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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, 2000
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission File Number 0-14120
Advanta Corp.
(Exact name of registrant as specified in its charter)
Delaware 23-1462070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code)
(215) 657-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Outstanding at November 6, 2000
Common Stock, $.01 par value 10,040,230 shares
Class B Outstanding at November 6, 2000
Common Stock, $.01 par value 17,132,849 shares
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TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Income Statements 4
Consolidated Statements of Changes in
Stockholders' Equity 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 42
PART II - OTHER INFORMATION 43
Item 6. Exhibits and Reports on Form 8-K 43
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ITEM 1. FINANCIAL STATEMENTS
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
2000 1999
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash $ 77,067 $ 29,301
Federal funds sold 107,046 144,938
Restricted interest-bearing deposits 42,556 93,688
Investments available for sale 800,567 748,881
Loan and lease receivables, net:
Held for sale 580,578 711,303
Other 292,459 738,321
----------- -----------
Total loan and lease receivables, net 873,037 1,449,624
Retained interests in securitizations 432,253 515,789
Contractual mortgage servicing rights 95,954 92,636
Premises and equipment (at cost, less accumulated
depreciation of $69,485 in 2000 and $54,613 in 1999) 96,639 89,869
Other assets 594,187 524,936
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,119,306 $ 3,689,662
- -------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 17,338 $ 5,768
Interest-bearing 1,512,947 1,506,591
----------- -----------
Total deposits 1,530,285 1,512,359
Long-term debt 759,900 788,508
Other borrowings 6,030 409,601
Other liabilities 290,322 289,563
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,586,537 3,000,031
- -------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of Advanta 100,000 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding - 1,010
shares in 2000 and 1999 1,010 1,010
Class A voting common stock, $.01 par value:
Authorized - 214,500,000 shares; Issued - 10,040,230
shares in 2000, and 10,465,883 shares in 1999 100 105
Class B non-voting common stock, $.01 par value:
Authorized - 230,000,000 shares; Issued - 17,708,494
shares in 2000, and 18,256,029 in 1999 177 182
Additional paid-in capital 221,486 232,585
Deferred compensation (10,131) (16,597)
Unearned ESOP shares (11,818) (12,132)
Accumulated other comprehensive loss (6,317) (10,794)
Retained earnings 256,227 421,741
Less: Treasury stock at cost, 0 Class A and 527,168
Class B common shares in 2000 and 405,000 Class A
and 972,768 Class B common shares in 1999 (17,965) (26,469)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 432,769 589,631
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,119,306 $ 3,689,662
- -------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Interest income $ 80,529 $ 61,185 $ 249,207 $ 185,700
Securitization income (loss) 48,868 51,360 (99,484) 127,245
Servicing revenues 39,055 29,548 119,273 86,835
Other revenues, net 20,443 18,650 75,535 76,270
- ------------------------------------------------------------------------------------------------------
TOTAL REVENUES 188,895 160,743 344,531 476,050
- ------------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 97,927 82,702 286,405 251,314
Interest expense 52,005 41,935 151,490 128,529
Provision for credit losses 20,999 10,452 59,858 28,007
Minority interest in income
of consolidated subsidiary 2,220 2,220 6,660 6,660
Unusual charges 0 0 0 6,713
- ------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 173,151 137,309 504,413 421,223
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 15,744 23,434 (159,882) 54,827
Income tax expense 0 9,256 0 21,564
- ------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 15,744 $ 14,178 $(159,882) $ 33,263
- ------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share
Class A $ .61 $ .56 $ (6.41) $ 1.28
Class B .63 .57 (6.36) 1.33
Combined .62 .57 (6.38) 1.31
- ------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share
Class A $ .61 $ .54 $ (6.41) $ 1.26
Class B .63 .56 (6.36) 1.31
Combined .62 .55 (6.38) 1.30
- ------------------------------------------------------------------------------------------------------
Basic weighted average shares
outstanding (000's)
Class A 9,109 8,984 9,098 9,078
Class B 16,150 14,429 15,995 14,143
Combined 25,259 23,413 25,093 23,221
- ------------------------------------------------------------------------------------------------------
Diluted weighted average shares
outstanding (000's)
Class A 9,158 9,030 9,098 9,110
Class B 16,168 14,960 15,995 14,410
Combined 25,326 23,990 25,093 23,520
- ------------------------------------------------------------------------------------------------------
Cash dividends declared
Class A $ .063 $ .063 $ .189 $ .189
Class B .076 .076 .227 .227
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
($ IN THOUSANDS)
CLASS A CLASS A CLASS B ADDITIONAL
COMPREHENSIVE PREFERRED COMMON COMMON PAID-IN
INCOME (LOSS) STOCK STOCK STOCK CAPITAL
- -------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $1,010 $104 $163 $229,304
Net income $ 49,818
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $5,763 (10,703)
---------
Comprehensive income (loss) $ 39,115
=========
Conversion of Class B
Preferred Stock 14 (14)
Preferred and common cash
dividends declared
Exercise of stock options 20
Issuance of stock:
Benefit plans 1 9 10,579
Amortization of deferred
compensation
Termination benefit-
Benefit plans (4) (7,421)
Stock buyback
ESOP shares committed to be
released 117
- -------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $1,010 $105 $182 $232,585
- -------------------------------------------------------------------------------------------------------
Net loss $(159,882)
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $(2,411) 4,477
---------
Comprehensive income (loss) $(155,405)
=========
Preferred and common cash
dividends declared
Exercise of stock options 155
Issuance of stock:
Benefit plans 2 2,380
Amortization of deferred
compensation
Termination benefit-
Benefit plans (1) (3) (5,209)
Retirement of treasury stock (4) (4) (8,496)
ESOP shares committed to be
released 71
- -------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 $1,010 $100 $177 $221,486
- -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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($ IN THOUSANDS)
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES LOSS EARNINGS STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $(29,764) $ (91) $382,092 $(22,514) $560,304
Net income 49,818 49,818
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $5,763 (10,703) (10,703)
Comprehensive income (loss)
Conversion of Class B
Preferred Stock 0
Preferred and common cash
dividends declared (10,169) (10,169)
Exercise of stock options 20
Issuance of stock:
Benefit plans (10,589) 0
Amortization of deferred
compensation 3,781 3,781
Termination benefit-
Benefit plans 7,425 0
Stock buyback (3,955) (3,955)
ESOP shares committed to be
released 418 535
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $(28,729) $(10,794) $421,741 $(26,469) $589,631
- -----------------------------------------------------------------------------------------------------------------
Net loss (159,882) (159,882)
Other comprehensive income
(loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $(2,411) 4,477 4,477
Comprehensive income (loss)
Preferred and common cash
dividends declared (5,632) (5,632)
Exercise of stock options 155
Issuance of stock:
Benefit plans (2,382) 0
Amortization of deferred
compensation 3,635 3,635
Termination benefit-
Benefit plans 5,213 0
Retirement of treasury stock 8,504 0
ESOP shares committed to be
released 314 385
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 $(21,949) $(6,317) $256,227 $(17,965) $432,769
- -----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
($ IN THOUSANDS) SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ (159,882) $ 33,263
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Investment securities gains (10,422) (29,781)
Noncash charges associated with exit of auto
finance business 0 16,900
Depreciation and amortization 15,627 13,754
Provision for credit losses, excluding auto 59,858 23,107
Valuation adjustment for loans held for sale 6,307 0
Proceeds from sale of trading investments 0 185,042
Origination of loans and leases held for sale (1,895,390) (2,533,678)
Proceeds from sales of loans and leases held for sale 2,142,431 2,831,799
Change in other assets and other liabilities (42,512) 26,942
Change in retained interests in securitizations and
contractual mortgage servicing rights, excluding
auto charge 80,218 (65,016)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 196,235 502,332
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Change in federal funds sold and interest-
bearing deposits 89,024 (105,339)
Purchase of investments available for sale (1,449,619) (933,747)
Proceeds from sales of investments available for sale 630,969 621,660
Proceeds from maturing investments available for sale 784,392 224,064
Principal collected on Advanta Mortgage loans and
leases not held for sale 96,426 125,649
Origination of Advanta Mortgage loans and leases
not held for sale (181,757) (143,191)
Proceeds from sale of loans and leases originally
classified as not held for sale 397,735 0
Change in business credit card receivables and other
loans not held for sale (73,747) (8,493)
Purchases of premises and equipment, net (22,162) (16,371)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 271,261 (235,768)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Change in demand and savings deposits (148,113) 97,015
Proceeds from the issuance of time deposits 1,110,682 539,584
Payments for maturing time deposits (944,643) (682,213)
Change in repurchase agreements and FHLB advances (324,191) 0
Proceeds from issuance of long-term debt 197,831 82,615
Payments on redemption of long-term debt (226,439) (262,948)
Change in other borrowings (79,380) (25,719)
Stock buyback 0 (3,955)
Proceeds from issuance of stock 155 20
Cash dividends paid (5,632) (8,146)
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (419,730) (263,747)
- ----------------------------------------------------------------------------------------------
Net increase in cash 47,766 2,817
Cash at beginning of period 29,301 16,267
- ----------------------------------------------------------------------------------------------
Cash at end of period $ 77,067 $ 19,084
- ----------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
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ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2000
(UNAUDITED)
In these notes to consolidated financial statements, "we", "us", and "our" refer
to Advanta Corp. and its subsidiaries, unless the context otherwise requires.
NOTE 1) BASIS OF PRESENTATION
Advanta Corp. (collectively with its subsidiaries, "Advanta") has prepared the
consolidated financial statements included herein pursuant to the rules and
regulations of the Securities and Exchange Commission. We have condensed or
omitted certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles pursuant to such rules and regulations. In the opinion of
management, the statements include all adjustments (which include normal
recurring adjustments and the valuation adjustments discussed in Note 2)
required for a fair statement of financial position, results of operations and
cash flows for the interim periods presented. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in our latest annual report on Form 10-K. The results of operations for the
interim periods are not necessarily indicative of the results for the full year.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Estimates are used when accounting for securitization income (loss), retained
interest in securitizations, contractual mortgage servicing rights, the
allowance for credit losses and income taxes, among others. Actual results could
differ from those estimates.
Certain prior period balances have been reclassified to conform to the current
period presentation.
NOTE 2) RECENT REGULATORY DEVELOPMENTS
In June 2000, we announced that our banking subsidiaries, Advanta National Bank
and Advanta Bank Corp., reached agreements with their respective bank regulatory
agencies, primarily relating to the banks' subprime lending operations. The
agreements outlined a series of steps to modify processes and formalize and
document certain practices and procedures for the banks' subprime lending
operations. The agreements also established temporary asset growth limits at
Advanta National Bank and deposit growth limits at Advanta Bank Corp., imposed
restrictions on taking brokered deposits at Advanta National Bank, and required
that by September 30, 2000 Advanta National Bank's capital ratios be maintained
at approximately the levels at March 31, 2000. At September 30, 2000, Advanta
National Bank was in compliance with the increased capital ratios required by
the agreements. We achieved these ratios through a combination of decreasing the
assets at Advanta National Bank and making aggregate capital contributions and
other investments in Advanta National Bank of approximately $70 million. The
agreements also required us to change our charge-off policy for delinquent
mortgages to 180 days and to modify our accounting processes and methodology for
our allowance for credit losses and valuation of residual assets.
In July 2000, we announced that Advanta National Bank signed an agreement with
the Office of the Comptroller of the Currency regarding the carrying value of
Advanta National Bank's retained interests in mortgage securitizations and
allowance for mortgage credit losses. For Advanta National Bank's June 30, 2000
Call Report, in
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accordance with the provisions of the agreement, we calculated the valuation of
the retained interests based on an 18% discount rate on the interest-only strip
and subordinated trust assets, a 15% discount rate on the contractual mortgage
servicing rights, a prepayment rate that represents the average prepayment
experience for the six months ended February 29, 2000 and cumulative loss rates
as a percentage of original principal balance of 6% on closed end mortgage loans
and 8% for HELOC (open end) mortgage loans. The agreement required that based on
these assumptions, the carrying value of Advanta National Bank's contractual
mortgage servicing rights be reduced by $13 million and the carrying value of
Advanta National Bank's subordinated trust assets and retained interest-only
strip be reduced by a total amount of $201 million. The agreement further
required that Advanta National Bank's allowance for credit losses be increased
by $22 million. The agreement contains provisions regarding the use of similar
discount rate and credit loss assumptions for the calculation of the carrying
value of the residual assets in future periods.
