards 861 1,093 Leases 1,228 1,501 Consumer credit cards 0 2,719 Other loans 7 1 --------- --------- Total recoveries 4,335 8,321 Net charge-offs (19,426) (53,109) Ending Balance $ 35,328 $ 33,437 ========= =========
NOTE 6) SELECTED BALANCE SHEET INFORMATION
SEPTEMBER 30, DEC. 31, OTHER ASSETS 1999 1998 ------------ -------- Contractual mortgage servicing rights $ 88,458 $ 74,425 Current and deferred income taxes, net 51,687 31,243 Goodwill 3,392 3,600 Other real estate (A) 8,342 6,622 Other 383,899 526,001 -------- -------- TOTAL OTHER ASSETS $535,778 $641,891 -------- --------
(A) Carried at the lower of cost or fair market value less selling costs.
SEPTEMBER 30, DEC. 31, OTHER LIABILITIES 1999 1998 ------------ -------- Accounts payable and accrued expenses $ 83,326 $ 66,852 Accrued interest payable 66,003 38,035 Current and deferred income taxes 0 2,445 Other 134,469 137,546 -------- -------- TOTAL OTHER LIABILITIES $283,798 $244,878 -------- --------
11 12 NOTE 7) LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of over one year. The composition of long-term debt at September 30, 1999 and December 31, 1998, was as follows:
SEPTEMBER 30, DECEMBER 31, 1999 1998 - ------------------------------------------------------------------------------------------------------- SENIOR DEBT 12 month senior notes (7.33%-9.03%) $ 74,836 $ 48,948 18 month senior notes (8.57%-8.76%) 6,561 6,565 24 month senior notes (7.14%-9.03%) 42,711 32,360 30 month senior notes (7.23%-8.89%) 13,344 13,609 48 month senior notes (9.08%) 8,617 8,454 60 month senior notes (9.53%) 26,537 20,779 Value notes, fixed (6.85%-7.85%) 8,808 9,300 Medium-term notes, fixed (6.41%-8.36%) 560,150 703,460 Medium-term notes, floating 67,400 163,000 Medium-term bank notes, fixed (6.45%-7.12%) 7,344 7,338 Other senior notes (4.60%-11.34%) 32,588 14,844 - ------------------------------------------------------------------------------------------------------- Total senior debt 848,896 1,028,657 Subordinated notes (6.54%-11.34%) 919 1,490 - ------------------------------------------------------------------------------------------------------- Total long-term debt $ 849,815 $1,030,147 =======================================================================================================
Advanta has priced its floating rate medium-term notes based on a spread over LIBOR. At September 30, 1999, the rates on these notes varied from 5.28% to 5.71%. At September 30, 1999 and December 31, 1998, Advanta used derivative financial instruments to effectively convert certain fixed rate debt to a LIBOR based variable rate. NOTE 8) DISPOSITION OF CONSUMER CREDIT CARD ASSETS In accordance with the terms of the Contribution Agreement, dated as of October 28, 1997, as amended February 20, 1998, by and between Advanta and Fleet Financial Group, Inc. ("Fleet"), Advanta and certain of its subsidiaries and Fleet and certain of its subsidiaries each contributed certain assets and liabilities of their respective consumer credit card businesses to Fleet Credit Card LLC (the "LLC") in exchange for an ownership interest in the LLC (the "Fleet Transaction"). Subsequent to February 20, 1998, Fleet Credit Card Services LP became the successor in interest to the LLC. References to the LLC include its successor in interest Fleet Credit Card Services LP. Advanta recognized a gain on the transfer of the consumer credit card business representing the excess of liabilities transferred to the LLC over the net basis of the assets transferred. The gain also included Advanta's ownership interest in the LLC. The gain on the transfer was not subject to income tax and no tax provision was recorded. As further described in Note 15, Advanta and Fleet are parties to a lawsuit concerning disputes regarding the final determination of the transferred assets and liabilities. It is possible that the outcome of the litigation will result in an increase or decrease to the gain recorded. Concurrently with the Fleet Transaction, Advanta purchased 7,882,750 shares of its Class A Common Stock, 12,482,850 of its Class B Common Stock, each at $40 per share net, and 1,078,930 of its depositary shares each representing one one-hundredth interest in a share of 6 3/4% Convertible Class B Preferred Stock, Series 1995 at $32.80 per share net, through an issuer tender offer (the "Tender Offer") which was completed on February 20, 1998. 12 13 NOTE 9) CAPITAL STOCK On September 15, 1999, 1.4 million of outstanding depositary shares, each representing a one-hundredth interest in a share of Stock Appreciation Income Linked Securities ("SAILS"), mandatorily converted into 1.4 million shares of Class B Common Stock. The SAILS constituted a series of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995. During the third quarter of 1998, the Board of Directors authorized the repurchase of up to 2.5 million shares of Advanta's Class A and Class B Common Stock and the formation of an Employee Stock Ownership Plan ("ESOP"). Through September 30, 1999, Advanta had purchased 445,600 shares of Class B Common Stock and 1,405,000 shares of Class A Common Stock at a total cost of $21.1 million. Of the total shares purchased, 1,000,000 shares of Class A Common Stock were purchased for Advanta's ESOP. NOTE 10) SEGMENT INFORMATION Advanta adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," effective January 1, 1998. SFAS 131 establishes revised standards for public companies related to the reporting of financial and descriptive information about their operating segments in financial statements. Advanta has three reportable segments as of September 30, 1999: Advanta Mortgage, Advanta Leasing Services and Advanta Business Cards. Each of these business segments has separate management teams and infrastructures that offer different products and services. Through February 20, 1998, Advanta also had a fourth reportable segment, Advanta Personal Payment Services. Advanta changed its reportable segments subsequent to December 31, 1998. Management considers Advanta Leasing Services and Advanta Business Cards separate segments due to the development of separate management teams and infrastructures in each unit, whereas at December 31, 1998, they were considered one combined segment, Advanta Business Services. Advanta has restated the corresponding items of segment information for earlier periods. Advanta Mortgage is engaged in nonconforming home equity lending directly to consumers or through brokers and other originators. This business unit originates, purchases, securitizes and services nonconforming credit first and second lien mortgage loans and home equity lines of credit, directly through subsidiaries of Advanta. In addition to servicing and managing the loans it originates, Advanta Mortgage contracts with third parties to service their home equity loans on a subservicing basis. Advanta Business Cards offers MasterCard(R) business credit cards to small businesses. Direct marketing techniques are the source of growth in accounts in the business credit card operations. Advanta Leasing Services offers flexible lease financing programs on small-ticket equipment to small businesses. The commercial equipment leasing business is generated primarily through third-party referrals from manufacturers or distributors of equipment, as well as independent brokers. Prior to the Fleet Transaction, Advanta offered consumer credit cards through Advanta Personal Payment Services. This business segment issued consumer credit cards nationwide using direct marketing techniques. As of February 20, 1998, this segment had no operations, and the activity below reflects operations through that date. 13 14 The accounting policies of the segments are the same as those followed by Advanta. Advanta evaluates performance based largely on the net income of the respective business units.