NOTE 3) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, cannot be applied retroactively and will be adopted as required
January 1, 2001. We anticipate that the adoption of SFAS No. 133 will not have a
material effect on the results of operations; however, we continue to monitor
potential changes and implementation guidance to this new accounting standard.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities- a Replacement
of FASB Statement No. 125." SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without amendment. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. We anticipate that
the adoption of SFAS No. 140 will not have a material effect on our results of
operations.
NOTE 4) INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------
U.S. Treasury & other U.S.
Government securities $436,545 $433,644 $145,112 $140,444
State and municipal securities 4,273 4,333 3,473 3,388
Collateralized mortgage obligations 171,489 166,966 456,288 448,068
Mortgage-backed securities 94,561 92,203 98,190 94,556
Equity securities(1) 75,726 75,726 60,892 60,892
Other 27,690 27,695 1,531 1,533
- ----------------------------------------------------------------------------------------------------
Total investments available for sale $810,284 $800,567 $765,486 $748,881
====================================================================================================
(1) Includes venture capital investments. The amount shown as amortized cost
represents carrying value for these investments.
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NOTE 5) LOAN AND LEASE RECEIVABLES
Loan and lease receivables on the balance sheet, including those held for sale,
consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
- ---------------------------------------------------------------------------------
Advanta Mortgage loans $ 332,074 $ 1,050,478
Business credit cards 462,366 275,095
Leases 100,471 132,802
Other loans 26,080 21,930
- ---------------------------------------------------------------------------------
Gross loan and lease receivables 920,991 1,480,305
- ---------------------------------------------------------------------------------
Add: Deferred origination costs,
net of deferred fees, and
unamortized purchase premiums 16,670 11,166
Less: Allowance for credit losses
Advanta Mortgage loans (25,073) (21,743)
Business credit cards (31,164) (14,663)
Leases (6,056) (3,110)
Other loans (2,331) (2,331)
- ---------------------------------------------------------------------------------
Total allowance for credit losses (64,624) (41,847)
- ---------------------------------------------------------------------------------
Net loan and lease receivables $ 873,037 $ 1,449,624
- ---------------------------------------------------------------------------------
Securitized receivables consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
- ------------------------------------------------------------
Advanta Mortgage loans $7,900,399 $7,333,058
Business credit cards 1,067,417 765,019
Leases 694,354 662,841
- ------------------------------------------------------------
Total $9,662,170 $8,760,918
- ------------------------------------------------------------
Advanta Mortgage loans include home equity loans, home equity lines of credit
and auto loans. We also contract with third parties to service their
nonconforming home equity loans on a subservicing basis. Subservicing
receivables were $12.7 billion at September 30, 2000 and $11.9 billion at
December 31, 1999. We bear no risk of credit loss on the receivables in our
subservicing portfolio and subserviced receivables are not included in Advanta
Mortgage loans.
NOTE 6) ALLOWANCE FOR CREDIT LOSSES
The following table presents activity in the allowance for credit losses for the
periods presented:
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
- -------------------------------------------------------------------------------
Beginning balance $ 41,847 $ 33,437
Provision for credit losses 59,858 42,647
Valuation allowance on loans transferred to
held for sale (7,730) 0
Allowance on receivables sold 0 (6,690)
Gross charge-offs:
Advanta Mortgage loans (14,948) (15,132)
Business credit cards (14,460) (11,341)
Leases (5,710) (4,429)
Other loans 0 (2,404)
- -------------------------------------------------------------------------------
Total gross charge-offs (35,118) (33,306)
Recoveries:
Advanta Mortgage loans 2,499 3,011
Business credit cards 1,486 1,238
Leases 1,782 1,503
Other loans 0 7
- -------------------------------------------------------------------------------
Total recoveries 5,767 5,759
- -------------------------------------------------------------------------------
Net charge-offs (29,351) (27,547)
- -------------------------------------------------------------------------------
Ending Balance $ 64,624 $ 41,847
===============================================================================
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The provision for credit losses in the nine months ended September 30, 2000
includes an increase in the credit loss assumption made in response to our bank
regulatory examination process, including the implementation of the agreements
with the bank regulators that were signed during the second quarter and in July
2000 (see Note 2), and changes during the second quarter in the market and the
political and regulatory environment for subprime lending.
During the nine months ended September 30, 2000, $520 million of loans were
transferred to the held for sale classification due to a change in management's
intention regarding the sale of those loans. Approximately $398 million of the
transferred loans were sold in the third quarter of 2000 as part of the planned
decrease of assets at Advanta National Bank, in order to meet required capital
levels.
NOTE 7) RETAINED INTERESTS IN SECURITIZATIONS AND CONTRACTUAL MORTGAGE SERVICING
RIGHTS
Retained interests in securitizations include the retained interest-only ("IO")
strip and subordinated trust assets related to Advanta Mortgage loan
securitizations. The following table presents activity in the retained interests
in securitizations and contractual mortgage servicing rights ("CMSR") related to
Advanta Mortgage loan securitizations:
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
- --------------------------------------------------------------------------------------
Beginning balance retained interests in
securitizations $ 515,789 $ 501,038
Beginning balance CMSR $ 92,636 $ 74,425
Retained interests in securitizations activity:
Retained IO on sales, net 55,736 50,462
Collateral deposits to subordinated
trust assets 73,884 45,717
Interest income 57,457 46,581
Cash released to Advanta (82,932) (86,241)
Fair value adjustments (210,654) (32,000)
Fair value adjustment related to
auto exit 0 (12,000)
Net change in subordinated trust assets
associated with off-balance sheet warehouse
facilities 21,260 (416)
Other 1,713 2,648
CMSR activity:
Servicing rights retained 39,312 54,124
Amortization, net (20,619) (39,134)
Valuation provision (15,375) 3,221
Ending balance retained interests in
securitizations $ 432,253 $ 515,789
Ending balance CMSR $ 95,954 $ 92,636
======================================================================================
The par value of subordinated trust assets was $510,718 at September 30, 2000
and $411,417 at December 31, 1999.
Valuation adjustments recorded to the retained interests in securitizations and
CMSR in the nine months ended September 30, 2000 resulted from an increase in
discount rate and credit loss assumption used in the valuation of these assets.
These changes were made in response to our bank regulatory examination process,
including the implementation of the agreements with the bank regulators that
were signed during the second quarter and in July 2000 (see Note 2), and
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changes during the second quarter in the market and the political and
regulatory environment for subprime lending.
NOTE 8) SELECTED BALANCE SHEET INFORMATION
SEPTEMBER 30, DECEMBER 31,
OTHER ASSETS 2000 1999
- --------------------------------------------------------------------------
Servicing advances $133,662 $105,302
Current and deferred income taxes, net 89,516 89,788
Accrued interest receivable 37,931 32,410
Other real estate (A) 6,235 9,560
Goodwill 3,115 3,323
Other 323,728 284,553
- --------------------------------------------------------------------------
Total other assets $594,187 $524,936
==========================================================================
(A) Carried at the lower of cost or fair market value less selling costs
SEPTEMBER 30, DECEMBER 31,
OTHER LIABILITIES 2000 1999
- ------------------------------------------------------------------------
Accounts payable and accrued expenses $ 75,984 $107,692
Accrued interest payable 73,680 36,554
Other 140,658 145,317
- ------------------------------------------------------------------------
Total other liabilities $290,322 $289,563
========================================================================
NOTE 9) LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of over one
year. The composition of long-term debt was as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
- ----------------------------------------------------------------------------------------------
SENIOR DEBT:
12 month senior notes (8.62%-10.66%) $141,278 $ 86,647
18 month senior notes (8.57%-10.89%) 9,185 8,344
24 month senior notes (7.47%-11.11%) 78,473 50,571
30 month senior notes (7.23%-11.15%) 13,458 13,852
48 month senior notes (6.39%-11.20%) 8,357 8,427
60 month senior notes (6.02%-11.24%) 32,536 28,863
Value notes, fixed (7.00%-7.85%) 4,137 7,779
Medium-term notes, fixed (6.81%-7.47%) 335,100 490,650
Medium-term notes, floating 30,500 47,400
Medium-term bank notes, fixed (6.45%-7.12%) 7,353 7,347
Other senior notes (7.33%-11.34%) 98,752 37,670
- ----------------------------------------------------------------------------------------------
Total senior debt 759,129 787,550
Subordinated notes (9.08%-10.44%) 771 958
- ----------------------------------------------------------------------------------------------
Total long-term debt $759,900 $788,508
==============================================================================================
We have priced our floating rate medium-term notes based on a spread over LIBOR.
At September 30, 2000, the rates on these notes varied from 7.06% to 7.30%. At
September 30, 2000 and December 31, 1999, we used derivative financial
instruments to effectively convert certain fixed rate debt to a LIBOR-based
variable rate.
NOTE 10) OTHER BORROWINGS
The composition of other borrowings was as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
- ------------------------------------------------------------------------------
Warehouse facility $ 0 $ 76,435
FHLB advances 0 220,000
Securities sold under repurchase agreements 0 104,191
Other borrowings 6,030 8,975
- ------------------------------------------------------------------------------
Total $ 6,030 $409,601
==============================================================================
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NOTE 11) CAPITAL STOCK
In the three months ended March 31, 2000, we retired 405,000 shares of Class A
Treasury stock and 445,600 shares of Class B Treasury stock.
NOTE 12) SEGMENT INFORMATION
During the first quarter of 2000, we made changes to the methods used to
allocate centrally incurred interest and operating expenses to the reportable
segments in order to better reflect the use of the related assets or personnel
by the segments. These changes included the allocation of certain expenses based
on consumption rather than based on average managed assets, and a change in the
classification of certain employee groups. Prior period segment results have
been restated to reflect the current allocation methods.
The results for the Advanta Mortgage segment in the nine months ended September
30, 2000 include the carrying value adjustments described in Note 2.
ADVANTA ADVANTA
THREE MONTHS ENDED ADVANTA BUSINESS LEASING
SEPTEMBER 30, MORTGAGE CARDS SERVICES OTHER(1) TOTAL
- ---------------------------------------------------------------------------------------------------------------------
2000
Noninterest revenues $ 68,346 $ 41,060 $ 804 $ (1,844) $ 108,366
Interest revenue 37,186 24,007 3,894 15,442 80,529
Interest expense 24,240 10,035 3,308 14,422 52,005
Pretax income (loss) 16,311 14,202 (12,019) (2,750) 15,744
Average managed
receivables $ 8,323,026 $ 1,472,729 $ 796,375 $ 24,250 $10,616,380
- ---------------------------------------------------------------------------------------------------------------------
1999
Noninterest revenues $ 66,076 $ 20,509 $ 10,672 $ 2,301 $ 99,558
Interest revenue 28,239 12,428 2,632 17,886 61,185
Interest expense 17,882 4,530 2,050 17,473 41,935
Pretax income (loss) 14,189 9,216 1,640 (1,611) 23,434
Average managed
receivables $ 8,389,792 $ 906,032 $ 741,571 $ 17,322 $10,054,717
- ---------------------------------------------------------------------------------------------------------------------
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ADVANTA ADVANTA
NINE MONTHS ENDED ADVANTA BUSINESS LEASING
SEPTEMBER 30, MORTGAGE CARDS SERVICES OTHER(1) TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
2000
Noninterest revenues $ (28,884) $ 111,443 $ 3,243 $ 9,522 $ 95,324
Interest revenue 133,762 59,027 11,532 44,886 249,207
Interest expense 75,878 23,681 9,417 42,514 151,490
Pretax income (loss) (189,527) 52,197 (28,898) 6,346 (159,882)
Average managed
receivables $ 8,408,983 $ 1,304,881 $ 801,461 $ 21,657 $ 10,536,982
- ---------------------------------------------------------------------------------------------------------------------------
1999
Noninterest revenues $ 180,364 $ 56,835 $ 33,206 $ 19,945 $ 290,350
Interest revenue 99,345 25,391 7,112 53,852 185,700
Interest expense 60,142 9,740 6,216 52,431 128,529
Pretax income (loss) 29,109 22,685 5,404 (2,371) 54,827
Average managed
receivables $ 8,370,460 $ 865,510 $ 699,551 $ 17,385 $ 9,952,906
- ---------------------------------------------------------------------------------------------------------------------------
(1) Other includes insurance operations, investment activities not attributable
to the reportable segments, and costs associated with exiting the auto
finance business in 1999.
NOTE 13) NET INTEREST INCOME
The following table presents the components of net interest income:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $ 44,942 $ 32,152 $ 141,295 $ 89,380
Investments 17,596 18,415 50,455 61,214
Retained interests in
mortgage securitizations 17,991 10,618 57,457 35,106
- --------------------------------------------------------------------------------------------------------
Total interest income 80,529 61,185 249,207 185,700
- --------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 33,294 25,503 95,628 79,098
Debt and other borrowings 18,711 16,432 55,862 49,431
- --------------------------------------------------------------------------------------------------------
Total interest expense 52,005 41,935 151,490 128,529
- --------------------------------------------------------------------------------------------------------
Net interest income 28,524 19,250 97,717 57,171
Less: Provision for credit losses (20,999) (10,452) (59,858) (28,007)
- --------------------------------------------------------------------------------------------------------
Net interest income after
provision for credit losses $ 7,525 $ 8,798 $ 37,859 $ 29,164
========================================================================================================
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NOTE 14) INCOME TAX EXPENSE
Income tax expense is based on the estimated annual effective tax rate of 0% for
the nine months ended September 30, 2000, compared to a 39% tax rate for the
comparable 1999 period.
Income tax expense consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------
Current:
Federal $ 2,523 $ 5,000 $ 3,972 $15,000
State 2,066 (747) 2,306 1,548
- --------------------------------------------------------------------------------
Total current 4,589 4,253 6,278 16,548
- --------------------------------------------------------------------------------
Deferred:
Federal 0 3,012 0 4,025
State (4,589) 1,991 (6,278) 991
- --------------------------------------------------------------------------------
Total deferred (4,589) 5,003 (6,278) 5,016
- --------------------------------------------------------------------------------
Total tax expense $ 0 $ 9,256 $ 0 $21,564
================================================================================
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,
- ------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
Statutory federal income tax $ 5,510 $ 8,202 $(55,959) $ 19,189
Valuation allowance (5,015) 0 57,993 0
State income taxes (1,696) 808 (2,478) 1,650
Compensation limitation 35 44 105 132
Non taxable investment income (160) (144) (398) (460)
Other 1,326 346 737 1,053
- ------------------------------------------------------------------------------------------------
Consolidated tax expense $ 0 $ 9,256 $ 0 $ 21,564
================================================================================================
The net deferred tax asset is comprised of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
- --------------------------------------------------------------------
Gross deferred tax liabilities $ (91,967) $(102,248)
Gross deferred tax assets 331,583 277,593
Valuation allowance (140,993) (83,000)
- --------------------------------------------------------------------
Net deferred tax asset $ 98,623 $ 92,345
====================================================================
A summary of deferred tax assets and (liabilities) follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
- ----------------------------------------------------------------------
Deferred loan fees and costs $ (4,119) $ (6,149)
Allowance for credit losses 22,267 22,273
Net operating loss carryforwards 162,833 182,437
Securitization income (loss) 66,828 (41,547)
Leasing income (loss) (34,960) (19,009)
Deferred compensation 6,849 9,054
Noncash unusual charges 6,835 18,321
Other 13,083 9,965
Valuation allowance (140,993) (83,000)
- ----------------------------------------------------------------------
Net deferred tax asset $ 98,623 $ 92,345
======================================================================
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As a result of the carrying value adjustments discussed in Note 2, we reported a
pretax loss for the nine months ended September 30, 2000. A valuation allowance
has been provided against the resulting deferred tax asset given our
pre-existing net operating loss carryforwards and the uncertainty of the
realizability of the incremental deferred tax asset. In establishing the
valuation allowance, management considered (1) the level of expected future
taxable income, (2) existing and projected book/tax differences, (3) tax
planning strategies available, and (4) the general and industry specific
economic outlook. Based on this analysis, management believes the net deferred
tax asset will be realized.
The net deferred federal tax asset is presented with current federal income
taxes for financial reporting purposes, and is included in other assets.
NOTE 15) UNUSUAL CHARGES
In accordance with the terms of the contribution agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between Advanta Corp. and Fleet
Financial Group, Inc. ("Fleet"), Advanta Corp. and certain of its subsidiaries
and Fleet and certain of its subsidiaries each contributed certain assets and
liabilities of their respective consumer credit card businesses to Fleet Credit
Card LLC ("Fleet LLC") in exchange for an ownership interest in Fleet LLC (the
"Consumer Credit Card Transaction").
Concurrently with the Consumer Credit Card Transaction, we purchased 7,882,750
shares of its Class A Common Stock and 12,482,850 of its Class B Common Stock,
each at $40 per share net, and 1,078,930 of our depositary shares each
representing one one-hundredth interest in a share of 6 3/4% Convertible Class B
Preferred Stock, Series 1995 Stock Appreciated Income Linked Securities at
$32.80 per share net, through an issuer tender offer (the "Tender Offer") which
was completed on February 20, 1998.
In connection with the Consumer Credit Card Transaction, we made major
organizational changes during the first quarter of 1998 to reduce corporate
expenses incurred in the past: (a) to support the business contributed to Fleet
LLC in the Consumer Credit Card Transaction; and (b) associated with the
business and products no longer being offered or not directly associated with
our mortgage, business credit card and leasing units. In addition, in the first
quarter of 1999, we implemented a plan to exit the auto finance business and to
implement cost reduction initiatives throughout the organization including the
consolidation of support functions. Costs associated with these changes were
included in unusual charges on the consolidated income statements. The following
table presents activity in the accrual related to these costs:
12/31/99 CHARGED 9/30/00
ACCRUAL TO ACCRUAL ACCRUAL
BALANCE IN 2000 BALANCE
- ------------------------------------------------------------------------------------------------
Employee costs associated with staff reductions $ 822 $ 822 $ 0
Employee costs associated with Consumer Credit
Card Transaction/Tender Offer 3,008 3,008 0
Expenses associated with exited businesses/products 20,648 5,291 15,357
- ------------------------------------------------------------------------------------------------
Total $24,478 $ 9,121 $15,357
================================================================================================
Employee costs associated with staff reductions
In the first quarter of 1999, we recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with cost reduction initiatives and the
consolidation of support functions. There were 121 employees severed who were
entitled to benefits. This staff reduction was substantially complete by June
30, 1999.
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Employee costs associated with Consumer Credit Card Transaction/Tender Offer
In connection with the organizational changes in 1998, we incurred approximately
$26.8 million of severance and related costs classified as employee costs
associated with the Consumer Credit Card Transaction/Tender Offer. These
expenses included severance and outplacement costs associated with the workforce
reduction, option exercise and re-measurement costs, and other employee costs
directly attributable to the Consumer Credit Card Transaction/Tender Offer.
In connection with these organizational changes, 255 employees who ceased to be
employed by Advanta were entitled to benefits, of which 190 employees were
directly associated with the business contributed to Fleet LLC and 65 employees
were associated with the workforce reduction.
Additionally, during the first quarter of 1998, we incurred approximately $35.5
million of other compensation charges. This amount includes $21.3 million
attributable to payments under change of control plans and $14.2 million
associated with the execution of the Tender Offer.
Exited businesses/products
In the first quarter of 1999, we implemented a plan to cease the origination of
auto loans and recorded a $3.4 million charge for costs associated with exited
businesses/products. The charges included severance and outplacement costs for
22 employees in the auto origination group, and professional fees associated
with exited businesses/products not directly associated with our mortgage,
business credit card and leasing units. We completed the closing of the auto
loan origination center and termination of related employees during the second
quarter of 1999. We expect to pay a substantial portion of the remaining costs
during the year ended December 31, 2000.
During the first quarter of 1998, we implemented a plan to exit certain
businesses and product offerings not directly associated with our mortgage,
business credit card and leasing units. In connection with this plan,
contractual vendor commitments of approximately $10.0 million associated with
discontinued development and other activities were accrued. We have
substantially completed the settlement of these contractual commitments.
We also have contractual commitments to certain customers, and non-related
financial institutions that are providing benefits to those customers, under a
product that will no longer be offered and for which no future revenues or
benefits will be received. In 1998, we recorded a charge of $22.8 million
associated with this commitment, and an $8.3 million charge associated with the
write-down of assets associated with this program. In the fourth quarter of
1999, we recorded an additional charge of $10.0 million based on a change in the
estimate of total expected costs for exited businesses. We expect to pay a
substantial portion of these costs over the next 27 months. The actions required
to complete this plan include the settlement of contractual commitments and the
payment of customer benefits.
In connection with the Consumer Credit Card Transaction/Tender Offer and the
other exited business and product offerings in 1998, Advanta also incurred $11.5
million of related professional fees and $1.5 million of other expenses related
to these plans.
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NOTE 16) EARNINGS (LOSS) PER SHARE
The following table presents the calculation of basic earnings (loss) per share
and diluted earnings (loss) per share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 15,744 $ 14,178 $(159,882) $ 33,263
Less: Preferred A dividends 0 0 (141) (141)
Less: Preferred B dividends (2) N/A (887) N/A (2,661)
- --------------------------------------------------------------------------------------------------------
Income (loss) available to common
shareholders $ 15,744 $ 13,291 $(160,023) $ 30,461
Less: Class A dividends declared (573) (567) (1,665) (1,789)
Less: Class B dividends declared (1,299) (1,172) (3,826) (3,555)
- --------------------------------------------------------------------------------------------------------
Undistributed earnings (loss) $ 13,872 $ 11,552 $(165,514) $ 25,117
Basic shares (000's)
Class A 9,109 8,984 9,098 9,078
Class B 16,150 14,429 15,995 14,143
Combined (1) 25,259 23,413 25,093 23,221
Options Class A 1 1 0 1
Options Class B 18 294 0 187
Restricted shares Class A 48 45 0 31
Restricted shares Class B 0 237 0 80
Diluted shares (000's)
Class A 9,158 9,030 9,098 9,110
Class B 16,168 14,960 15,995 14,410
Combined (1) 25,326 23,990 25,093 23,520
Basic earnings (loss) per share
Class A $ .61 $ .56 $ (6.41) $ 1.28
Class B .63 .57 (6.36) 1.33
Combined (1) .62 .57 (6.38) 1.31
Diluted earnings (loss) per share
Class A $ .61 $ .54 $ (6.41) $ 1.26
Class B .63 .56 (6.36) 1.31
Combined (1) .62 .55 (6.38) 1.30
Antidilutive shares (000's)
Preferred Class B (2) N/A 14 N/A 14
Options Class A 1 1 2 1
Options Class B 1,952 1,351 2,682 1,568
Restricted shares Class A 46 54 97 46
Restricted shares Class B 1,030 1,038 1,188 1,197
- --------------------------------------------------------------------------------------------------------
(1) Combined represents a weighted average of Class A and Class B shares and
earnings (loss) per share.
(2) Each share of Class B convertible preferred stock was mandatorily converted
into one share of Class B Common Stock effective September 15, 1999.
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NOTE 17) CONTINGENCIES
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta and certain of its subsidiaries in Delaware Chancery Court. Fleet's
allegations, which Advanta denies, center around Fleet's assertions that Advanta
has failed to complete certain post-closing adjustments to the value of the
assets and liabilities Advanta contributed to Fleet LLC in connection with the
Consumer Credit Card Transaction. Fleet seeks damages of approximately $141
million. Advanta has filed an answer to the complaint denying the material
allegations of the complaint, but acknowledging that Advanta contributed $1.8
million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities Advanta has already assumed. Advanta also
has filed a countercomplaint against Fleet for approximately $101 million in
damages Advanta believes have been caused by certain actions of Fleet following
the closing of the Consumer Credit Card Transaction. Formal discovery has begun
and is ongoing. The court has scheduled trial in this matter to begin in
September 2001. Management expects that the ultimate resolution of this
litigation will not have a material adverse effect on the financial position or
future operating results of Advanta.
Advanta Corp. 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 our control,
it is reasonably possible that our estimated liability under these proceedings
may change.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In this form 10-Q, "Advanta", "we", "us", and "our" refer to Advanta Corp. and
its subsidiaries, unless the context otherwise requires.
OVERVIEW
For the three months ended September 30, 2000, we reported net income of $15.7
million or $0.62 per combined diluted common share, compared to net income of
$14.2 million or $0.55 per combined diluted common share for the three months
ended September 30, 1999. Pro forma net income, reflecting income for Advanta
Mortgage that is essentially the same as a portfolio lender, was $464 thousand,
or $0.02 per combined diluted common share, for the three months ended September
30, 2000. For the three months ended September 30, 1999, pro forma net income on
a portfolio lender basis was equal to reported net income of $14.2 million.
Net income as reported and on a pro forma portfolio lender basis for the three
months ended September 30, 2000 includes $23 million of provisions and charges
consisting of the following: a charge of approximately $10 million in the
leasing business due to continued charge-offs largely concentrated within
certain unprofitable segments of this business originated in prior periods; an
increase of approximately $10 million in the on-balance sheet allowance for
credit losses for business credit cards; and a charge of approximately $3
million in the insurance business relating to a large policy claim settled
during the quarter. Approximately $6 to $8 million of the $10 million increase
in allowance for credit losses for business cards strengthened on-balance sheet
reserves and is attributable to a revision of the methodology for estimating
loan losses as a result of our recent discussions with the FDIC relating to the
implementation of the agreement between Advanta Bank Corp. and the FDIC that was
previously disclosed in June 2000, and the remainder of the increase is due to
the maturing and growth of the portfolio. Excluding the $23 million of
provisions and charges, net income would have been $1.53 per combined diluted
share for the three months ended September 30, 2000 and net income on a pro
forma portfolio lender basis for the same period would have been $0.58 per
combined diluted share.