ADVANTA ADVANTA ADVANTA PERSONAL THREE MONTHS ENDED ADVANTA BUSINESS LEASING PAYMENT SEPTEMBER 30, MORTGAGE CARDS SERVICES SERVICES OTHER (1) TOTAL - ------------------------------------------------------------------------------------------------------------------------ 1999 Noninterest revenues $ 66,076 $ 20,509 $ 10,320 $ -- $ 2,653 $ 99,558 Interest revenue 28,239 12,428 3,023 -- 17,495 61,185 Interest expense 21,581 4,906 2,719 -- 12,729 41,935 Net income (loss) 7,900 5,965 1,085 -- (772) 14,178 Average managed Receivables 8,389,792 906,032 741,571 -- 17,322 10,054,717 - ------------------------------------------------------------------------------------------------------------------------ 1998 Noninterest revenues $ 65,780 $ 14,541 $ 9,598 $ -- $ 824 $ 90,743 Interest revenue 33,601 5,822 3,066 -- 14,050 56,539 Interest expense 20,828 2,348 2,521 -- 13,468 39,165 Net income (loss) 10,119 4,345 745 -- (184) 15,025 Average managed receivables 7,125,403 768,348 611,847 -- 17,704 8,523,302 - ------------------------------------------------------------------------------------------------------------------------
ADVANTA ADVANTA ADVANTA PERSONAL NINE MONTHS ENDED ADVANTA BUSINESS LEASING PAYMENT SEPTEMBER 30, MORTGAGE CARDS SERVICES SERVICES OTHER (1) TOTAL - ------------------------------------------------------------------------------------------------------------------------------ 1999 Noninterest revenues $ 180,728 $ 56,871 $ 32,492 $ -- $ 20,259 $ 290,350 Interest revenue 101,216 25,576 8,199 -- 50,709 185,700 Interest expense 67,008 10,045 8,060 -- 43,416 128,529 Unusual charges -- -- -- -- 6,713 6,713 Net income (loss) 15,256 15,493 3,417 -- (903) 33,263 Average managed Receivables 8,370,460 865,510 699,551 -- 17,385 9,952,906 - ------------------------------------------------------------------------------------------------------------------------------ 1998 Noninterest revenues $ 161,389 $ 36,008 $ 26,316 $ 83,966 $ 2,709 $ 310,388 Interest revenue 89,091 16,675 10,388 23,465 50,207 189,826 Interest expense 52,697 7,740 8,259 33,352 40,887 142,935 Gain on transfer of consumer card business -- -- -- 541,288 -- 541,288 Unusual charges -- -- -- 125,072 -- 125,072 Net income 22,389 7,382 897 412,452 162 443,282 Average managed receivables 6,334,967 729,018 599,358 2,468,241 15,001 10,146,585 - ------------------------------------------------------------------------------------------------------------------------------
(1) Other includes insurance operations, venture capital operations, assets not attributable to other segments, and costs associated with exiting the auto finance business in 1999. 14 15 NOTE 11) NET INTEREST INCOME The following table presents the components of net interest income:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Interest income: Loans and leases $ 32,152 $ 30,892 $ 89,380 $ 105,215 Investments 28,014 20,710 80,386 68,730 Interest component of previously discounted cash flows 1,019 4,937 15,934 15,881 ------ ------ ------- ------- Total interest income 61,185 56,539 185,700 189,826 Interest expense: Deposits 25,503 14,014 79,098 62,747 Debt and other borrowings 16,432 25,151 49,431 80,188 ------ ------ ------- ------- Total interest expense 41,935 39,165 128,529 142,935 - ------------------------------------------------------------------------------------------------------------------------ Net interest income 19,250 17,374 57,171 46,891 Less: Provision for credit losses (10,452) (6,414) (28,007) (47,221) - ------------------------------------------------------------------------------------------------------------------------ Net interest after provision for credit losses $ 8,798 $ 10,960 $ 29,164 $ (330) - ------------------------------------------------------------------------------------------------------------------------
NOTE 12) INCOME TAX EXPENSE Income tax expense is based on the estimated annual effective tax rate of 39.5% for the three months ended September 30, 1999, compared to a 30.0% tax rate for the comparable 1998 period. Income tax expense (benefit) consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Current: Federal $ 5,000 $ 24,216 $ 15,000 $(45,651) State (747) 1,937 1,548 8,566 - -------------------------------------------------------------------------------------------------------------------- Total current 4,253 26,153 16,548 (37,085) - -------------------------------------------------------------------------------------------------------------------- Deferred: Federal 3,012 (19,843) 4,025 26,526 State 1,991 129 991 (454) - -------------------------------------------------------------------------------------------------------------------- Total deferred 5,003 (19,714) 5,016 26,072 - -------------------------------------------------------------------------------------------------------------------- Total tax expense (benefit) $ 9,256 $ 6,439 $ 21,564 $(11,013) - --------------------------------------------------------------------------------------------------------------------
15 16 The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax $ 8,202 $ 7,512 $ 19,189 $ 151,294 State income taxes 808 1,343 1,650 9,173 Insurance program income 0 13 0 33,059 Tax credits 0 (2,321) 0 (6,963) Compensation limitation 44 132 4,725 Transfer of consumer credit card business (see Note 8) 0 0 0 (200,494) Non taxable investment income (144) (153) (460) (445) Other 346 45 1,053 (1,362) - ------------------------------------------------------------------------------------------------------------------------- Consolidated tax expense(benefit) $ 9,256 $ 6,439 $21,564 $ (11,013) - -------------------------------------------------------------------------------------------------------------------------
NOTE 13) UNUSUAL CHARGES Employee costs associated with staff reductions In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs associated with staff reductions. These expenses included severance and outplacement costs associated with the consolidation of support functions. Employee costs associated with Fleet Transaction/Tender Offer In connection with the Fleet Transaction/Tender Offer in the first quarter of 1998 discussed in Note 8, Advanta made major organizational changes and incurred approximately $26.8 million of severance and related costs classified as employee costs associated with Fleet Transaction/Tender Offer. These expenses included severance and outplacement costs associated with the workforce reduction, option exercise and re-measurement costs, and other employee costs directly attributable to the Fleet Transaction/Tender Offer. Additionally, during the first quarter of 1998, Advanta incurred approximately $35.5 million of other compensation charges. This amount includes $21.3 million attributable to payments under change of control plans and $14.2 million associated with the execution of the Tender Offer. Exited business/products In the first quarter of 1999, Advanta recorded a $3.4 million charge for costs associated with exited businesses/products. The charges include severance and outplacement costs, and professional fees associated with exited businesses/products. In the first quarter of 1998, Advanta implemented a plan to exit certain businesses and product offerings not directly associated with its mortgage, leasing and business card units. In connection with this plan, contractual vendor commitments of approximately $10.0 million associated with discontinued development and other activities were accrued. Advanta has substantially completed the settlement of these contractual commitments. Advanta also has contractual commitments to certain customers and non-related financial institutions that are providing benefits to those customers, under a product that is no longer being offered and for which no future revenues or benefits will be received. In the first quarter of 1998, 16 17 Advanta recorded a charge of $22.8 million associated with this commitment, and an $8.3 million charge associated with the write-down of assets associated with this program. Advanta expects to pay a substantial portion of these costs over the next 24 months. The actions required to complete this plan include the settlement of contractual commitments and the payment of customer benefits. In connection with the Fleet Transaction/Tender Offer and the other exited business and product offerings in 1998, Advanta also incurred $11.5 million of related professional fees and $1.5 million of other expenses related to these plans. Asset impairment/disposal In connection with Advanta's plans to reduce corporate expenses and exit certain business and product offerings in the first quarter of 1998, Advanta identified certain assets for disposal and wrote off or wrote down the carrying costs of those assets to estimated realizable value, resulting in a charge of $8.7 million. These assets consisted principally of leasehold improvements and various other assets. Advanta has substantially completed the disposal of these assets. The accrual for unusual charges at September 30, 1999 is comprised of the following:
12/31/98 CHARGED TO 9/30/99 ACCRUAL ACCRUED ACCRUAL IN ACCRUAL BALANCE IN 1999 1999 BALANCE - ------------------------------------------------------------------------------------------------------- Employee costs associated with staff reductions $ 0 $ 3,350 $ 2,399 $ 951 Employee costs associated with Fleet Transaction/Tender Offer 3,291 0 283 3,008 Expenses associated with exited business/products 14,766 3,363 6,389 11,740 Asset impairment/disposal 567 0 0 567 - ------------------------------------------------------------------------------------------------------- Total $ 18,624 $ 6,713 $ 9,071 $ 16,266 =======================================================================================================
17 18 NOTE 14) EARNINGS PER SHARE The following table shows the calculation of basic earnings per share and diluted earnings per share.
- ---------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - ---------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------- Net income $ 14,178 $ 15,025 $ 33,263 $ 443,282 less: Preferred A dividends 0 0 (141) (141) less: Preferred B dividends (887) (929) (2,661) (2,733) - ---------------------------------------------------------------------------------------------------- Income available to common shareholders $ 13,291 $ 14,096 $ 30,461 $ 440,408 Less: Class A dividends declared (567) (653) (1,789) (1,961) Less: Class B dividends declared (1,172) (1,147) (3,555) (3,396) - ---------------------------------------------------------------------------------------------------- Undistributed earnings $ 11,552 $ 12,296 $ 25,117 $ 435,051 Basic shares Class A 8,984 10,316 9,078 11,780 Class B 14,429 14,166 14,143 16,100 Combined (2) 23,413 24,482 23,221 27,880 Options A 1 4 1 10 Options B 294 28 187 108 AMIP A 45 0 31 0 AMIP B 237 0 80 156 Preferred B (1) 0 0 0 1,622 Diluted shares Class A 9,030 10,320 9,110 11,790 Class B 14,960 14,194 14,410 17,986 Combined (2) 23,990 24,514 23,520 29,776 Basic earnings per share Class A $ .56 $ .57 $ 1.28 $ 15.77 Class B .57 .58 1.33 15.82 Combined (2) .57 .58 1.31 15.80 Diluted earnings per share Class A $ .54 $ .56 $ 1.26 $ 14.87 Class B .56 .58 1.31 14.89 Combined (2) .55 .58 1.30 14.88 - ----------------------------------------------------------------------------------------------------