For the nine months ended September 30, 2000, we reported a net loss of $159.9
million or $6.38 per combined diluted common share. These results include
charges, which were made in response to our regulatory review process, including
the implementation of the agreements with the bank regulators that were signed
during the second quarter and in July 2000, and changes during the second
quarter in the market and the political and regulatory environment for subprime
lending. These charges include a reduction in the valuation of Advanta National
Bank's retained interests in mortgage securitizations of $214.0 million and an
increase in Advanta National Bank's on-balance sheet allowance for credit losses
related to mortgage loans of $22.0 million. In addition, the results for the
nine months ended September 30, 2000 include a non-operating gain of $6.7
million, after tax, on investments held by Advanta Partners, our private equity
investment affiliate, and a $5.8 million charge, after tax, for a reduction in
the valuation of retained interests in leasing securitizations.
For the nine months ended September 30, 1999, we reported net income of $33.3
million or $1.30 per combined diluted common share. The earnings for the nine
months ended September 30, 1999 include non-recurring charges, after tax, of
approximately $14.5 million that were principally related to our exit from the
auto finance business and severance and outplacement associated with cost
cutting initiatives implemented in the first quarter of 1999. We also recognized
non-operating gains of approximately $16.7 million, after tax, in connection
with an investment held by Advanta Partners, and recorded a reduction in the
Advanta Mortgage retained interest-only strip of approximately $6.1 million,
after tax, associated with more conservative fair value assumptions.
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21
Pretax income (loss) by reportable segment for the three months ended September
30, 2000 was $16.3 million for Advanta Mortgage, $14.2 million for Advanta
Business Cards and ($12.0) million for Advanta Leasing Services. Pretax income
by reportable segment for the three months ended September 30, 1999 was $14.2
million for Advanta Mortgage, $9.2 million for Advanta Business Cards and $1.6
million for Advanta Leasing Services.
On October 24, 2000 we announced that we have accepted a proposal to sell our
mortgage business to a major financial institution in a cash transaction for a
price in excess of book value and we are negotiating an agreement with this
party. Under the terms of the proposal, we expect to receive proceeds that will
result in excess liquidity when added to our existing cash and equivalent
position. As a result, we intend to use a portion of this liquidity to pay off
all institutional medium term notes currently outstanding. We also intend to
seek shareholder approval for the transaction. While there can be no assurance
that a definitive agreement will be reached and a number of items remain to be
negotiated, if the transaction is consummated under the terms of the proposal,
it will result in the sale of virtually all mortgage assets. Mortgage assets
represented 33% of owned assets at September 30, 2000. We are also actively
pursuing strategic alternatives for our leasing business. The initial due
diligence has been completed with respect to the leasing business and bids are
being solicited from interested parties.
This report contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. These forward-looking statements can be identified by the
use of forward-looking phrases such as "will likely result," "may," "are
expected to," "is anticipated," "estimate," "projected," "intends to" or other
similar words. The most significant among these risks and uncertainties are: (1)
our managed net interest margin; (2) competitive pressures; (3) factors that
affect the level of delinquencies and charge-offs, including a deterioration of
general economic conditions; (4) the rate of prepayments; (5) interest rate
fluctuations; (6) the level of expenses; (7) managed and subserviced receivables
volume; (8) the timing of the securitizations of our receivables; (9) the level
of insurance policy renewals; (10) the effects of government regulation,
including restrictions and limitations imposed by banking laws, regulators,
examinations, and the agreements between our bank subsidiaries and their
respective regulators; (11) the level of conservatism and volatility associated
with the assumptions underlying the valuation of retained interests in
securitizations; (12) relationships with significant vendors, business partners
and customers; (13) the amount and cost of financing available to us; (14) the
ratings on the debt of Advanta Corp. and its subsidiaries; (15) the ability to
attract and retain key personnel and customers; and (16) the results of our
previously announced evaluation of strategic alternatives with respect to
Advanta Mortgage and Advanta Leasing Services, including the completion of a
definitive agreement and the closing and timing of any transaction. Additional
risks that may affect our future performance are set forth elsewhere in this
Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year
ended December 31, 1999 and in our other filings with the Securities and
Exchange Commission.
ADVANTA BUSINESS CARDS
OVERVIEW
Advanta Business Cards offers MasterCard(R)* business credit cards to small
businesses using targeted direct mail and the Internet. Pretax income for
Advanta Business Cards was $14.2 million for the three months ended September
30, 2000 as compared to $9.2 million for the same period in 1999. The results
for the three months ended September 30, 2000 include an increase in the
on-balance sheet allowance for credit losses of $10 million. Approximately $6 to
$8 million of this $10 million increase strengthened on-balance sheet reserves
and is attributable to a revision of the methodology for estimating credit
losses as a result of our recent discussions with the FDIC relating to the
implementation of the agreement between Advanta Bank Corp. and the FDIC that was
disclosed in June 2000, and the remainder of the increase is due to the maturing
and
- ----------
* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.
21
22
growth of the portfolio. Pretax income for the nine months ended September 30,
2000 was $52.2 million as compared to $22.7 million for the same period in 1999.
The increase in pretax income in both periods resulted from increased volume of
managed receivables, increases in portfolio yields and increased interchange
income. These increased revenues were partially offset by the increase in the
allowance for credit losses in the three months ended September 30, 2000 and an
increase in operating expenses in both periods due to increased marketing and
account origination activities.
SECURITIZATION INCOME
Advanta Business Cards recognized securitization income of $19.2 million for the
three months ended September 30, 2000 and $50.4 million for the nine months
ended September 30, 2000. This compares to $7.2 million of securitization income
recognized for the three months ended September 30, 1999 and $21.1 million of
securitization income recognized for the nine months ended September 30, 1999.
Advanta Business Cards sells receivables to existing securitization trusts on a
continuous basis to replenish the investors' interests in trust receivables that
have been repaid by the cardholders. The increase in securitization income in
both periods was due to increased yields on the securitized receivables and
increased volume of securitized receivables.
ORIGINATIONS
Originations for Advanta Business Cards were as follows ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
2000 1999 INCREASE 2000 1999 INCREASE
- ----------------------------------------------------------------------------------------------------------------
Dollar volume $ 881,215 $ 484,727 82% $2,529,183 $1,356,394 86%
Number of accounts 55,895 26,881 108 257,536 79,009 226
The increase in business credit card originations over the comparable periods in
1999 resulted from the successful application of our information based strategy
to expand the universe of potential business credit card customers.
ADVANTA MORTGAGE
OVERVIEW
Advanta Mortgage makes nonconforming home equity loans directly to consumers and
through brokers. This business unit originates and services first and second
lien mortgage loans, including home equity lines of credit, through subsidiaries
of Advanta. In addition to servicing and managing the loans it originates,
Advanta Mortgage contracts with third parties to service their nonconforming
home equity loans on a subservicing basis.
Advanta Mortgage pretax income for the three months ended September 30, 2000 was
$16.3 million as compared to $14.2 million for the same period of the prior
year. Pro forma pretax income for Advanta Mortgage on a portfolio lender basis
for the three months ended September 30, 2000, was $1.3 million. Pro forma
pretax income on a portfolio lender basis for the three months ended September
30, 1999 was equal to reported pretax income of $14.2 million. The decrease in
pro forma pretax income is due to lower mortgage origination volumes as a result
of continued implementation of processes required by the regulatory agreements
and the costs related to maintenance of an infrastructure at a level that is
commensurate with our prior mortgage volumes. These decreases were partially
offset by an increase in servicing revenues from growth in the subservicing
portfolio, and a decrease in the provision for credit losses.
Advanta Mortgage pretax income (loss) for the nine months ended September 30,
2000 was ($190.0) million as compared to $29.1 million for the same period of
the prior
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year. The decrease in pretax income was due to the reduction in the valuation of
the retained interests in mortgage securitizations and increase in on-balance
sheet reserves recorded in the second quarter of 2000. These adjustments were
made in response to our bank regulatory examination process, including the
implementation of the agreements with the bank regulators that were signed
during the second quarter and in July 2000, and changes during the second
quarter in the market and the political and regulatory environment for subprime
lending.
SECURITIZATION INCOME (LOSS)
Advanta Mortgage recognized gains of $35.2 million from the securitization and
sale of $1.0 billion of loans in the three months ended September 30, 2000, and
recognized gains of $40.1 million from the securitization and sale of $747
million of loans in the three months ended September 30, 1999. Advanta Mortgage
recognized gains of $99.8 million from the securitization and sale of $2.0
billion of loans for the nine months ended September 30, 2000 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. Gains on the sale of
receivables represented 3.4% of the loans sold in the three months ended
September 30, 2000, as compared to 5.4% of the loans sold in the same period of
1999. The gains recognized in the nine months ended September 30, 2000
represented 5.0% of loans sold, as compared to 5.5% of loans sold in the same
period of 1999. The decreases in the gains recognized as a percentage of loans
sold are due to changes in assumptions used in the calculation of gains in order
to comply with the regulatory agreements, and also due to changes in the mix of
loans sold. In the three months ended September 30, 2000, a significant portion
of loans sold represented loans indirectly originated, which typically have
lower yields. The sale of these loans was part of a planned decrease in assets
at Advanta National Bank in order to meet capital levels required by the
regulatory agreements.
In June 2000, we announced that our banking subsidiaries, Advanta National Bank
and Advanta Bank Corp., reached agreements with their respective bank regulatory
agencies, primarily relating to the banks' subprime lending operations. The
agreements outlined a series of steps to modify processes and formalize and
document certain practices and procedures for the banks' subprime lending
operations. The agreements also established temporary asset growth limits at
Advanta National Bank and deposit growth limits at Advanta Bank Corp., imposed
restrictions on taking brokered deposits at Advanta National Bank, and required
that by September 30, 2000 Advanta National Bank's capital ratios be maintained
at approximately the levels at March 31, 2000. At September 30, 2000, Advanta
National Bank was in compliance with the increased capital ratios required by
the agreements. We achieved these ratios through a combination of decreasing the
assets at Advanta National Bank and making aggregate capital contributions and
other investments in Advanta National Bank of approximately $70 million. The
agreements also required us to change our charge-off policy for delinquent
mortgages to 180 days and to modify our accounting processes and methodology for
our allowance for credit losses and valuation of residual assets.
In July 2000, we announced that Advanta National Bank signed an agreement with
the Office of the Comptroller of the Currency regarding the carrying value of
Advanta National Bank's retained interests in mortgage securitizations and
allowance for mortgage credit losses. For Advanta National Bank's June 30, 2000
Call Report, in accordance with the provisions of the agreement, we calculated
the valuation of the retained interests based on an 18% discount rate on the
interest-only strip and subordinated trust assets, a 15% discount rate on the
contractual mortgage servicing rights, a prepayment rate that represents the
average prepayment experience for the six months ended February 29, 2000 and
cumulative loss rates as a percentage of original principal balance of 6% on
closed end mortgage loans and 8% for HELOC (open end) mortgage loans. The
agreement required that based on these assumptions, the carrying value of
Advanta National Bank's contractual mortgage servicing rights be reduced by $13
million and the carrying value of Advanta National Bank's subordinated trust
assets and retained interest-only strip be reduced by a total
23
24
amount of $201 million. The agreement further required that Advanta National
Bank's allowance for credit losses be increased by $22 million. The agreement
contains provisions regarding the use of similar discount rate and credit loss
assumptions for the calculation of the carrying value of the residual assets in
future periods.
For the nine months ended September 30, 2000, Advanta Mortgage securitization
income (loss) included a $214.0 million charge due to the increases described
above in the discount rate and credit loss assumption used in the valuation of
Advanta National Bank's retained interests in mortgage securitizations,
including the retained interest-only strip, subordinated trust assets and
contractual mortgage servicing rights. During the three months ended June 30,
2000, the subprime lending industry was going through tremendous change due to
regulatory and legislative initiatives, changes in market participants caused by
the failure of some participants and new entrants into the market, and
publicized concerns regarding the business model of certain subprime lenders.
The change in the valuation assumptions was made in response to our regulatory
examination process, including the implementation of the agreements with the
bank regulators that were signed during the second quarter and in July 2000, and
changes during the second quarter in the market and the political and
regulatory environment for subprime lending. Although the mortgage loan
portfolio is performing in line with management's expectations, the change in
valuation assumptions in the second quarter was made in light of the more
conservative regulatory view and changes during the second quarter in the
market and the political and regulatory environment for subprime lending.
In the nine months ended September 30, 1999, securitization income included a
$10.0 million charge for additional reserves recorded on the retained
interest-only strip that resulted from the adoption of more conservative fair
value assumptions. There were no similar charges to retained interests in
mortgage securitizations in the three months ended September 30, 2000 or 1999.
The following summarizes the fair value assumptions used in the valuation of our
retained interests at September 30, 2000 and December 31, 1999.
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
Assumed constant prepayment rates:
Fixed rate loans 20% 25%
Variable rate loans 34 39
Lines of credit 25 30
Assumed loss rate (annualized) 1.87% 1.38%
The weighted average discount rate used in the estimation of the fair value of
the retained interest-only strip and subordinated trust assets was 18% at
September 30, 2000 and approximately 12% at December 31, 1999.
PORTFOLIO LENDER ANALYSIS
Gain on sale accounting is required under generally accepted accounting
principles for securitizations structured as sales. In the fourth quarter of
1998, we began to analyze and evaluate Advanta Mortgage's financial results from
a portfolio lender's perspective as well as under generally accepted accounting
principles. The following tables present Advanta Mortgage's reported results,
adjusted to approximate the results, excluding valuation adjustments made during
the three months ended June 30, 2000, of a portfolio lender for the three and
nine months ended September 30, 2000 and 1999 ($ in thousands).
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PORTFOLIO LENDER ANALYSIS
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------------------ -----------------------------------------
Advanta Advanta
Pro Mortgage Pro Mortgage
Advanta Forma as a Advanta Forma as a
Mortgage Adjust- Portfolio Mortgage Adjust- Portfolio
As Reported ments Lender As Reported ments Lender
- -------------------------------------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 37,186 $ 199,420 $ 236,606 $ 28,239 $ 182,379 $ 210,618
Securitization income 35,236 (35,236) 0 40,139 (40,139) 0
Servicing revenues 33,717 (13,324) 20,393 24,802 (7,815) 16,987
Other revenues, net (607) 0 (607) 1,135 0 1,135
- -------------------------------------------------------------------------------------------------------------------------
Total revenues 105,532 150,860 256,392 94,315 134,425 228,740
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 63,237 1,920 65,157 56,301 1,895 58,196
Interest expense 24,240 135,354 159,594 17,882 117,076 134,958
Provision for credit losses 0 28,575 28,575 4,078 15,454 19,532
Minority interest in income
of consolidated subsidiary 1,744 0 1,744 1,865 0 1,865
- -------------------------------------------------------------------------------------------------------------------------
Total expenses 89,221 165,849 255,070 80,126 134,425 214,551
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,311 (14,989) 1,322 14,189 0 14,189
Income tax expense 0 509 509 5,605 0 5,605
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 16,311 $ (15,498) $ 813 $ 8,584 $ 0 $ 8,584
=========================================================================================================================
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------------------- -----------------------------------------
Advanta
Mortgage as
a Portfolio Advanta
Pro Forma & Lender Pro Mortgage
Advanta Other Before Advanta Forma as a
Mortgage Adjust- Valuation Mortgage Adjust- Portfolio
As Reported ments Adjustments As Reported ments Lender
- ------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 133,762 $ 562,498 $ 696,260 $ 99,345 $ 523,827 $ 623,172
Securitization income (loss) (134,325) 134,325 0 105,115 (105,115) 0
Servicing revenues 102,056 (39,868) 62,188 72,123 (24,143) 47,980
Other revenues, net 3,385 0 3,385 3,126 0 3,126
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 104,878 656,955 761,833 279,709 394,569 674,278
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses 189,701 5,598 195,299 175,696 5,576 181,272
Interest expense 75,878 383,067 458,945 60,142 343,076 403,218
Provision for credit losses 23,508 52,744 76,252 9,145 35,917 45,062
Minority interest in income
of consolidated subsidiary 5,318 0 5,318 5,617 0 5,617
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 294,405 441,409 735,814 250,600 384,569 635,169
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (189,527) 215,546 26,019 29,109 10,000 39,109
Income tax expense 0 10,017 10,017 11,444 3,950 15,394
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(189,527) $ 205,529 $ 16,002 $ 17,665 $ 6,050 $ 23,715
==============================================================================================================================
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With respect to the pro forma portfolio lender results, individual line items
are stated as if the securitized mortgages were still owned by Advanta and
remained on the balance sheet. The pro forma adjustments (1) eliminate the gain
on sale, including the servicing component, (2) reflect interest income,
interest expense and operating expenses as if the sales had not occurred, and
(3) eliminate the impact of valuation adjustments reflected in the reported
results. The pro forma adjustment to provision for credit losses represents the
amount by which the provision would have increased from that reported had the
securitized Advanta Mortgage loans remained on the balance sheet and the
provision for credit losses on the securitized loans been equal to actual
reported charge-offs. The provision for credit losses is also adjusted to
exclude the increase recorded in connection with the regulatory agreements in
the three months ended June 30, 2000. The actual provision for credit losses of
a portfolio lender could differ from the charge-offs depending upon the age and
composition of the portfolio and the timing of charge-offs. Carrying value
adjustments to retained interests in securitizations, including contractual
mortgage servicing rights, and loan loss reserves in the three months ended June
30, 2000 are excluded from the pro forma results above. Income tax expense
amounts for the three and nine month periods ended September 30, 2000 are
adjusted to a normalized rate of 38.5%.
ORIGINATIONS
Originations for Advanta Mortgage were as follows ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, PERCENTAGE
2000 1999 DECREASE 2000 1999 DECREASE
---------- ---------- ---------- ---------- ---------- ----------
Direct $ 233,149 $ 368,654 (37)% $ 914,582 $1,179,738 (22)%
Indirect:
Broker 80,974 163,720 (51) 462,505 537,696 (14)
Other Indirect 0 34,941 (100) 4,692 288,920 (98)
---------- ---------- ---------- ----------
Subtotal Indirect 80,974 198,661 (59) 467,197 826,616 (43)
Auto 0 0 0 0 5,103 (100)
---------- ---------- ---------- ----------
Total $ 314,123 $ 567,315 (45) $1,381,779 $2,011,457 (31)
========== ========== ========== ==========
We continue to shift the composition of the managed mortgage portfolio toward a
higher proportion of direct and broker originations, which tend to have higher
yields and are typically more profitable than loans originated through other
indirect channels. The dollar volume of originations from direct to consumer
channels represented 74% of total originations for the three months ended
September 30, 2000 as compared to 65% for the three months ended September 30,
1999 and 66% for the nine months ended September 30, 2000 as compared to 59% for
the nine months ended September 30, 1999. At September 30, 2000, 48% of the
managed mortgage portfolio consisted of loans originated directly from
consumers. This compares to 42% at December 31, 1999 and 40% at September 30,
1999. Home equity lines of credit represented 14% of the managed mortgage loan
portfolio at September 30, 2000, as compared to 10% at December 31, 1999, and 9%
at September 30, 1999.
The decrease in the dollar volume of direct originations for the three and nine
months ended September 30, 2000 as compared to the same periods of 1999 is
primarily due to the impact of the implementation of the regulatory agreements
in the second and third quarters of 2000. The decrease in indirect originations
for the three and nine months ended September 30, 2000 as compared to the same
periods of 1999 resulted from our decision in 1999 to curtail the purchase of
pools of loans through indirect channels, other than broker originations.
Consistent with the strategy of focusing on profitable loan growth over volume,
the decision was based on unfavorable market pricing and management's commitment
to purchasing loans only when the loans exceed certain profitability
characteristics. There were no auto loans originated in 2000 due to our exit
from the auto finance business in the first quarter of 1999.
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SERVICING REVENUES
Servicing revenues were $33.7 million for the three months ended September 30,
2000, as compared to $24.8 million for the same period in 1999. For the nine
months ended September 30, 2000, servicing revenues were $102.1 million, as
compared to $72.1 million for the nine months ended September 30, 1999. The
increase in servicing revenues is due to an increase in average serviced
receivables of $3.1 billion and $3.7 billion for the three and nine months ended
September 30, 2000, respectively, as compared to the same periods of 1999.
Advanta Mortgage's subservicing portfolio was $12.7 billion at September 30,
2000, as compared to $11.9 billion at December 31, 1999 and $10.5 billion at
September 30, 1999. The increase in the subservicing portfolio resulted
primarily from growth in existing clients' portfolios. One of our larger
subservicing clients, which represented 37% of the subservicing portfolio at
September 30, 2000, has decided to move aspects of its servicing in-house and,
therefore, will terminate its subservicing contract effective during the fourth
quarter of 2000. We expect to collect a termination fee in connection with
cancellation of the contract, which will partially offset the financial impact
of the cancellation.
ADVANTA LEASING SERVICES
OVERVIEW
Advanta Leasing Services offers flexible lease financing programs on
small-ticket equipment to small businesses. Pretax loss for Advanta Leasing
Services was $12.0 million for the three months ended September 30, 2000 as
compared to pretax income of $1.6 million for the three months ended September
30, 1999. The pretax loss in the three months ended September 30, 2000 as
compared to the income from the same period of 1999 was primarily attributable
to $3.0 million of additional on-balance sheet loan loss reserves and a $7.0
million reduction in the valuation of retained interests in leasing
securitizations recorded in the three months ended September 30, 2000. Both of
these charges were related to higher credit losses associated with certain
unprofitable segments of broker originations from prior periods. Originations
from these unprofitable broker segments were discontinued in 2000. In addition,
net income in the three months ended September 30, 2000 was lower than the same
period of the prior year due to a decrease in origination volume.
Pretax loss for the nine months ended September 30, 2000 was $28.9 million as
compared to pretax income of $5.4 million for the comparable period in 1999. In
addition to the reasons for the variance in pretax income discussed above
relating to the three months ended September 30, 2000 and 1999, the decrease in
pretax income in the nine months ended September 30, 2000 was attributable to
lower margins and a $9.5 million pretax reduction in the valuation of retained
interests in leasing securitizations in the three months ended March 31, 2000.
SECURITIZATION INCOME
Advanta Leasing Services recognized $1.4 million in gains on the sale of $70
million of leases for the three months ended September 30, 2000, as compared to
$4.0 million in gains on the sale of $107 million of leases for the three months
ended September 30, 1999. As a percentage of receivables sold, the gains during
the three months ended September 30, 2000 represented 2.1%, while the gains
during the three months ended September 30, 1999 represented 3.8%. In the nine
months ended September 30, 2000, Advanta Leasing Services recognized $6.3
million in gains on the sale of $304 million of leases, as compared to $13.3
million in gains on the sale of $308 million of leases in the same period of
1999. As a percentage of receivables sold, these gains represented 2.1% in 2000
and 4.3% in 1999. The decrease in gain as a percentage of loans sold in both
periods resulted from a reduction in net interest income spread on securitized
receivables. The sales were
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through a combination of commercial paper conduit programs and a public lease
securitization.
Securitization income included a $7.0 million pretax charge in the three months
ended September 30, 2000 and $20.3 million of pretax charges in the nine months
ended September 30, 2000. These charges resulted from changes in valuation
assumptions related to retained interests in leasing securitizations, primarily
due to higher credit losses associated with certain unprofitable segments of
broker originations from prior periods. There were no similar charges in the
three or nine months ended September 30, 1999.
ORIGINATIONS
Originations for Advanta Leasing Services were as follows ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED PERCENTAGE
SEPTEMBER 30, PERCENTAGE SEPTEMBER 30, INCREASE
2000 1999 DECREASE 2000 1999 (DECREASE)
- ----------------------------------------------------------------------------------------
Vendor $ 42,877 $ 52,441 (18)% $130,806 $152,560 (14)%
Broker 9,910 39,700 (75) 57,906 122,497 (53)
Other 18,027 20,474 (12) 79,621 60,778 31
- ----------------------------------------------------------------------------------------
Total $ 70,814 $112,615 (37) $268,333 $335,835 (20)
========================================================================================
The decreases in vendor and broker originations were consistent with our focus
on profitable loan growth over volume. The increase in other originations for
the nine months ended September 30, 2000 as compared to the same period in 1999
resulted from a private label service agreement with a national direct marketer
of leases. This agreement was discontinued effective October 1, 2000.
ADVANTA CORP.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments, excluding the interest component
of previously discounted cash flows on retained interests in securitizations,
increased by $12.0 million for the three months ended September 30, 2000 as
compared to the same period in 1999, and increased $41.2 million for the nine
months ended September 30, 2000 as compared to the same period in 1999. During
the three months ended September 30, 2000, interest expense increased by $10.1
million as compared to the same period in 1999, and increased $23.0 million for
the nine months ended September 30, 2000 as compared to the same period in 1999.