(1) 14,211 shares of Advanta's Class B convertible preferred stock were outstanding but were not included in the computation of diluted earnings per share for the three or nine months ended September 30, 1999, or the three months ended September 30, 1998, because they were antidilutive for those periods. Each share of Class B convertible preferred stock was mandatorily converted into one share of Class B Common Stock effective September 15, 1999. (2) Combined represents a weighted average of Class A and Class B earnings per share. Options to purchase 1.4 million and 1.6 million shares of Class B Common Stock were outstanding during the three and nine months ended September 30, 1999, respectively, but were not included in the computation of diluted EPS because the exercise price of the option was greater than or equal to the average market price of the common shares during the applicable period. Options to purchase 3.0 million and 2.2 million shares of Class B Common Stock were outstanding during the three and nine 18 19 months ended September 30, 1998, respectively, but were not included in the computation of diluted EPS because the exercise price of the option was greater than or equal to the average market price of the common shares during the applicable period. NOTE 15) CONTINGENCIES On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which Advanta denies, center around Fleet's assertions that Advanta has failed to complete certain post-closing adjustments to the value of the assets and liabilities Advanta contributed to the LLC in connection with the Fleet Transaction. Fleet seeks damages of approximately $141 million. Advanta has filed an answer to the complaint denying the material allegations of the complaint, but acknowledging that Advanta contributed $1.8 million in excess liabilities in the post-closing adjustment process, after taking into account the liabilities Advanta has already assumed. Advanta also has filed a countercomplaint against Fleet for approximately $101 million in damages Advanta believes have been caused by certain actions of Fleet following closing of the Fleet Transaction. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on the financial position or future operating results of Advanta. On or about March 26, 1999, a complaint was filed by John Uphaus, individually and on behalf of a class, against Household Bank (Nevada) N.A. ("Household") and Advanta National Bank in the United States District Court for the Northern District of Illinois. Uphaus alleges that he had a credit card account with Household, which account was purchased by Advanta National Bank. He further alleges that the annual percentage rate on a portion of his account was increased in a manner contrary to the promotional material he received. Advanta's preliminary investigation suggests that if a change in interest rate took place, as alleged by Uphaus, that change occurred after the contribution of Advanta's consumer credit card portfolio, and it was made by Fleet Credit Card LLC. In any event, Fleet Credit Card LLC is obligated to defend and indemnify Advanta pursuant to the Contribution Agreement and the Licensing Agreement between the parties. Advanta National Bank's response to this complaint was filed with the court on June 21, 1999. Advanta and its subsidiaries are involved in other legal proceedings, claims and litigation, including those arising in the ordinary course of business. Management believes that the aggregate liabilities, if any, resulting from those actions will not have a material adverse effect on the consolidated financial position or results of operations of Advanta. However, as the ultimate resolution of these proceedings is influenced by factors outside of Advanta's control, it is reasonably possible that Advanta's estimated liability under these proceedings may change. 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW For the quarter ended September 30, 1999, Advanta reported net income of $14.2 million or $.55 per combined common share, assuming dilution, compared to $12.3 million or $.49 per combined diluted common share for the quarter ended June 30, 1999, and $15.0 million or $.58 per combined diluted common share for the quarter ended September 30, 1998. In the three months ended September 30, 1999, revenues increased by $13.5 million and expenses increased by $11.5 million in comparison with the same period in 1998, both resulting from higher levels of average managed and serviced receivables. In addition, the tax provision increased by $2.8 million in the three months ended September 30, 1999 in comparison with the same period of 1998. Advanta's effective tax rate was lower in 1998 than in 1999 as a result of certain credits included in the 1998 estimated tax rate. For the nine months ended September 30, 1999, Advanta reported net income of $33.3 million or $1.30 per combined common share, assuming dilution, compared to $443.3 million or $14.88 per combined diluted common share for the same period of 1998. The earnings for the nine months ended September 30, 1999 include non-recurring charges, after tax, of $14.5 million that are principally related to Advanta's exit from the auto finance business and severance and outplacement associated with cost cutting initiatives implemented in the first quarter. In addition, Advanta recognized non-operating gains of $16.7 million, after tax, in the nine months ended September 30, 1999, in connection with an investment held by Advanta Partners LP, Advanta's private equity investment affiliate. The earnings for the nine months ended September 30, 1999 also include a reduction in Advanta's retained interest-only strip of $6.1 million, after tax, reflecting the adoption of more conservative fair value assumptions. Earnings reported for the nine months ended September 30, 1998 include the $541.3 million gain on the Fleet Transaction (see Note 8 to Consolidated Condensed Financial Statements), a $62.3 million pretax charge for severance and outplacement costs associated with workforce reduction, option exercises and other employee costs associated with the Fleet Transaction/Tender Offer, a $54.1 million pretax charge for expenses associated with exited businesses and products, $42.5 million of equity securities losses and an $8.7 million pretax charge for facility impairments. This report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Significant risks and uncertainties include: Advanta's managed net interest margin; the receivables volume; the timing of Advanta's securitizations; prepayment rates; the mix of account types and interest rate fluctuations; the level of delinquencies, customer bankruptcies and charge-offs; and the amount and rate of growth in Advanta's expenses. Earnings also may be significantly affected by factors that affect consumer debt, competitive pressures from other providers of financial services, the effects of governmental regulation, the amount and cost of financing available to Advanta and its subsidiaries, the difficulty or inability to securitize Advanta's receivables and the impact of the ratings of debt of Advanta and its subsidiaries. Additional risks that may affect Advanta's future performance are set forth elsewhere in this Quarterly Report on Form 10-Q and in Advanta's Annual Report on Form 10-K for the year ended December 31, 1998 and its other filings with the Securities and Exchange Commission. 20 21 ADVANTA MORTGAGE OVERVIEW Net income for Advanta Mortgage was $7.9 million for the quarter ended September 30, 1999, compared to net income of $10.1 million for the same period of 1998. The decrease in net income is the result of a decrease in revenues of $5.1 million and a higher tax provision of $.8 million, partially offset by a decrease in expenses of $3.7 million due to cost reduction measures implemented during 1999. Revenues have decreased due to lower volumes of receivable securitizations, as well as lower interest income resulting from a decrease in on-balance sheet mortgage loans and the timing of cash flows on the retained interest-only strip. The tax provision increased in 1999 in comparison with 1998, due to an increase in the overall effective tax rate of Advanta. Net income for the nine months ended September 30, 1999 was $21.3 million, after excluding net of tax charges of $6.1 million associated with additional reserves recorded on Advanta's retained interest-only strip in the second quarter of 1999, as compared to $22.4 million in the nine months ended September 30, 1998. Pretax income increased by $3.2 million in the nine months ended September 30, 1999 in comparison with the same period of 1998 due to a decrease in expenses as a percentage of average managed receivables. The tax provision for the nine months ended September 30, 1999 increased by $4.3 million in comparison with the same period of the prior year due to an increase in the overall effective tax rate of Advanta. GAIN ON SALE OF RECEIVABLES Advanta Mortgage recognized gains of $40.1 million from the securitization and sale of $747 million of loans in the three months ended September 30, 1999, and recognized gains of $115.1 million from the securitization and sale of $2.1 billion of loans in the nine months ended September 30, 1999. Total Advanta Mortgage loan sales/securitization volume decreased 50.5% for the three months ended September 30, 1999, and 44.1% for the nine months ended September 30, 1999, as compared to the same periods in 1998. The decrease in sales/securitization volume resulted primarily from lower originations due to Advanta's focus on profitable loan growth over volume, as well as Advanta's decision to report income that is essentially equal to that of a portfolio lender. The gain, which represents 5.4% of the loans sold in the quarter ended September 30, 1999, is higher as a percentage of loans sold than the $59.8 million or 4.0% recognized in the third quarter of 1998. The gain recognized in the nine months ended September 30, 1999, represents 5.5% of loans sold, as compared to $148.1 million or 4.0% of loans sold in the same period of 1998. The increase in gain as a percentage of loans sold is primarily due to the higher proportion of loans sold during 1999 that were directly originated. The gain realized varies for each of Advanta Mortgage's products and origination channels. Typically, the gain realized from loans directly originated is higher than the gain from indirect origination channels. In the three months ended September 30, 1999, direct originations represented 65.0% of total originations, as compared to 31.2% in the same period of 1998. In the nine months ended September 30, 1999, direct originations represented 58.8% of total originations, as compared to 29.8% in the same period of 1998. Gain on sale of receivables, net, in the nine months ended September 30, 1999, included a $10.0 million charge associated with additional reserves recorded on the retained interest-only strip that resulted from the adoption of more conservative fair value assumptions. There were no similar charges in the three months ended September 30, 1999. Gain on sale of receivables, net, included pretax charges of $17.3 million in the three months ended September 30, 1998, 21 22 and $51.0 million in the nine months ending September 30, 1998, to adjust the retained interest-only strip to fair value, reflecting increases in prepayment speeds experienced during the periods. SERVICING REVENUES Servicing revenues were $24.8 million for the three months ended September 30, 1999, as compared to $22.0 million for the same period in 1998. For the nine months ended September 30, 1999, servicing revenues were $72.1 million as compared to $65.9 million for the nine months ended September 30, 1998. The increase in servicing revenues in both periods is due to an increase in average serviced receivables in comparison with the same periods of 1998. PORTFOLIO LENDER ANALYSIS In the fourth quarter of 1998, Advanta began to report income for Advanta Mortgage that is essentially equal to that of a portfolio lender, rather than the front-ended income typically reported through gain on sale accounting. Since gain on sale accounting is required under generally accepted accounting principles for securitizations structured as sales, Advanta intends to accomplish this by increasing its use of on-balance sheet funding and decreasing its degree of reliance on securitizations structured as sales over time. In this regard, Advanta began to analyze and evaluate Advanta Mortgage's financial results from a portfolio lender's perspective as well as under generally accepted accounting principles. The following tables present Advanta's reported results adjusted to approximate the results of a portfolio lender for the three and nine months ended September 30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 Advanta Advanta Mortgage Mortgage as a As Pro forma Portfolio Reported Adjustments Lender --------- ----------- --------- REVENUES: Gain on sale of receivables, net $ 40,139 $ (40,139) $ 0 Interest income 28,239 182,379 210,618 Servicing revenues 24,802 (7,815) 16,987 Other revenues, net 1,135 0 1,135 --------- --------- --------- Total revenues 94,315 134,425 228,740 EXPENSES: Operating expenses 53,733 1,895 55,628 Interest expense 21,581 117,076 138,657 Provision for credit losses 4,078 15,454 19,532 Minority interest in income of consolidated subsidiary 1,865 0 1,865 --------- --------- --------- Total expenses 81,257 134,425 215,682 --------- --------- --------- Income before income taxes 13,058 0 13,058 Income taxes 5,158 0 5,158 --------- --------- --------- Net income $ 7,900 $ 0 $ 7,900 ========= ========= =========