The increase in interest income in both periods was due to an increase in yields
on receivables as well as an increase in average on-balance sheet receivables.
The increase in interest expense in both periods was due to an increase in the
cost of funds. Our cost of funds increased to 7.15% for the three months ended
September 30, 2000 from 5.84% in the same period in 1999, and increased to 6.77%
in the nine months ended September 30, 2000 from 5.80% in the same period in
1999. The increase in the cost of funds in 2000 was primarily attributable to
rising market interest rates.
The following table provides an analysis of owned interest income and expense
data, average balance sheet data, net interest spread, and net interest margin.
Net interest spread represents the difference between the yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Net interest margin represents the difference between the yield on
interest-earning assets and the average rate paid to fund interest-earning
assets. Average owned loan and lease receivables and the related interest
revenues include certain loan fees and costs.
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INTEREST RATE ANALYSIS
($ IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
--------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
----------- ---------- ------ ----------- ---------- ------
ON-BALANCE SHEET
Mortgage loans $ 637,627 $ 16,983 10.60% $ 697,713 $ 16,477 9.37%
Business credit cards 473,210 23,789 20.00 284,874 12,367 17.22
Leases 87,349 3,745 17.15 110,132 2,918 10.60
Auto loans 5,910 228 15.37 2,699 84 12.40
Other loans 24,250 233 3.82 17,322 548 12.56
----------- ---------- ----------- ----------
Total receivables(2) 1,228,346 44,978 14.57 1,112,740 32,394 11.56
Retained interests in
securitizations 388,961 17,991 18.50 513,957 10,618 8.26
Investments(2) 1,126,681 17,632 6.21 1,396,623 20,937 5.97
----------- ---------- ----------- ----------
Total interest-earning
assets $ 2,743,988 $ 80,601 11.70% $ 3,023,320 $ 63,949 8.42%
Interest-bearing
liabilities $ 2,833,029 $ 50,876 7.15% $ 2,788,784 $ 40,975 5.84%
Net interest spread 4.55% 2.58%
Net interest margin 4.31% 3.01%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,632,239 $ 7,580,722
Business credit cards
securitized 999,519 621,158
Leases securitized 709,026 631,439
Auto loans securitized 47,250 108,658
----------- -----------
Total average
securitized receivables $ 9,388,034 $ 8,941,977
=========== ===========
Total average managed
receivables $10,616,380 $10,054,717
=========== ===========
Managed net interest
margin (3) 4.43% 3.75%
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Interest and average rate for tax-exempt securities, loans and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin represents a combination of owned
interest-earning assets/owned interest-bearing liabilities and securitized
mortgage and business credit card assets/liabilities.
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INTEREST RATE ANALYSIS
($ IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
--------------------------------------- --------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
----------- ---------- ------ ---------- ---------- ------
ON-BALANCE SHEET
Mortgage loans $ 913,848 $ 70,462 10.30% $ 781,960 $ 53,549 9.16%
Business credit cards 407,266 58,369 19.14 204,189 25,218 16.51
Leases 109,135 11,455 14.00 108,371 7,639 9.40
Auto loans 5,777 787 18.19 18,827 2,079 14.77
Other loans 21,657 629 3.88 17,385 1,640 12.61
----------- ---------- ---------- ----------
Total receivables(2) 1,457,683 141,702 12.98 1,130,732 90,125 10.66
Retained interests in
securitizations 483,611 57,457 15.84 516,442 35,106 9.06
Investments(2) 1,054,341 50,542 6.37 1,454,935 60,960 5.57
----------- ---------- ---------- ----------
Total interest-earning
assets $ 2,995,635 $ 249,701 11.12% $3,102,109 $ 186,191 8.00%
Interest-bearing
liabilities $ 2,920,584 $ 148,117 6.77% $2,881,632 $ 125,030 5.80%
Net interest spread 4.35% 2.20%
Net interest margin 4.53% 2.64%
OFF-BALANCE SHEET
Mortgage loans
securitized $ 7,429,278 $7,438,740
Business credit cards
securitized 897,615 661,321
Leases securitized 692,326 591,180
Auto loans securitized 60,080 130,933
----------- ----------
Total average
securitized receivables $ 9,079,299 $8,822,174
=========== ==========
Total average managed
receivables $10,536,982 $9,952,906
=========== ==========
Managed net interest
margin (3) 4.36% 3.55%
(1) Includes assets held and available for sale and nonaccrual loans and
leases.
(2) Interest and average rate for tax-exempt securities, loans and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Managed net interest margin represents a combination of owned
interest-earning assets/owned interest-bearing liabilities and securitized
mortgage and business credit card assets/liabilities.
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OTHER REVENUES
($ in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------
Business credit card
interchange income $16,349 $ 8,909 $44,348 $23,273
Leasing other revenues 2,294 3,862 9,158 12,613
Investment securities gains, net 556 2,109 10,422 29,781
Insurance revenues, net and other 1,244 3,770 11,607 10,603
- ---------------------------------------------------------------------------------------------
Total other revenues, net $20,443 $18,650 $75,535 $76,270
=============================================================================================
Business credit card interchange income increased by $7.4 million for the three
months ended September 30, 2000 and $21.1 million for the nine months ended
September 30, 2000, as compared to the same periods of 1999. The increase in
both periods was due to higher purchase volume related to the increase in
average managed business credit card accounts and receivables.
Investment securities gains, net, include changes in the fair value and realized
gains on venture capital investments. Investment securities gains for the nine
months ended September 30, 2000 include a $9.4 million gain on the sale of an
investment. Included in investment securities gains in the nine months ended
September 30, 1999, is an $18 million gain on an investment in a company that
was merged with another entity in exchange for that entity's stock in the first
quarter of 1999. The stock received had a value significantly higher than our
basis in its investment. In the second quarter of 1999, we sold the majority of
this stock, realizing an additional gain of approximately $10 million.
Insurance revenues, net and other in the three months ended September 30, 2000
includes a charge of approximately $3 million in the insurance business
relating to a large policy claim settled during the quarter. We have been
notified by Progressive Casualty Insurance Company that it does not intend to
renew the strategic alliance with Advanta Insurance when the original five year
term for the alliance expires next year. The agreement governing the
relationship between Advanta Insurance and Progressive requires that upon
termination, we transfer our interest in the assets and liabilities of the
strategic alliance to Progressive, and that Progressive make certain payments
to us, subject to certain adjustments.
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OPERATING EXPENSES
($ in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 30,125 $ 32,128 $ 90,629 $ 95,064
Marketing expense 23,258 11,644 66,908 39,785
Amortization of business credit card
deferred origination costs, net 6,720 1,208 16,279 3,564
Equipment expense 6,336 5,253 18,286 15,767
Professional fees 5,403 6,503 15,818 19,419
External processing expense 5,182 4,112 15,047 11,001
Occupancy expense 4,370 4,132 12,942 12,297
Credit and collection expense 3,859 5,697 13,444 14,606
Telephone expense 3,324 2,743 9,646 8,279
Postage expense 1,682 1,556 4,920 4,551
Credit card fraud losses 565 191 1,258 625
Other 7,103 7,535 21,228 26,356
- ---------------------------------------------------------------------------------------------------------
Total operating expenses $ 97,927 $ 82,702 $286,405 $251,314
=========================================================================================================
At quarter end:
Number of accounts managed (in 000's)
884 621 N/A N/A
Number of employees 2,763 2,574 N/A N/A
For the quarter:
Efficiency ratio 65.52% 62.01% 62.75% 66.80%
Operating expenses as a percentage of
average managed receivables (1) 3.44% 3.24% 3.42% 3.32%
- ---------------------------------------------------------------------------------------------------------
(1) Excludes amortization of business credit card deferred origination costs,
net.
Operating expenses as a percentage of average managed receivables for the three
months and nine months ended September 30, 2000 were higher than the same
periods of 1999. The increase in the operating expense ratios are due to the
costs related to maintenance of an infrastructure at a level that is
commensurate with our prior mortgage origination volumes, although volumes have
decreased as a result of the implementation of processes required by the
regulatory agreements.
Marketing expense increased by $11.6 million for the three months ended
September 30, 2000 as compared to the same period of 1999, and increased by
$27.1 million for the nine months ended September 30, 2000 as compared to the
same period of 1999. These increases are primarily due to increased marketing
and account origination activities in Advanta Business Cards.
In the three months ended September 30, 2000, there was a $5.5 million increase
in the amortization of business credit card deferred origination costs, net, and
a $1.1 million increase in external processing expense compared to the same
period of 1999. In the nine months ended September 30, 2000 there was a $12.7
million increase in the amortization of business credit card deferred
origination costs, net, and a $4.0 million increase in external processing
expense compared to the same period of 1999. These increases in deferred
origination cost amortization and external processing expenses are due to the
growth in managed business credit card receivables. For the three months ended
September 30, 2000 there was a $1.1 million decrease in professional fees, as
compared to the same period of 1999. In the nine months ended September 30, 2000
there was a $3.6 million decrease in professional fees, as compared to the same
period of 1999. These decreases were due to a decrease in consulting and
outsourcing costs, including consulting costs associated with the year 2000
computer issue.
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PROVISION FOR CREDIT LOSSES
For the three months ended September 30, 2000, the provision for credit losses
of $21.0 million represented an increase of $10.5 million from the provision for
credit losses of $10.5 million in the same period of 1999. The increase was due
to an $11.3 million increase in the provision for credit losses relating to
business credit cards, a $4.1 million decrease in the provision related to
Advanta Mortgage loans, and a $3.3 million increase in the provision related to
lease receivables. Approximately $6 to $8 million of the increase in the
business credit card provision strengthened on-balance sheet reserves and is
attributable to a revision of the methodology for estimating credit losses as a
result of our recent discussions with the FDIC relating to the implementation of
the agreement between Advanta Bank Corp. and the FDIC that was previously
disclosed in June 2000, and the remainder of the increase is due to the maturing
and growth of the portfolio. The decrease in the provision for credit losses
related to Advanta Mortgage loans was due a decrease in on-balance sheet Advanta
Mortgage loans of $750 million in the three months ended September 30, 2000. The
increase in the provision for credit losses related to lease receivables was due
to higher credit loss experience associated with certain unprofitable segments
of broker originations from prior periods.
For the nine months ended September 30, 2000, the provision for credit losses
increased to $59.9 million from $28.0 million for the same period in 1999. The
increase in the provision in the nine months ended September 30, 2000 was $31.9
million, of which $14.4 million related to provisions for credit losses on
Advanta Mortgage loans, $17.7 million related to provisions for credit losses on
business credit cards, and $4.4 million related to provisions for credit losses
on lease receivables. The provision for credit losses for the nine months ended
September 30, 1999 also included a $4.6 million provision related to our exit
from the auto finance business. The increase in the provision relating to
Advanta Mortgage loans represents an increase in the credit loss assumption made
in response to our regulatory examination process including the implementation
of the agreements with the bank regulators that were signed during the second
quarter and in July 2000, and changes during the second quarter in the market
and the political and regulatory environment for subprime lending. In addition
to the increase discussed above for the three month period ended September 30,
2000, the increase in Advanta Business Cards' provision for the nine months
ended September 30, 2000 relates to a $203 million increase in average
on-balance sheet business credit card receivables.
ASSET QUALITY
Nonperforming assets include: Advanta Mortgage loans, business credit cards and
leases past due 90 days or more; real estate owned; and bankrupt, decedent and
fraudulent business credit cards. The carrying value for real estate owned is
based on fair value, net of estimated costs of disposition, and is reflected in
other assets. We charge losses on nonperforming Advanta Mortgage loans against
the allowance generally at the earlier of foreclosure or when they have become
180 days delinquent. This policy was implemented in the three months ended June
30, 2000. The previous policy was the earlier of foreclosure or 12 months
delinquent. Losses on lease receivables are generally charged against the
allowance when 121 days contractually delinquent. During the three months ended
June 30, 2000 the timing of the delinquency measurement of lease receivables was
changed from mid-month to month end. See the following tables for charge-off
rates using the new and prior methodologies for both mortgage loans and leases.
Our charge-off policy, as it relates to business credit card accounts, is to
charge-off an unpaid receivable at 180 days contractually delinquent. Business
credit card accounts suspected of being fraudulent are charged-off after a
90-day investigative period, unless our investigation shows no evidence of
fraud. Bankrupt business credit card accounts are currently charged off within a
90-day investigative period after receipt of notification. However, this policy
for bankrupt accounts will be changed to within 60 days of notification in the
fourth quarter of 2000 in accordance with FFIEC
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guidelines. This change in policy is not expected to have an impact on net
income for the fourth quarter, since our current policy is to provide an
allowance for credit losses for bankrupt accounts when we receive notification
of bankruptcy.
We had lower mortgage originations during the three and nine months ended
September 30, 2000 in comparison with the same periods of the prior year due to
the implementation of the regulatory agreements, as well as our focus on
profitable loan growth over volume. These factors have resulted in a significant
reduction in the rate of portfolio growth relative to prior periods. The decline
in the growth rate has reduced the proportion of new, unseasoned loans in the
portfolio. This "seasoning" effect results in higher reported delinquencies and
charge-offs consistent with an aging portfolio. The increase in reported
delinquency and charge-off rates for mortgage loans is partially attributable to
seasoning of the mortgage loan portfolio. In addition, the increase in
delinquencies was impacted by temporary operational considerations and a general
increase in delinquencies experienced across the mortgage lending industry.
Delinquency and charge-off rates on business credit cards continued to perform
in line with our expectations. After increasing the allowance for credit losses
in the three months ended September 30, 2000, reserves as a percentage of owned
receivables increased to 6.7% at September 30, 2000 as compared to 5.3% at
December 31, 1999. Based on the average owned net charge-offs for the quarter,
the on-balance sheet allowance for credit losses represents 16 months of
charge-off coverage at September 30, 2000. Managed charge-offs for the three
months ended September 30, 2000 were 4.8% as compared to 5.3% for the same
period of the prior year. As the accounts that we added during the second half
of 1999 mature, we anticipate that charge-offs on business credit cards will
increase, but remain within our current reserve level. The charge-off rate for
the fourth quarter of 2000 will be higher in part due to the implementation of a
new charge-off policy for bankrupt accounts discussed above.
Charge-off rates on leases have increased in the nine months ended September 30,
2000 as compared to the same period in the prior year. This increase is due to
the performance of certain unprofitable segments of broker originations from
prior periods. We expect the impact of this segment of the lease portfolio to
moderate by the end of the year.
The following tables provide a summary of nonperforming assets, delinquencies
and charge-offs, under the new and prior methodologies where applicable, as of
and for the year-to-date periods indicated ($ in thousands).
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SEPT. 30, DEC. 31, SEPT. 30,
CONSOLIDATED - MANAGED 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------
Nonperforming assets $ 495,379 $ 511,301 $ 497,859
Total loans 30 days or more delinquent 875,528 838,563 767,406
As a percentage of gross receivables:
Nonperforming assets
New methodology (A) 4.7%
Prior methodology 5.0 5.0% 4.9%
Total loans 30 days or more delinquent
New methodology (A) 8.3
Prior methodology 8.6 8.2 7.6
Net charge-offs:
Amount $ 195,483 $ 155,452 $ 109,951
As a percentage of average gross receivables (annualized)
New methodology (A) 2.5%
Prior methodology 2.0 1.6% 1.5%
ADVANTA MORTGAGE LOANS - MANAGED
Nonperforming assets $ 450,337 $ 475,711 $ 465,115
Total loans 30 days or more delinquent 745,903 729,187 669,954
As a percentage of gross receivables:
Nonperforming assets
New methodology (A) 5.5%
Prior methodology 5.9 5.7% 5.6%
Total loans 30 days or more delinquent
New methodology (A) 9.1
Prior methodology 9.5 8.7 8.0
Net charge-offs - Closed end mortgage loans:
Amount $ 94,144 $ 60,351 $ 40,104
As a percentage of average gross receivables (annualized)
New methodology (A) 1.7%
Prior methodology 1.2 0.8% 0.7%
Net charge-offs -Open end mortgage loans:
Amount $ 20,941 $ 3,952 $ 1,836
As a percentage of average gross receivables (annualized)
New methodology (A) 2.6%
Prior methodology 2.1 0.7% 0.5%
Net charge-offs - Auto Loans:
Amount $ 4,719 $ 18,855 $ 15,757
As a percentage of average gross receivables (annualized) 9.6% 13.9% 14.0%
BUSINESS CREDIT CARDS - MANAGED
Nonperforming assets $ 35,355 $ 23,498 $ 21,178
Total loans 30 days or more delinquent 66,036 38,437 31,829
As a percentage of gross receivables:
Nonperforming assets 2.3% 2.3% 2.3%
Total loans 30 days or more delinquent 4.3 3.7 3.4
Net charge-offs - Business Credit Cards:
Amount $ 42,834 $ 44,309 $ 34,725
As a percentage of average gross receivables (annualized) 4.4% 5.0% 5.4%
LEASES - MANAGED
Nonperforming assets $ 9,126 $ 11,472 $ 11,109
Total loans 30 days or more delinquent 62,574 69,695 64,780
As a percentage of gross receivables:
Nonperforming assets
New methodology (A) 1.2%
Prior methodology 1.5 1.4% 1.4%
Total loans 30 days or more delinquent
New methodology (A) 7.9
Prior methodology 8.2 8.8 8.3
Net charge-offs - Leases:
Amount $ 32,845 $ 25,586 $ 17,501
As a percentage of average gross receivables (annualized)
New methodology (A) 5.4%
Prior methodology 5.0 3.6% 3.3%
(A) Beginning in the second quarter of 2000, charge-off and delinquency
statistics reflect the adoption of new charge-off policies for mortgage loans
and leases. Under the new policy, mortgage loans are generally charged-off at
the earlier of foreclosure or 180 days delinquent. The previous policy was the
earlier of foreclosure or 12 months delinquent. Leases are generally charged-off
at 121 days delinquent, however, under the new policy, the timing of the
delinquency measurement was changed from mid-month to month end in the second
quarter of 2000. Cumulative catch-up adjustments included in second quarter
charge-off amounts are not annualized when calculating the annualized charge-off
rates under the new methodologies.
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SEPT. 30, DEC. 31, SEPT. 30,
CONSOLIDATED - OWNED 2000 1999 1999
- --------------------------------------------------------------------------------------------------------------------
Allowance for credit losses $ 64,624 $ 41,847 $ 35,328
Nonperforming assets 49,830 45,620 51,158
Total loans 30 days or more delinquent 74,750 62,850 62,618
As a percentage of gross receivables:
Allowance for credit losses 7.0% 2.8% 3.7%
Nonperforming assets
New methodology (A) 5.4
Prior methodology 6.2 3.1 5.3
Total loans 30 days or more delinquent
New methodology (A) 8.1
Prior methodology 8.9 4.3 6.5
Net charge-offs:
Amount $ 29,351 $ 27,547 $ 19,426
As a percentage of average gross receivables (annualized)
New methodology (A) 2.7%
Prior methodology 2.0 2.4% 2.3%
ADVANTA MORTGAGE LOANS - OWNED
Allowance for credit losses $ 25,073 $ 21,743 $ 16,480
Nonperforming assets 37,713 36,709 42,355
Total loans 30 days or more delinquent 47,996 45,263 45,527
As a percentage of gross receivables:
Allowance for credit losses 7.6% 2.1% 2.6%
Nonperforming assets
New methodology (A) 11.4
Prior methodology 13.3 3.5 6.8
Total loans 30 days or more delinquent
New methodology (A) 14.5
Prior methodology 16.4 4.3 7.3
Net charge-offs - Closed end mortgage loans:
Amount $ 11,234 $ 7,887 $ 5,840
As a percentage of average gross receivables (annualized)
New methodology (A) 1.9%
Prior methodology 1.0 1.2% 1.2%
Net charge-offs - Open end mortgage loans:
Amount $ 1,419 $ 502 $ 183
As a percentage of average gross receivables (annualized)
New methodology (A) 1.3%
Prior methodology .3 .4% .2%
Net charge-offs (recoveries) - Auto Loans:
Amount $ (204) $ 3,732 $ 3,777
As a percentage of average gross receivables (annualized) (4.7%) 25.6% 26.7%
BUSINESS CREDIT CARDS - OWNED
Allowance for credit losses $ 31,164 $ 14,663 $ 10,784
Nonperforming assets 10,922 6,408 5,906
Total loans 30 days or more delinquent 20,722 10,347 7,792
As a percentage of gross receivables:
Allowance for credit losses 6.7% 5.3% 5.6%
Nonperforming assets 2.4 2.3 3.1
Total loans 30 days or more delinquent 4.5 3.8 4.1
Net charge-offs - Business Credit Cards:
Amount $ 12,974 $ 10,103 $ 7,874
As a percentage of average gross receivables (annualized) 4.2% 4.8% 5.1%
LEASES - OWNED
Allowance for credit losses $ 6,056 $ 3,110 $ 3,368
Nonperforming assets 634 1,883 2,440
Total loans 30 days or more delinquent 5,017 5,996 8,456
As a percentage of gross receivables:
Allowance for credit losses 6.0% 2.3% 2.6%
Nonperforming assets
New methodology (A) .6
Prior methodology 1.2 1.4 1.9
Total loans 30 days or more delinquent
New methodology(A) 5.0
Prior methodology 5.6 4.5 6.6
Net charge-offs - Leases:
Amount $ 3,928 $ 2,926 $ 1,721
As a percentage of average gross receivables (annualized)
New methodology (A) 4.8%
Prior methodology 4.1 2.7% 2.1%
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UNUSUAL CHARGES
Employee costs associated with staff reductions
In the first quarter of 1999, we recorded a $3.3 million charge for costs
associated with staff reductions. These expenses included severance and
outplacement costs associated with cost reduction initiatives and the
consolidation of support functions. There were 121 employees severed who were
entitled to benefits. This staff reduction was substantially complete by June
30, 1999. The final payment outstanding related to these severance costs was
paid in the three months ended March 31, 2000.
Employee costs associated with Consumer Credit Card Transaction/Tender Offer
In 1998, we accelerated vesting of 43.15% of outstanding options that were not
vested at the time of the closing of the Consumer Credit Card Transaction. In
connection with the Tender Offer (see Note 15 to the Consolidated Financial
Statements), present and former directors and employees who held exercisable
options to purchase Class A and Class B Common Stock tendered these options in
lieu of first exercising the options and tendering the underlying stock. We used
approximately $850 million, before taking into account the exercise price of
options, to repurchase the shares in the Tender Offer. In addition, we also
amended the terms of options granted to employees who became employees of Fleet
LLC or whose employment with us was otherwise terminated in connection with the
Consumer Credit Card Transaction (the "Affected Employees") to extend the
post-employment exercise period. Although there was a charge to earnings
associated with this amendment, there was no net impact to capital as a result
of this amendment. We also canceled options issued to certain members of the
Board of Directors and replaced the canceled options with stock appreciation
rights.
In March 1997, the Compensation Committee of the Board of Directors approved the
Advanta Senior Management Change of Control Severance Plan which provides
benefits to senior management employees in the event of a change of control of
Advanta if, within one year of the date of a change of control, there has been
either an actual or constructive termination of the senior management employee.
In February 1998, pursuant to our agreement with Fleet, the Compensation
Committee approved an amendment to the management severance plan that allows the
Office of the Chairman, in its sole discretion, to extend the level of benefits
that would otherwise be allowed in the event of a change of control to Affected
Employees. The Board of Directors also authorized the Chairman of the Board, in
his sole discretion, to pay bonuses to certain key employees in recognition of
their efforts on behalf of Advanta in the consumer credit card business
strategic alternatives process. In accordance with our agreement with Fleet,
Fleet LLC agreed to assume Advanta's management severance plan and 50% of the
bonus payments with respect to those Affected Employees who became employees of
Fleet LLC in connection with the Consumer Credit Card Transaction. In May 1997,
the Board of Directors adopted the Office of the Chairman Supplemental
Compensation Program which entitled the members of the Office of the Chairman to
receive benefits in the event of a change of control or other similar
transaction. In October 1997, we announced that the Chief Executive Officer of
Advanta Corp. and the Chief Executive Officer of the consumer credit card
business unit were leaving Advanta in connection with the Consumer Credit Card
Transaction. These benefits were all contingent upon the consummation of the
Consumer Credit Card Transaction and were recognized upon the closing of the
transaction.
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In connection with our evaluation of consumer credit card business strategic
alternatives and the Consumer Credit Card Transaction, we adopted special
retention programs. Under these programs, certain employees were entitled to
receive special payments based on their targeted bonuses and contingent upon
their continued employment with Advanta or a successor entity. The first
payments under the special retention programs were made in March 1998. Further,
in March 1998, we identified employees that would be terminated in connection
with the Consumer Credit Card Transaction as part of the corporate restructuring
to reduce corporate expenses. During the first quarter of 1998, the Board of
Directors approved the corporate restructuring and affected employees were
informed of the termination benefits they would receive. Substantially all of
these employees ceased employment with Advanta before April 30, 1998.