22 23
NINE MONTHS ENDED SEPTEMBER 30, 1999 Advanta Advanta Mortgage Mortgage as a As Pro forma Portfolio Reported Adjustments Lender --------- ----------- --------- REVENUES: Gain on sale of receivables, net $ 105,115 $(105,115) $ 0 Interest income 101,216 523,827 625,043 Servicing revenues 72,123 (24,143) 47,980 Other revenues, net 3,490 0 3,490 --------- --------- --------- Total revenues 281,944 394,569 676,513 EXPENSES: Operating expenses 175,016 5,576 180,592 Interest expense 67,008 343,076 410,084 Provision for credit losses 9,145 35,917 45,062 Minority interest in income of consolidated subsidiary 5,617 0 5,617 --------- --------- --------- Total expenses 256,786 384,569 641,355 --------- --------- --------- Income before income taxes 25,158 10,000 35,158 Income taxes 9,902 3,950 13,852 --------- --------- --------- Net income $ 15,256 $ 6,050 $ 21,306 --------- --------- ---------
With respect to the portfolio lender results, individual line items are stated as if the securitized mortgages were still owned by Advanta and remained on the balance sheet. The pro forma adjustment to gain on sale of receivables represents the reclassification of net gains recognized on the sale of Advanta Mortgage loans. The pro forma adjustment to provision for credit losses represents the amount by which the provision would have increased from that reported had the securitized Advanta Mortgage loans remained on the balance sheet and the provision for credit losses on the securitized Advanta Mortgage loans been equal to actual reported charge-offs. The actual provision for credit losses of a portfolio lender could differ from the recorded charge-offs depending upon the age and composition of the portfolio and the timing of charge-offs. The pro forma presentation for the nine months ending September 30, 1999 results in an increase in net income of $6.1 million resulting from the elimination of a $10.0 million pretax charge to earnings reflecting the adoption of more conservative valuation assumptions for the retained interest-only strip. 23 24 ORIGINATIONS Originations for Advanta Mortgage were as follows ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Direct $368,654 $ 483,290 $1,179,738 $1,148,580 Broker 125,204 162,531 387,275 347,142 Conduit 66,952 584,418 402,362 1,364,374 Corporate Finance 6,505 320,871 36,979 994,770 Auto 0 18,593 5,103 98,052 -------- ---------- ---------- ---------- $567,315 $1,569,703 $2,011,457 $3,952,918
Total Advanta Mortgage originations decreased 63.9% in the three months ended September 30, 1999, and decreased 49.1% in the nine months ended September 30, 1999, over the comparable 1998 periods. Direct mortgage originations decreased 23.7% in the three months ended September 30, 1999, and increased 2.7% in the nine months ended September 30, 1999, over the comparable 1998 periods. Indirect mortgage originations decreased 81.4% for the three months ended September 30, 1999 and decreased 69.5% in the nine months ended September 30, 1999, over the comparable 1998 periods. The decrease in direct originations in the three months ended September 30, 1999 as compared to the same three months of the prior year, is due to Advanta's focus on profitable loan growth over volume. In addition, there were unusually low direct originations in September 1999, attributable to a number of factors including training and other efforts associated with new systems implementations and severe weather conditions. The decrease in indirect originations in 1999 over the comparable 1998 periods resulted from management's decision to substantially reduce the purchase of loans from the conduit and corporate finance channels. This decision was based on unfavorable market pricing and management's strategy of purchasing loans only when the loans meet certain minimum profitability characteristics. The decrease in auto loan originations was due to Advanta's exit from the auto finance business in the first quarter of 1999. Advanta originated more second lien home equity loans and home equity lines of credit as a percentage of total originations during the three months ended September 30, 1999 than it originated during the first six months of 1999. This was primarily due to rising interest rates that created increased demand for these types of loans. Second lien home equity loans represented 25% of the dollar value of originations in the three months ended September 30, 1999, compared to 21% in the three months ended June 30, 1999. Home equity lines of credit represented 9.2% of the managed mortgage loan portfolio as of September 30, 1999, as compared to 4.5% at December 31, 1998. ADVANTA BUSINESS CARDS OVERVIEW Advanta Business Cards offers MasterCard(R) business credit cards to small businesses. Net income for Advanta Business Cards was $6.0 million for the three months ended September 30, 1999 as compared to $4.3 million for the same period in 1998. Net income for the nine months ended September 30, 1999 was $15.5 million as compared to $7.4 million for the same period of 1998. The increase in net income in both periods resulted from increased volume, significant improvement in portfolio yields due to changes in pricing and increased interchange income. 24 25 GAIN ON SALE OF RECEIVABLES Advanta Business Cards recognized $7.2 million in securitization income in the three months ended September 30, 1999, and recognized $21.1 million in securitization income in the nine months ended September 30, 1999. Advanta Business Cards sells receivables to an existing securitization trust on a continuous basis to replenish the investors' interest in trust receivables that have been repaid by the cardholders. This compares to $5.3 million in securitization income recognized in the three months ended September 30, 1998, and $11.1 million recognized in the nine months ended September 30, 1998. The increase in securitization income in both periods is due primarily to increased yields on the securitized receivables and a decrease in receivable charge-off rates. ORIGINATIONS Originations for business cards were $484.7 million for the three months ended September 30, 1999 and $349.6 million for the same period of 1998. Business card originations for the nine months ended September 30, 1999 were $1.4 billion and were $987.3 million in the same period of 1998. The increases in business card originations over comparable periods in 1998 resulted from programs designed to expand the target market and encourage existing customers to increase their use of the business cards. ADVANTA LEASING SERVICES OVERVIEW Advanta Leasing Services offers flexible lease financing programs on small-ticket equipment to small businesses. Net income for Advanta Leasing Services was $1.1 million for the three months ended September 30, 1999 as compared to $0.7 million for the same period in 1998. Net income for the nine months ended September 30, 1999 was $3.4 million, and was $0.9 million for the same period of 1998. The increase in net income in 1999 was attributable to increased volume as well as a decrease in operating expenses that resulted from cost reduction measures implemented this year. GAIN ON SALE OF RECEIVABLES Advanta Leasing Services recognized $4.0 million in gains on the sale of $107 million of leases in the three months ended September 30, 1999, as compared to $2.6 million in gains on the sale of $78 million of leases for the same period in 1998. In the nine months ended September 30, 1999, Advanta Leasing Services recognized $13.3 million in gains on the sale of $308 million of leases, as compared to $7.9 million in gains on the sale of $210 million of leases in the same period of 1998. The sales were through a combination of commercial paper conduit programs and a public lease securitization. ORIGINATIONS Originations for Advanta Leasing Services were as follows ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- Vendor $ 52,441 $44,749 $152,560 $125,628 Broker 55,115 40,033 170,442 84,889 Other 5,059 6,954 12,833 17,449 -------- ------- -------- -------- $112,615 $91,736 $335,835 $227,966
25 26 Lease originations increased 22.8% for the three months ended September 30, 1999 and 47.3% for the nine months ended September 30, 1999, in comparison with the same periods of the prior year. The increase in lease originations over the comparable periods of 1998 is due to the growth in the number of vendor and broker relationships, as well as the expansion of existing relationships. ADVANTA CORP. INTEREST INCOME AND EXPENSE Interest income on receivables and investments, excluding the interest component of previously discounted cash flows, increased by $8.6 million in the three months ended September 30, 1999 as compared to the same period in 1998, and decreased $4.2 million for the nine months ended September 30, 1999 as compared to the same period of 1998. During the three months ended September 30, 1999, interest expense increased $2.8 million as compared to the same period in 1998, and decreased $14.4 million for the nine months ended September 30, 1999 as compared to the same period of 1998. The increase in interest income and interest expense in the three months ended September 30, 1999 as compared to the same period of the prior year resulted from an increase in Advanta's average on-balance sheet assets and liabilities. The decreases in interest income and interest expense in the nine months ended September 30, 1999 as compared to the same period of 1998 were mainly attributable to a decrease in interest bearing assets and liabilities owned by Advanta in connection with the Fleet Transaction and Tender Offer in February 1998. The mix of on-balance sheet receivables had a favorable impact on interest income as the proportion of higher-yielding business card receivables to total receivables has increased in 1999 relative to the same periods in 1998. The increase in on-balance sheet receivables was due to the timing of securitizations. Both periods reflect decreased margins as a result of carrying higher cash, cash equivalent and investment balances as a percent of owned assets for liquidity purposes. Securitization activity shifts revenues from interest income to non-interest revenues. This activity reduces the level of higher-yielding receivables on-balance sheet while proportionately increasing the balance sheet levels of lower-yielding receivables and short-term, high quality investments earning money market rates. The owned average cost of funds decreased to 5.84% in the three months ended September 30, 1999 from 6.17% in the same period in 1998, and decreased to 5.80% in the nine months ended September 30, 1999 from 6.31% in the same period of 1998. The decrease in the cost of funds was attributable to the increase in the use of deposits as a funding source. Deposits represented 66% of total average interest-bearing liabilities for the three months ended September 30, 1999 as compared to 41% for the same period in 1998. Deposits represented 66% of total average interest-bearing liabilities for the nine months ended September 30, 1999 as compared to 47% for the same period in 1998. Advanta has utilized derivatives to manage interest rate risk (see discussion under "Derivatives Activities"). The following table provides an analysis of owned interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets) for the three and nine months ended September 30, 1999 and 1998. Interest revenues on loan and lease receivables include the amortization of certain loan fees and costs. 26 27 INTEREST RATE ANALYSIS ($ IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 AVERAGE YIELD/ AVERAGE YIELD/ BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE ---------- -------- ----- ---------- -------- ----- ON-BALANCE SHEET Mortgage loans $ 697,713 $16,477 9.37% $ 869,133 $20,701 9.45% Business cards 284,874 12,367 17.22 136,338 5,770 16.79 Leases 110,132 2,918 10.60 98,514 2,620 10.64 Auto loans 2,699 84 12.40 37,670 1,462 15.40 Other loans 17,322 548 12.56 17,704 574 12.87 ---------- ------- --------- ------- Gross receivables(2) 1,112,740 32,394 11.56 1,159,359 31,127 10.66 Subordinated trust assets 343,018 7,103 8.28 52,046 874 6.71 Investments(2) 1,396,623 20,937 5.97 1,294,986 19,870 6.11 ---------- ------- ---------- ------- Total interest earning assets $2,852,381 $60,434 8.43% $2,506,391 $51,871 8.23% Interest-bearing liabilities $2,788,784 $40,975 5.84% $2,391,471 $37,133 6.17% Net interest spread 2.59% 2.06% Net interest margin (3) 2.71% 2.33% OFF-BALANCE SHEET Mortgage loans securitized $ 7,580,722 $6,012,374 Business cards securitized 621,158 632,010 Leases securitized 631,439 513,333 Auto loans securitized 108,658 206,226 ----------- ---------- Total average securitized receivables $ 8,941,977 $7,363,943 =========== ========== Total average managed receivables $10,054,717 $8,523,302 =========== ==========
(1) Includes assets held and available for sale and nonaccrual loans and leases. (2) Interest and average rate for tax-free securities, loans and leases computed on a tax equivalent basis using a statutory rate of 35%. (3) Managed net interest margin for the three months ended September 30, 1999 was 3.26%, representing a combination of owned interest-earning assets/owned interest-bearing liabilities and securitized mortgage assets/liabilities. 27 28 INTEREST RATE ANALYSIS ($ IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 AVERAGE YIELD/ AVERAGE YIELD/ BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE ---------- -------- ----- ---------- -------- ---- ON-BALANCE SHEET Mortgage loans $ 781,960 $ 53,549 9.16% $ 691,622 $ 49,474 9.56% Business cards 204,189 25,218 16.51 147,741 16,544 14.97 Leases 108,371 7,639 9.40 101,768 8,965 11.75 Auto loans 18,827 2,079 14.77 48,174 6,179 17.15 Consumer credit cards 0 0 0.00 514,338 23,457 6.10 Other loans 17,385 1,640 12.61 15,001 1,288 11.48 ----------- -------- ----------- -------- Gross receivables(2) 1,130,732 90,125 10.66 1,518,644 105,907 9.32 Subordinated trust assets 316,400 19,172 8.08 46,077 2,462 7.12 Investments(2) 1,454,935 60,960 5.57 1,509,837 66,376 5.86 ----------- -------- ----------- -------- Total interest earning assets $ 2,902,067 $170,257 7.83% $ 3,074,558 $174,745 7.59% Interest-bearing liabilities $ 2,881,632 $125,030 5.80% $ 2,960,501 $139,992 6.31% Net interest spread 2.03% 1.28% Net interest margin (3) 2.08% 1.51% OFF-BALANCE SHEET Mortgage loans securitized $ 7,438,740 $ 5,413,782 Business cards securitized 661,321 581,277 Leases securitized 591,180 497,590 Auto loans securitized 130,933 181,389 Consumer credit cards securitized 0 1,953,903 ----------- ----------- Total average securitized receivables $ 8,822,174 $ 8,627,941 =========== =========== Total average managed receivables $ 9,952,906 $10,146,585 =========== ===========
(1) Includes assets held and available for sale and nonaccrual loans and leases. (2) Interest and average rate for tax-free securities, loans and leases computed on a tax equivalent basis using a statutory rate of 35%. (3) Managed net interest margin for the nine months ended September 30, 1999 was 3.13%, representing a combination of owned interest-earning assets/interest-bearing liabilities and securitized mortgage assets/liabilities. 28 29 OTHER REVENUES ($ in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 -------- -------- -------- -------- Equity securities gains (losses) $ 2,109 $ 19 $ 29,781 $(42,470) Business card interchange income 8,909 5,688 23,273 14,540 Leasing other revenues 3,862 4,177 12,613 11,542 Consumer credit card overlimit fees 0 0 0 16,094 Insurance revenues, net and other 3,770 3,766 10,603 28,375 -------- -------- -------- -------- Total other revenues, net $ 18,650 $ 13,650 $ 76,270 $ 28,081 ======== ======== ======== ========
Other revenues in the nine months ended September 30, 1999 include equity securities gains of $29.8 million, reflecting changes in the fair value and realized gains on Advanta Partners LP ("Advanta Partners") investments. Included in this amount is an $18 million gain on an investment in a company that was merged with another company in exchange for that company's stock in the first quarter of 1999. The stock received had a value significantly higher than Advanta Partners' basis in the investment. In the second quarter of 1999, Advanta Partners sold the majority of their interest in this investment realizing an additional gain of approximately $10 million. Partially offsetting this gain in the second quarter was the write-down of another equity investment of approximately $0.8 million. Other revenues in the nine months ended September 30, 1998 include equity securities losses of $42.5 million. Most of the loss relates to investments not publicly traded for which Advanta Partners decided to expedite a disposal plan. Insurance revenues, net and other decreased $17.8 million in the nine months ended September 30, 1999 as compared with the same period in 1998. This decline is attributable to the transfer of the consumer credit card portfolio in connection with the Fleet Transaction. Business card interchange income increased in the three and nine month periods ended September 30, 1999, in comparison with the same periods of 1998, due to an increase in interchange rates, as well as an increase in average managed business card receivables. 29 30 OPERATING EXPENSES ($ in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------- Salaries and employee benefits $ 44,951 $ 41,908 $133,795 $136,822 Other operating expenses: Marketing 11,644 13,569 39,785 37,932 Professional fees 6,503 1,606 22,519 8,150 Credit and collection expense 5,697 3,381 14,606 11,454 Occupancy expense 4,132 3,243 12,297 11,694 External processing 4,112 3,740 11,001 18,262 Telephone expense 2,743 2,361 8,279 9,811 Amortization of credit card deferred origination costs, net 1,208 1,175 3,564 21,109 Credit card fraud losses 191 100 625 3,000 Other 1,521 6,936 4,843 29,111 - ---------------------------------------------------------------------------------------------- Total other operating expenses 37,751 36,111 $117,519 $150,523 - ---------------------------------------------------------------------------------------------- Total operating expenses $ 82,702 $ 78,019 $251,314 $287,345 ============================================================================================== At quarter end (in thousands): Number of accounts managed 621 540 N/A N/A Number of employees 2,574 2,544 N/A N/A For the quarter: Operating expenses as a percentage of average managed receivables(1) 3.24% 3.61% 3.32% 3.50% - ----------------------------------------------------------------------------------------------
(1) Excludes amortization of credit card deferred origination costs, net Operating expenses as a percentage of average managed receivables for the three and nine month periods ended September 30, 1999 decreased in comparison with the same periods of 1998 due to cost reduction measures implemented during 1999. Total operating expenses in the three months ended September 30, 1999 increased by $4.7 million as compared to the same period of the prior year. This increase is aligned with growth in the portfolio of average managed receivables. Total operating expenses in the nine months ended September 30, 1999 decreased by $36.0 million as compared to the same period of the prior year. This decrease is the result of the Fleet Transaction in 1998 as well as exit and disposition plans associated with business and product offerings not directly associated with Advanta's mortgage, leasing and business card units. Professional fees increased by $4.9 million for the three months ended September 30, 1999 and $14.4 million for the nine months ended September 30, 1999, as compared to the same periods of 1998. These increases are due to consulting costs and outsourcing costs associated with Advanta's management of capacity and resources. PROVISION FOR CREDIT LOSSES For the three months ended September 30, 1999 the provision for credit losses increased $4.1 million to $10.5 million in comparison with the provision in the same period in 1998 of $6.4 million. The majority of this increase was in the 30 31 Advanta Business Cards provision for loan losses, which increased by $3.3 million in the three months ended September 30, 1999 in comparison with the same period of 1998. The increase in the Advanta Business Cards provision relates to the increase in average on-balance sheet business card receivables from $136 million for the three months ended September 30, 1998 to $285 million in the three months ended September 30, 1999. For the nine months ended September 30, 1999, the provision for credit losses decreased to $28.0 million from $47.2 million for the same period in 1998 and charge-offs on owned receivables decreased to $19.4 million from $47.3 million during the same period in 1998. These decreases are mainly attributable to the February 1998 transfer of the consumer credit card receivables in connection with the Fleet Transaction. ASSET QUALITY Impaired assets include both nonperforming assets (Advanta Mortgage loans, credit card receivables and lease receivables past due 90 days or more; real estate owned; and bankrupt, decedent and fraudulent credit cards) and accruing loans past due 90 days or more on leases and other loans. Advanta charges off expected losses on all nonperforming mortgage loans at the earlier of foreclosure or when they have become 12 months delinquent. Lease receivables are written off no later than when they have become 120 days delinquent. All other loans are generally charged off upon the earlier of approximately 6 months delinquency or after an investigative period for bankrupt and fraudulent accounts. The carrying value for real estate owned is based on fair value, net of costs of disposition and is reflected in other assets. The consolidated managed charge-off rate for the three months ended September 30, 1999 was 1.6% compared to 1.3% in the same period of 1998. On the total owned portfolio, the charge-off rate was 2.6% in the three months ended September 30, 1999 compared to 1.9% for the same period in 1998. The following represents the quarterly managed charge-off rates by product:
FOR THE QUARTER ENDED ------------------------------------------------------------------------ 9/30/99 6/30/99 9/30/98 ------- ------- ------- Mortgage 0.86% 0.66% 0.56% Auto 12.33 15.99 7.11 Business Card 5.25 5.22 5.79 Leases 3.76 3.23 2.29
Advanta Mortgage continues to emphasize profitability enhancement over loan growth, and to emphasize the direct to consumer channels over indirect channels for originations. This has resulted in a significant reduction in the rate of portfolio growth relative to prior periods. The decline in the growth rate has reduced the proportion of new, unseasoned loans in the portfolio. This "seasoning" effect results in higher reported delinquencies and charge-offs consistent with an aging portfolio. The increase in reported delinquency and charge-off rates is primarily attributable to seasoning of the mortgage loan portfolio. 31 32 The following tables provide a summary of impaired assets, delinquencies and charge-offs, as of and for the year-to-date periods indicated ($ in thousands).