We recorded a $62.3 million pretax charge to earnings in connection with the
foregoing plans, plan amendments and workforce reduction activities in 1998. The
final payment outstanding related to these employee costs was paid in the three
months ended March 31, 2000.
Expense Associated with Exited Businesses/Products
In the first quarter of 1999, we implemented a plan to cease the origination of
auto loans and recorded a $3.4 million charge for costs associated with exited
businesses/products. The charges included severance and outplacement costs for
22 employees in the auto origination group, and professional fees associated
with exited businesses/products not directly associated with our mortgage,
business credit card and leasing units. We completed the closing of the auto
loan origination center and termination of related employees during the second
quarter of 1999. We expect to pay a substantial portion of the remaining costs
during the year ended December 31, 2000.
In connection with our efforts to reduce expenses associated with business and
product offerings which are not directly associated with our mortgage, business
credit card and leasing units, management approved exit and disposition plans
during the first quarter of 1998 related to certain businesses and products
previously offered. We recorded charges in the quarter ended March 31, 1998
related to costs to be incurred by us in executing these plans, including
contractual obligations to customers for which no future revenue will be
received, and contractual vendor obligations for services from which no future
benefit will be derived. The charges also include termination benefits to
employees associated with the businesses and products identified in the exit
plan. Related to the exit plan, certain assets were identified for disposal and
written down to estimated realizable value. In addition, we recognized
investment banking, professional and consulting fees that were contingent upon
completion of the Consumer Credit Card Transaction as well as other professional
and consulting fees associated with our corporate restructuring. During the
quarter ended March 31, 1998, we recorded a $54.1 million pretax charge to
earnings in connection with these exit plans. In 1999, an additional charge of
$10.0 million was recorded associated with exited products based on a change in
the estimate of total expected costs. We expect to pay a substantial portion of
these costs over the next 27 months. The actions required to complete these
plans include the settlement of contractual commitments and the payment of
customer benefits.
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INCOME TAXES
As a result of the carrying value adjustments in the three months ended June 30,
2000, described in Note 2 to the Consolidated Financial Statements, we reported
a pretax loss for the nine months ended September 30, 2000. A valuation
allowance has been provided against the resulting deferred tax asset given our
pre-existing net operating loss carryforwards and the uncertainty of the
realizability of the incremental deferred tax asset. In establishing the
valuation allowance, management considered (1) the level of expected future
taxable income, (2) existing and projected book/tax differences, (3) tax
planning strategies available, and (4) the general and industry specific
economic outlook. Based on this analysis, management believes the net deferred
tax asset as of September 30, 2000 will be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, cannot be applied retroactively and will be adopted as required
January 1, 2001. We anticipate that the adoption of SFAS No. 133 will not have a
material effect on the results of operations; however, we continue to monitor
potential changes and implementation guidance to this new accounting standard.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities- a Replacement
of FASB Statement No. 125." SFAS No. 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without amendment. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. We anticipate that
the adoption of SFAS No. 140 will not have a material effect on our results of
operations.
ASSET/LIABILITY MANAGEMENT
We manage our financial condition with a focus on maintaining disciplined
management of market risks and prudent levels of leverage and liquidity.
MARKET RISK SENSITIVITY
We measure our interest rate risk using a rising rate scenario and a declining
rate scenario. Net interest income is estimated using a third party software
model that uses standard income modeling techniques. We estimate that at
September 30, 2000, our net interest income over a twelve-month period would
increase or decrease by approximately 1% if interest rates were to rise or fall
by 200 basis points. Both increasing and decreasing rate scenarios assume an
instantaneous shift in rates and measure the corresponding change in expected
net interest income over one year.
The above estimates of net interest income sensitivity alone do not provide a
comprehensive view of our exposure to interest rate risk. The quantitative risk
information is limited by the parameters and assumptions utilized in generating
the results. These analyses are useful only when viewed within the context of
the parameters and assumptions used. The above rate scenarios in no way reflect
management's expectation regarding the future direction of interest rates, and
they depict only two possibilities out of a large set of possible scenarios.
In addition to interest rate risk, we are subject to prepayment risk related to
other financial instruments, namely servicing rights and retained interest-only
strips. Prepayments are principal payments received in excess of scheduled
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principal payments. Prepayments generally result from entire loan payoffs due
largely to refinancing a loan or selling a home. Actual or anticipated
prepayment rates are expressed in terms of a constant prepayment rate, which
represents the annual percentage of beginning loan balances that prepay. To a
degree, prepayment rates are related to market interest rates and changes in
those interest rates. The relationship between them, however, is not precisely
determinable. Accordingly, we believe it is more relevant to disclose the fair
value sensitivity of these instruments based on changes in prepayment rate
assumptions rather than based on changes in interest rates.
Our servicing rights and interest-only strips are derived from both fixed and
variable rate loans, the majority of which are fixed. Fixed and variable rate
loans are currently prepaying at different rates, which is expected to continue
in the future. We have estimated the impact on the fair value of these assets
assuming a 2.0% change in constant prepayment rate for fixed rate loans and a
3.1% change in constant prepayment rate for variable rate loans. We have
estimated that these changes in prepayment assumptions could result in a $24
million change in the combined fair value of these assets as of September 30,
2000. These estimates do not factor in the impact of changes in the interest
rate environment associated with the changes in the prepayment rates. Changes in
interest rates generally affect the level of loan originations. The estimates
also assume credit losses are held constant. Prepayment assumptions are not the
only assumptions in the fair value calculation for these assets. Other key
assumptions are not directly impacted by market forces, as defined earlier. The
above prepayment scenarios do not reflect management's expectation regarding the
future direction of prepayments, and they depict only two possibilities out of a
large set of possible scenarios.
DERIVATIVES ACTIVITIES
The following table summarizes by notional amounts our derivative instruments as
of September 30, 2000 and December 31, 1999 ($ in thousands):
ESTIMATED
FAIR VALUE
SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, 2000 ASSET/
2000 1999 (LIABILITY)
- ------------------------------------------------------------------------------------
Interest rate swaps $2,345,977 $2,975,086 $ 14,813
Interest rate caps written 344,367 409,278 (1,381)
Interest rate caps purchased 344,367 409,278 1,381
Put options purchased 161,000 156,000 181
Forward contracts 276,000 565,000 (836)
- ------------------------------------------------------------------------------------
Total $3,471,711 $4,514,642 $ 14,158
====================================================================================
The notional amounts of derivatives do not represent amounts exchanged by the
counterparties and, thus, are not a measure of our exposure through our use of
derivatives. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the derivative contracts.
The fair value of interest rate swaps, options and forward contracts is the
estimated amount that we would pay or receive to terminate the agreement at the
reporting date, taking into account current interest rates and the current
creditworthiness of the counterparty.
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Our credit exposure to derivatives, with the exception of caps written, is
represented by contracts with a positive fair value without giving consideration
to the value of any collateral exchanged. For caps written, credit exposure does
not exist since the counterparty has performed its obligation to pay us a
premium payment.
LIQUIDITY AND CAPITAL RESOURCES
Our goal is to maintain an adequate level of liquidity, for both long-term and
short-term needs, through active management of both assets and liabilities.
During the nine months ended September 30, 2000, we securitized or sold
approximately $2.0 billion of Advanta Mortgage loans, $293 million of business
credit cards and $304 million of leases. We temporarily invested cash generated
from these transactions in short-term, high quality investments at money market
rates pending redeployment to pay down borrowings and to fund future mortgage
loan, business credit card and lease receivable growth. At September 30, 2000,
we had $107 million of federal funds sold, $581 million of loan and lease
receivables held for sale, and $657 million of investments that could be sold to
generate additional liquidity. Equity, including capital securities, was $533
million at September 30, 2000.
Our funding strategy relies on cash, cash equivalents and investments as well as
deposit gathering activity at Advanta National Bank and Advanta Bank Corp.
(together, the "banks"), unsecured debt of Advanta Corp., and securitizations.
We use both retail and institutional on-balance sheet funding sources. During
the three months ended September 30, 2000, we completed our first public
business credit card securitization, adding to our funding diversification. We
have the ability to issue a variety of debt securities and, through the banks,
deposit products. Our regulatory agreements established temporary deposit growth
limits at Advanta Bank Corp. and imposed restrictions on taking brokered
deposits at Advanta National Bank. As of September 30, 2000, Advanta National
Bank's total deposits were $929 million and Advanta Bank Corp.'s total deposits
were $601 million.
After paying down $172 million in medium term notes in the nine months ended
September 30, 2000, we had approximately $220 million of unrestricted cash, cash
equivalents and marketable securities at the parent company level at September
30, 2000. At September 30, 2000, the parent company's assets include advances to
wholly-owned non-bank subsidiaries to fund $80 million in loans, $213 million in
retained interest-only strips, subordinated trust assets and contractual
mortgage servicing rights, and $49 million of equity securities accounted for at
fair value.
At September 30, 2000, we had a $500 million committed warehouse financing
facility for mortgage loans. At September 30, 2000, we had additional
uncommitted warehouse financing facilities for mortgage loans of $550 million.
At September 30, 2000, we had $280 million of committed commercial paper
facilities for business credit card receivables and a $200 million uncommitted
repurchase agreement facility for business credit card receivables. At September
30, 2000, we had a $360 million committed commercial paper facility for lease
contracts and lease residuals. At September 30, 2000, we had available $1.1
billion in unused warehouse financing facilities and commercial paper conduit
facilities.
We also offer unsecured debt of Advanta Corp. to retail investors through the
Advanta Retail Note Program. In addition, notwithstanding our current liquidity,
efforts continue to develop new sources of funding, both through previously
untapped customer segments and through development of new financing structures.
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At September 30, 2000, Advanta National Bank's combined total capital ratio
(combined Tier I and Tier II capital) was 15.41% and Advanta Bank Corp.'s
combined total capital ratio was 12.64%. At December 31, 1999, Advanta National
Bank's combined total capital ratio (combined Tier I and Tier II capital) was
14.86%, and Advanta Bank Corp.'s combined total capital ratio was 13.28%. In
each case, Advanta National Bank and Advanta Bank Corp. had capital at levels a
bank is required to maintain to be classified as "well-capitalized" under the
regulatory framework for prompt corrective action. However, Advanta National
Bank does not meet the definition of "well-capitalized" because of the existence
of the agreement with the Office of the Comptroller of the Currency. Our
regulatory agreement with the Office of the Comptroller of the Currency required
that Advanta National Bank achieve by September 30, 2000 and thereafter maintain
a ratio of 14% of Tier 1 capital to risk-weighted assets and a ratio of 17% of
Tier 1 capital to adjusted total assets. We achieved these ratios, as defined
within the agreement, through a combination of decreasing the assets at Advanta
National Bank and making aggregate capital contributions and other investments
in Advanta National Bank of approximately $70 million.
Recently, an FDIC discussion draft proposal has been made public regarding
capital requirements for subprime lenders. Under the proposal, regulatory
capital required to be held for certain loan classes included in the
institution's portfolio could be increased. In a separate draft proposal issued
jointly by the regulatory agencies, dated August 7, 2000, capital requirements
associated with certain residual interests would be amended to require capital
equal to the residual retained, regardless of recourse levels. Further, the
proposal requires residuals in excess of 25% of Tier 1 capital to be treated as
a deduction of Tier 1 capital for purposes of risk based and leverage capital
calculations. The ultimate resolution of these proposals and their impact on
financial results is uncertain at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is set forth in "Item 2-Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Report on Form 10-Q. See "Asset/Liability Management-Market Risk
Sensitivity."
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PART II - OTHER INFORMATION
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 24, 2000, was filed
by Advanta delaying its previously scheduled July 25th
conference call with analysts and investors until August 2,
2000, due to ongoing discussions with bank regulators
regarding adjustments to the valuation of residual assets
and allowance for credit losses for the mortgage business.
(b)(2) A Current Report on Form 8-K, dated July 31, 2000, was filed
announcing that Advanta's bank subsidiary, Advanta National
Bank, had concluded discussions and signed an agreement with
the Office of the Comptroller of the Currency regarding the
carrying value of Advanta National Bank's retained interests
in mortgage securitizations and allowance for credit losses.
(b)(3) A Current Report on Form 8-K, dated August 2, 2000, was
filed by Advanta setting forth the financial highlights of
Advanta's results of operations for the three months ended
June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Advanta Corp.
(Registrant)
November 14, 2000 By /s/Philip M. Browne
-------------------
Senior Vice President and
Chief Financial Officer
November 14, 2000 By /s/James L. Shreero
-------------------
Vice President and
Chief Accounting Officer
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit 12 Consolidated Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
45