SEPT. 30, DEC. 31, SEPT. 30, CONSOLIDATED-MANAGED 1999 1998 1998 Nonperforming assets (2) $497,859 $410,584 $343,788 Accruing loans past due 90 days or more 0 30 36 Impaired assets 497,859 410,614 343,824 Total loans 30 days or more delinquent 767,406 753,251 616,858 As a percentage of gross receivables: Nonperforming assets (2) 4.9% 4.2% 3.9% Impaired assets 4.9 4.2 3.9 Total loans 30 days or more delinquent 7.6 7.7 6.9 Net charge-offs: Amount (1) $109,951 $247,287 $213,287 As a percentage of average gross receivables (annualized) (1) 1.5% 2.5% 2.8% ADVANTA MORTGAGE LOANS - MANAGED Nonperforming assets (2) $465,115 $375,520 $315,415 Total loans 30 days or more delinquent 669,954 656,789 533,695 As a percentage of gross receivables: Nonperforming assets (2) 5.6% 4.5% 4.2% Total loans 30 days or more delinquent 8.0 7.9 7.2 Net charge-offs - Mortgage Loans: Amount $ 41,940 $ 36,142 $ 25,273 As a percentage of average gross receivables (annualized) .7% .6% .6% Net charge-offs - Auto Loans: Amount $ 15,757 $ 21,238 $ 13,570 As a percentage of average gross receivables (annualized) 14.0% 9.3% 7.9% LEASES - MANAGED Nonperforming assets (2) $ 11,109 $ 9,595 $ 7,386 Impaired assets 11,109 9,602 7,386 Total loans 30 days or more delinquent 64,780 60,154 48,990 As a percentage of receivables: Nonperforming assets (2) 1.4% 1.4% 1.2% Impaired assets 1.4 1.4 1.2 Total loans 30 days or more delinquent 8.3 9.0 7.7 Net charge-offs - Leases: Amount $ 17,501 $ 16,220 $ 11,532 As a percentage of average gross receivables (annualized) 3.3% 2.7% 2.6% BUSINESS CARDS - MANAGED Nonperforming assets (2) $ 21,178 $ 25,231 $ 20,671 Impaired assets 21,178 25,231 20,671 Total loans 30 days or more delinquent 31,829 35,900 33,560 As a percentage of receivables: Nonperforming assets (2) 2.3% 3.1% 2.7% Impaired assets 2.3 3.1 2.7 Total loans 30 days or more delinquent 3.4 4.4 4.3 Net charge-offs - Business Cards: Amount $ 34,725 $ 43,732 $ 32,959 As a percentage of average gross receivables (annualized) 5.4% 5.9% 6.0%
(1) Includes consumer credit cards through February 20, 1998. (2) Nonperforming assets include mortgage loans, auto loans, business cards and leases past due 90 days or more; real estate owned; and bankrupt, decedent and fraudulent business cards. 32 33
SEPT. 30, DEC. 31, SEPT. 30, CONSOLIDATED-OWNED 1999 1998 1998 Allowance for credit losses $ 35,328 $ 33,437 $ 19,153 Nonperforming assets (2) 51,158 49,568 38,561 Accruing loans past due 90 days or more 0 30 36 Impaired assets 51,158 49,598 38,597 Total loans 30 days or more delinquent 62,618 73,755 60,928 As a percentage of gross receivables: Allowance for credit losses 3.7% 3.0% 2.3% Nonperforming assets (2) 5.3 4.4 4.6 Accruing loans past due 90 days or more 0.0 0.0 0.0 Impaired assets 5.3 4.4 4.6 Total loans 30 days or more delinquent 6.5 6.5 7.2 Net charge-offs: Amount (1) $ 19,426 $ 53,109 $ 47,310 As a percentage of average gross receivables (annualized) (1) 2.3% 3.7% 4.2% ADVANTA MORTGAGE LOANS - OWNED Allowance for credit losses $ 16,480 $ 20,092 $ 6,235 Nonperforming assets (2) 42,355 38,734 30,858 Total loans 30 days or more delinquent 45,527 56,131 42,267 As a percentage of gross receivables: Allowance for credit losses 2.6% 2.4% 1.1% Nonperforming assets (2) 6.8 4.6 5.4 Total loans 30 days or more delinquent 7.3 6.7 7.4 Net charge-offs - Mortgage: Amount $ 6,023 $ 3,658 $ 2,469 As a percentage of average gross receivables (annualized) 1.0% .5% .5% Net charge-offs - Auto: Amount $ 3,777 $ 7,648 $ 5,697 As a percentage of average gross receivables (annualized) 26.7% 16.1% 15.8% LEASES - OWNED Allowance for credit losses $ 3,368 $ 2,695 $ 2,421 Nonperforming assets (2) 2,440 3,115 2,898 Impaired assets 2,440 3,122 2,904 Total loans 30 days or more delinquent 8,456 9,739 11,218 As a percentage of receivables: Allowance for credit losses 2.6% 2.2% 2.1% Nonperforming assets (2) 1.9 2.5 2.5 Impaired assets 1.9 2.6 2.5 Total loans 30 days or more delinquent 6.6 7.9 9.6 Net charge-offs - Leases: Amount $ 1,721 $ 3,491 $ 3,030 As a percentage of average gross receivables (annualized) 2.1% 3.4% 4.0% BUSINESS CARDS - OWNED Allowance for credit losses $ 10,784 $ 6,916 $ 6,763 Nonperforming assets (2) 5,906 7,481 4,489 Impaired assets 5,906 7,481 4,489 Total loans 30 days or more delinquent 7,792 7,207 6,830 As a percentage of receivables: Allowance for credit losses 5.6% 4.6% 4.9% Nonperforming assets (2) 3.1 5.0 3.3 Impaired assets 3.1 5.0 3.3 Total loans 30 days or more delinquent 4.1 4.8 5.0 Net charge-offs - Business Cards: Amount $ 7,874 $ 10,033 $ 7,836 As a percentage of average gross receivables (annualized) 5.1% 6.9% 7.1%
(1) Includes consumer credit cards through February 20, 1998. (2) Nonperforming assets include mortgage loans, auto loans, business cards and leases past due 90 days or more; real estate owned; and bankrupt, decedent and fraudulent business cards. 33 34 UNUSUAL CHARGES Employee costs associated with staff reductions In the first quarter of 1999, Advanta recorded a $3.3 million charge for costs associated with staff reductions. These expenses included severance and outplacement costs associated with the consolidation of support functions. Employee costs associated with Fleet Transaction/Tender Offer In connection with the Fleet Transaction and Tender Offer in the first quarter of 1998 more fully discussed in Note 8 to the Consolidated Condensed Financial Statements, Advanta made major organizational changes and incurred approximately $26.8 million of severance and related costs classified as employee costs associated with Fleet Transaction/Tender Offer. These expenses included severance and outplacement costs associated with the workforce reduction, option exercise and re-measurement costs, and other employee costs directly attributable to the Fleet Transaction/Tender Offer. Additionally, during the first quarter of 1998, Advanta incurred approximately $35.5 million of other compensation charges. This amount includes $21.3 million attributable to payments under change of control plans and $14.2 million associated with the execution of the Tender Offer. Exited business/products In the first quarter of 1999, Advanta recorded a $3.4 million charge for costs associated with exited businesses/products. The charges include severance and outplacement costs, and professional fees associated with exited businesses/products. In the first quarter of 1998, Advanta implemented a plan to exit certain businesses and product offerings not directly associated with its mortgage, leasing and business card units. In connection with this plan, contractual vendor commitments of approximately $10.0 million associated with discontinued development and other activities were accrued. Advanta has substantially completed the settlement of these contractual commitments. Advanta also has contractual commitments to certain customers and non-related financial institutions that are providing benefits to those customers, under a product that is no longer being offered and for which no future revenues or benefits will be received. In the first quarter of 1998, Advanta recorded a charge of $22.8 million associated with this commitment, and an $8.3 million charge associated with the write-down of assets associated with this program. Advanta expects to pay a substantial portion of these costs over the next 24 months. The actions required to complete this plan include the settlement of contractual commitments and the payment of customer benefits. In connection with the Fleet Transaction/Tender Offer and the other exited business and product offerings in 1998, Advanta also incurred $11.5 million of related professional fees and $1.5 million of other expenses related to these plans. 34 35 Asset impairment/disposal In connection with Advanta's plans to reduce corporate expenses and exit certain business and product offerings in the first quarter of 1998, Advanta identified certain assets for disposal and wrote down or wrote off the carrying costs of those assets to estimated realizable value, resulting in a charge of $8.7 million. These assets consisted principally of leasehold improvements and various other assets. Advanta has substantially completed the disposal of these assets. ASSET/LIABILITY MANAGEMENT Advanta manages its financial condition with a focus on maintaining disciplined management of market risks and prudent levels of leverage and liquidity. MARKET RISK SENSITIVITY Advanta has measured its interest rate risk using a rising rate scenario and a declining rate scenario. Net interest income is estimated using a third party software model that uses standard income modeling techniques. Advanta estimates that its net interest income over a twelve month period would increase or decrease by approximately 3.5% if interest rates were to rise or fall by 200 basis points. Both increasing and decreasing rate scenarios assume an instantaneous shift in rates and measure the corresponding change in expected net interest income over one year. The above estimates of net interest income sensitivity alone do not provide a comprehensive view of Advanta's exposure to interest rate risk. The quantitative risk information is limited by the parameters and assumptions utilized in generating the results. Such analyses are useful only when viewed within the context of the parameters and assumptions used. The above rate scenarios in no way reflect management's expectation regarding the future direction of interest rates, and they depict only two possibilities out of a large set of possible scenarios. In addition to interest rate risk, Advanta has other financial instruments, namely capitalized servicing rights and interest-only strips, which are subject to prepayment risk. Prepayments are principal payments received in excess of scheduled principal payments. Prepayments generally result from entire loan payoffs due largely to refinancing a loan or selling a home. Actual or anticipated prepayment rates are expressed in terms of a constant prepayment rate ("CPR"), which represents the annual percentage of beginning loan balances that prepay. To a degree, prepayment rates are related to market interest rates and changes in those interest rates. The relationship between them, however, is not precisely determinable. Accordingly, Advanta believes it is more relevant to disclose the fair value sensitivity of these instruments based on changes in prepayment rate assumptions rather than based on changes in interest rates. Advanta's capitalized servicing rights and interest only strips result from the sale of both fixed and variable rate loans, the majority of which are fixed. Fixed and variable rate loans are currently prepaying at different rates and Advanta expects them to continue to do so in the future. Advanta has estimated the impact on the fair value of 35 36 these assets assuming a change in prepayments of 2.6% CPR for fixed rate loans and 3.7% CPR for variable rate loans. Advanta has estimated that these changes in prepayment assumptions could result in a $29 million change in the combined fair value of these assets. These estimates do not factor in the impact of changes in the interest rate environment associated with the changes in the prepayment rates. Changes in interest rates also generally affect the level of new loan origination. Prepayment assumptions are not the only assumptions in the fair value calculation for these assets, but they are the most influential. Other key assumptions are not directly impacted by market forces as defined earlier. The above prepayment scenario does not reflect management's expectation regarding the future direction of prepayments, and depicts only one possibility out of a large set of possible scenarios. DERIVATIVES ACTIVITIES The following table summarizes by notional amounts Advanta's derivative instruments as of September 30, 1999 and December 31, 1998 ($ in thousands):
ESTIMATED FAIR VALUE SEPT. 30, SEPT. 30, DEC. 31, 1999 ASSET/ 1999 1998 (LIABILITY) ---------- ---------- ---------- Interest rate swaps $3,086,310 $2,997,912 $ 19,853 Interest rate options: Caps written 420,511 268,633 (1,293) Caps purchased 420,511 268,633 1,293 Put options purchased 101,000 0 188 Forward contracts 484,000 499,000 (28) ---------- ---------- ---------- $4,512,332 $4,034,178 $ 20,013 ========== ========== ==========
The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of Advanta's exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivative contracts. Put options provide the holder the right, but not the obligation, to sell the underlying financial instrument at a specified exercise or strike price at a specific point in time. Put options, therefore, protect Advanta from losses in a rising interest rate environment, but allow for the appreciation of underlying assets should interest rates fall. Advanta regularly securitizes and sells receivables. Advanta may choose to hedge the changes in the market value of the index on which the securitization is priced, relating to the warehouse and/or pipeline of receivables anticipated to be securitized, by purchasing put options on the underlying index. Gains and losses from put options are deferred and included in the measurement of the dollar basis of the loans sold. The fair value of interest rate swaps, options and forward contracts is the estimated amount that Advanta 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. 36 37 Advanta's credit exposure to derivatives, with the exception of caps written, is represented by contracts with a positive fair value without giving consideration to the value of any collateral exchanged. For caps written, credit exposure does not exist since the counterparty has performed its obligation to pay Advanta a premium payment. LIQUIDITY AND CAPITAL RESOURCES Advanta's goal is to maintain an adequate level of liquidity, for both long-term and short-term needs, through active management of both assets and liabilities. During the nine months ended September 30, 1999, Advanta, through its subsidiaries, securitized or sold approximately $2.1 billion of Advanta Mortgage loans, $308 million of leases and $283 million of net business card receivables. Advanta temporarily invested cash generated from these transactions in short-term, high quality investments at money market rates awaiting redeployment to pay down borrowings and to fund future mortgage loan, business card and lease receivable growth. At September 30, 1999, Advanta had $0.4 billion of federal funds sold, $0.5 billion of loan and lease receivables held for sale, and $1.0 billion of investments available for sale which could be sold to generate additional liquidity. Equity, including capital securities, was $677 million at September 30, 1999. Advanta's funding strategy relies on cash, cash equivalents and investments as well as deposit gathering activity at Advanta National Bank ("ANB") and Advanta Bank Corp. ("ABC", together with ANB, the "Banks") and securitizations. Advanta and the Banks use both retail and institutional on-balance sheet funding sources and have the ability to issue a variety of debt and deposit products. As of September 30, 1999, ANB's total deposits were $1.4 billion and ABC's total deposits were $276 million. After paying down approximately $239 million in long-term debt in the nine months ended September 30, 1999, Advanta had unrestricted cash, cash equivalents and marketable securities in excess of $400 million at the parent company level and more than $800 million at Advanta National Bank ("ANB") and Advanta Bank Corp. ("ABC" together with ANB, the "Banks") on September 30, 1999. The parent company's assets include advances to wholly-owned non-bank subsidiaries to fund $159.8 million in loans, $27.4 million in retained interest-only strips and contractual mortgage servicing rights, $182.6 million in subordinated trust assets, and $31.8 million of equity securities accounted for at fair value as of September 30, 1999. Total parent company advances to non-bank subsidiaries of $401.6 million have decreased by $208.6 million in comparison to advances at December 31, 1998. At September 30, 1999, Advanta Mortgage Corp. USA ("AMCUSA"), its subsidiaries and the Banks have a secured committed revolving credit facility of $500 million, and a $250 million commercial paper conduit facility. AMCUSA and ANB have additional uncommitted secured revolving credit facilities of $550 million. At September 30, 1999, ABC has $740 million of commercial paper facilities secured by business credit card receivables, and a $350 million commercial paper facility secured by lease contracts and lease residuals. At September 30, 1999, Advanta had available $1.4 billion in unused warehouse lines and commercial paper conduit facilities. In addition, notwithstanding Advanta's current liquidity, efforts continue to develop new sources of funding, both through previously untapped customer segments and through development of new financing structures. 37 38 At September 30, 1999, ANB's combined total capital ratio (combined Tier I and Tier II capital) was 13.62%, and ABC's combined total capital ratio was 12.90%. At December 31, 1998, ANB's combined total capital ratio (combined Tier I and Tier II capital) was 12.12% and ABC's combined total capital ratio was 14.13%. In each case, ANB and ABC met the requirements of their respective regulatory agencies, and each was categorized as well-capitalized under the regulatory framework for prompt corrective action. Advanta intends to maintain capital ratios at both institutions in order to meet "well capitalized" guidelines. YEAR 2000 READINESS DISCLOSURE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results on or after the year 2000. The "Year 2000 Issue" affects computer and information technology ("IT") systems, as well as non-IT systems which include embedded technology such as micro-processors and micro-controllers (or micro-chips) that have date sensitive programs that may not properly recognize the Year 2000 or beyond. If the systems and products used by Advanta are not properly equipped to identify and recognize the Year 2000, Advanta's IT systems and non-IT systems could fail or create erroneous results. This could cause Advanta to experience a temporary inability to process transactions, originate loans or leases, service the loans of third parties and engage in other normal business activities. Under these circumstances, the Year 2000 Issue could have a material adverse effect on Advanta's products, services, operations and financial results. In connection with the Year 2000 Issue, Advanta has organized a separate Year 2000 Project Office (the "Project Office") managed by a team led by a senior information technology manager to assess whether the computer systems and applications used by Advanta are Year 2000 compliant and to implement appropriate responses in the event any of such systems and applications are not compliant. The Project Office has developed standards for its work based on the work of leading authorities in the field. The Project Office reports to Advanta's Year 2000 Steering Committee which consists of Advanta's Chief Information Officer, the General Counsel and other key members of senior management. In addition, Advanta's Internal Audit Department has assigned a senior information technology auditor to monitor all Year 2000 Issues and developments for the Audit Committee of Advanta's Board of Directors. Independent consultants have assisted in the verification and validation processes to assure the reliability of Advanta's risk and cost estimates. Advanta has implemented a Year 2000 compliance program in accordance with applicable guidelines and regulations of the Federal Financial Institutions Examination Council ("FFIEC") as adopted by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"). Advanta's compliance program consists of the following phases: AWARENESS Define the scope of the Year 2000 problem. Establish a Year 2000 project team. Develop an overall strategy to address the Year 2000 problem. Identify all IT and non-IT systems that may be affected by the Year 2000 Issue. 38 39 ASSESSMENT Assess the size and complexity of the Year 2000 Issue. Evaluate whether IT and non-IT systems are Year 2000 compliant. Identify and prioritize "mission-critical" systems. RENOVATION Remediate or replace systems that are not Year 2000 compliant. VALIDATION Test of systems to validate that they are Year 2000 compliant. CONTINGENCY Develop options in the event that any or all of the PLANNING IT and non-IT systems fail or cannot be made Year 2000 compliant. IMPLEMENTATION Certify that systems are Year 2000 compliant. Implement contingency plans for any non-compliant system. Advanta has completed all six phases of its Year 2000 compliance program with respect to its internal and external mission-critical systems as of September 30, 1999. On an ongoing basis, Advanta is also providing customer awareness training for customer-centered employees that will equip them to respond to customer inquiries about Advanta's Year 2000 readiness. Advanta has identified its significant business relationships, including without limitation vendors, customers and asset management and funding counterparties, to assess the potential impact on Advanta's operations if those third parties and/or their products or systems fail to become Year 2000 compliant in a timely manner. Advanta has mailed questionnaires to third parties with which it maintains a significant business relationship to help identify which of those third parties and/or their products or systems will not be Year 2000 compliant. In addition, Advanta regularly reviews Internet websites to monitor and assess the level of Year 2000 compliance of vendors, suppliers and other third parties. Evaluation of questionnaire responses, risk assessments, action steps and contingency plans related to significant third party relationships have been completed within the time frames established by the FFIEC guidelines as adopted by the OCC and FDIC. Non-compliant products have been remediated, replaced or retired. To date, Advanta is not aware of any material third party business relationship, product or system with a Year 2000 problem that management believes would have a material adverse effect on Advanta. However, there can be no assurance that the systems and products used by outside service providers or other third parties upon which Advanta's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with Advanta's systems, would not have a material adverse effect on Advanta. Advanta's Year 2000 compliance program also includes the development of contingency plans for each of Advanta's business units in the event that remediation or replacement plans are not successfully implemented. The contingency plans are designed to protect its business and operations from business interruptions related to the Year 2000 Issue and, by way of example, may include back-up procedures or the identification of alternative suppliers, where practical. Each of Advanta's business units has developed, and has validated, its contingency plans. These plans are reviewed regularly and updated. Many of the functions performed by the products and systems used by Advanta, which operate automatically, can be performed manually. 39 40 Consequently, in the event these products or systems experience isolated failures as a result of the Year 2000 problem, the disruption caused by such isolated failures should not have a material adverse effect on Advanta. There can be no assurances, however, that any of Advanta's contingency plans will be sufficient to anticipate or address all of the problems or issues that may arise. Advanta established a two-year budget for 1998 and 1999 of approximately $21 million, including capital expenditures, to address the Year 2000 Issue. This budget includes approximately $5 million to cover the costs associated with diverted personnel. Of the total budget, Advanta has allocated approximately $10 million to $12 million for contingencies. Based on current information, Advanta believes that the budget will be sufficient to cover its expenditures associated with the Year 2000 Issue. As of September 30, 1999, exclusive of costs associated with diverted personnel, Advanta has spent approximately $6.6 million in operating expenses and approximately $1.2 million in capital expenditures. Funding for the project is being provided out of operating revenues. Advanta notes that GAAP generally requires that the costs of becoming Year 2000 compliant, including without limitation modifying computer software or converting to new programs, be charged to expense as they are incurred. Therefore, except for the cost of replacement systems or other items that have a future use, Advanta will expense the cost of the Year 2000 project as incurred. Advanta has deferred development on selected business systems due to Year 2000 priorities. These deferrals are not expected to have a material effect on the financial condition and results of operations of Advanta. Advanta believes that the Year 2000 Issue will not pose significant operational problems for it and will not have a material adverse effect on its future financial condition, liquidity or results of operations during 1999 and in future periods. The projected costs and expenditures and project completion dates are based on management's best estimates, are subject to the performance of third parties over which Advanta has no control and may be updated from time to time as additional information becomes available. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is set forth in Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations. 40 41 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which Advanta denies, center around Fleet's assertions that Advanta has failed to complete certain post-closing adjustments to the value of the assets and liabilities Advanta contributed to the LLC in connection with the Fleet Transaction. Fleet seeks damages of approximately $141 million. Advanta has filed an answer to the complaint denying the material allegations of the complaint, but acknowledging that Advanta contributed $1.8 million in excess liabilities in the post-closing adjustment process, after taking into account the liabilities Advanta has already assumed. Advanta also has filed a countercomplaint against Fleet for approximately $101 million in damages Advanta believes have been caused by certain actions of Fleet following closing of the Fleet Transaction. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on the financial position or future operating results of Advanta. On or about March 26, 1999, a complaint was filed by John Uphaus, individually and on behalf of a class, against Household Bank (Nevada) N.A. ("Household") and Advanta National Bank in the United States District Court for the Northern District of Illinois. Uphaus alleges that he had a credit card account with Household, which account was purchased by Advanta National Bank. He further alleges that the annual percentage rate on a portion of his account was increased in a manner contrary to the promotional material he received. Advanta's preliminary investigation suggests that if a change in interest rate took place, as alleged by Uphaus, that change occurred after the contribution of Advanta's consumer credit card portfolio, and it was made by Fleet Credit Card LLC. In any event, Fleet Credit Card LLC is obligated to defend and indemnify Advanta pursuant to the Contribution Agreement and the Licensing Agreement between the parties. Advanta National Bank's response to this complaint was filed with the court on June 21, 1999. 41 42 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits - The following exhibits are being filed with this report on Form 10-Q. EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 12 Consolidated Computation of Ratio of Earnings to Fixed Charges. 27 Financial data schedule. (b) Reports on Form 8-K (b)(1) A Current Report on Form 8-K, dated July 27, 1999, was filed by Advanta setting forth the financial highlights of Advanta's results of operations for the three months ended June 30, 1999. (b)(2) A Current Report on Form 8-K, dated September 17, 1999, was filed by Advanta reporting the conversion of Depositary Shares issued in respect of the Company's 6.75% Convertible Class B Preferred Stock, Series 1995 into Class B Common Stock effective September 15, 1999. 42 43 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Advanta Corp. (Registrant) November 12, 1999 By /s/Philip M. Browne ------------------- Senior Vice President and Chief Financial Officer November 12, 1999 By /s/James L. Shreero ------------------- Vice President and Chief Accounting Officer 43 44 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 12 Consolidated Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule
44 EX-12 2 CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
Three Months Ended Nine Months Ended September 30, September 30, - -------------------------------------------------------------------------------------------- 1999 1998 1999 1998(A) - -------------------------------------------------------------------------------------------- Net earnings $ 14,178 $ 15,025 $ 33,263 $ 443,282 Federal and state income taxes 9,256 6,439 21,564 (11,013) Earnings before income taxes 23,434 21,464 54,827 432,269 Fixed charges: Interest 41,935 39,165 128,529 142,935 One-third of all rentals 771 583 2,364 2,006 Preferred stock dividend of subsidiary trust 2,248 2,248 6,743 6,743 Total fixed charges 44,954 41,996 137,636 151,684 Earnings before income taxes and fixed charges 68,388 63,460 192,463 583,953 Ratio of earnings to fixed charges (B) 1.52x 1.51x 1.40x 3.85x
(A) Earnings before income taxes in 1998 include a $541.3 million gain on the transfer of the consumer credit card business and $125.1 million of other charges including severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with the Fleet Transaction/Tender Offer; expense associated with exited business/product; and asset impairment. (B) For purposes of computing these ratios, "earnings" represent income before income taxes plus fixed charges. "Fixed charges" consist of interest expense, one-third (the proportion deemed representative of the interest factor) of rental expense on operating leases, and preferred stock dividends of subsidiary trust. EX-27 3 FINANCIAL DATA SCHEDULE
9 1000 9-MOS DEC-31-1999 SEP-30-1999 19084 81767 371000 0 952908 0 0 973128 35328 3525594 1704176 408603 283798 451793 0 1010 285 575929 3525594 89380 80386 15934 185700 79098 128529 57171 28007 29781 264687 54827 33263 0 0 33263 1.31 1.30 2.08 51158 0 0 0 33437 23761 4335 35328 35328 0 0
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