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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ X / Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required] for the
fiscal year ended December 31, 1994 or
/ / Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
for the transition period from_____________to
____________
Commission File No. 0-14120
Advanta Corp.
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(Exact name of Registrant as specified in its Charter)
Delaware 23-1462070
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
organization)
Brandywine Corporate Center, 650 Naamans Road, Claymont, Delaware 19703
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 791-4400
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Class B Common Stock, $.01 par value
- ------------------------------------------------------------------------------
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K / /.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing. (See definition of affiliate in Rule 405.)
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Advanta Corp. and Subsidiaries
$ 400,865,321.50 as of March 1, 1995 which amount excludes the value
of all shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the Company (however, this
does not constitute a representation or acknowledgment that any of such
individuals is an affiliate of the Registrant).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 3, 1995 there were 17,355,778 shares of the Registrant's
Class A Common Stock, $.01 par value, outstanding and 23,185,692 shares of the
Registrant's Class B Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or information statement; and (3) Any prospectus filed pursuant to Rule
424(b) or (e) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
Document Form 10-K Reference
- -------- -------------------
Definitive Proxy Statement relating to the Part III, Items 10-13
Registrant's 1995 Annual Meeting of
Stockholders, to be filed pursuant to
Regulation 14A not later than 120 days
following the end of the Registrant's
last fiscal year, and referred
to herein as the "Proxy Statement".
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Advanta Corp. and Subsidiaries
PART I
ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. (the "Company") is a highly focused direct marketer of select
consumer financial services. The Company primarily originates and services
credit cards and mortgage loans. Other businesses include small ticket
equipment leasing, credit insurance and deposit products. At year end 1994,
assets under management totaled $9.3 billion.
Approximately 78% of total revenues are derived from credit cards
marketed through carefully targeted direct mail campaigns. By focusing
primarily on the no fee gold card, the Company has successfully grown to one of
the ten largest issuers of gold cards. Mortgage services contribute 9% of
total revenues with a managed loan portfolio of $1.3 billion. Mortgage loans
are originated through a network of branch offices, a direct originations
center and correspondent relationships.
The Company was incorporated in Delaware in 1974 as Teachers Service
Organization, Inc., the successor to a business originally founded in 1951. In
January 1988, the Company's name was changed from TSO Financial Corp. to
Advanta Corp. The Company's principal executive office is located at
Brandywine Corporate Center, 650 Naamans Road, Claymont, Delaware 19703. Its
principal operating office is located at Five Horsham Business Center, 300
Welsh Road, Horsham, Pennsylvania 19044-0749. The Company's telephone numbers
at its principal executive and operating offices are, respectively, (302)
791-4400 and (215) 657-4000. References to the Company in this Report include
its consolidated subsidiaries unless the context otherwise requires.
CREDIT CARDS
The Company, which has been in the credit card business since 1983, issues gold
and standard MasterCard(R)** MasterCard(R) is a federally registered
servicemark of MasterCard International, Inc.; VISA(R) is a federally
registered servicemark of VISA, U.S.A., Inc. and VISA(R) credit cards
nationwide. The Company has built a substantial cardholder base which, as of
December 31, 1994, totaled 3.8 million accounts and $6.5 billion in managed
receivables. According to industry statistics, the Company is one of the ten
largest issuers of gold cards. Both gold and standard accounts undergo the
same credit analysis, but gold accounts have higher initial credit limits
because of the cardholders' better credit quality. In addition, gold accounts
generally offer a wider variety of services to cardholders.
The primary method of account acquisition is direct mail solicitation.
The Company generally uses credit scoring by independent third parties and a
proprietary market segmentation and targeting model to target its mailings to
profitable segments of the market.
In 1982, the Company acquired Colonial National Bank USA ("Colonial
National"). As a national bank, Colonial National has the ability to make
loans to consumers without many of the restrictions found in various state
usury and licensing laws, to negotiate variable rate loans, to generate funds
economically in the form of deposits insured by the Federal Deposit Insurance
Corporation ("FDIC"), and to include in its product mix a MasterCard and VISA
credit card program. Substantially all of the Company's credit card
receivables and bank deposits are originated by Colonial National.
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* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.; VISA(R) is a federally registered servicemark of VISA,
U.S.A., Inc.
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MasterCard and VISA license banks, such as Colonial National and other
financial institutions, to issue credit cards using their trademarks and to
utilize their interchange networks. Cardholders may use their cards to make
purchases at participating merchants or to obtain cash advances at
participating financial institutions. Cardholders may also use special credit
line drafts issued by Colonial National to draw against their Visa or
MasterCard credit lines for cash, purchases or balance transfers. Each
purchase is submitted to a merchant bank which remits to the merchant the
purchase amount less a merchant discount fee, and submits the purchase to the
card issuing bank for payment through the interchange system. The card issuing
bank receives an interchange fee as compensation for the funding and credit
risk that it takes when its customers use its credit card. MasterCard or VISA
sets the interchange fee as a percentage of each card transaction (currently
approximately 1.4%).
The Company generates interest and other income from its credit card
business through finance charges assessed on outstanding loans, interchange
income, cash advance and other credit card fees, and securitization income as
described below. Credit card income also includes fees paid by credit card
customers for product enhancements they may select, and revenues paid to
Colonial National by third parties for the right to market their products to
the Company's credit card customers.
Most of the Company's MasterCard and VISA credit cards carry no annual
fee, and those credit cards which do include an annual fee generally have lower
fees than those charged by many of the Company's competitors. The Company
believes that this characteristic of no or low annual fee credit cards has
appealed to consumers, and that the Company's credit cards have also appealed
to consumers because of their competitive interest rates, quality service,
payment terms and credit lines.
While the Company believes that its credit card offers will continue
to appeal to consumers for the reasons stated, the Company also notes that
competition is increasing in the credit card industry. At the same time, the
American people are becoming generally more sophisticated and demanding users
of credit. These forces are likely to produce significant changes in the
industry; in recent years they have resulted in slower growth and lower yields
for the industry, and these trends may continue. The Company is devoting
substantial resources to meeting the challenges, and taking advantage of the
opportunities, which management sees emerging in the industry. In 1994, this
included significant focus on balance transfer initiatives, in which the
Company encouraged consumers to transfer account balances they were maintaining
with other credit card issuers to a Colonial National account with a lower
interest rate. Approximately one-half of the growth in the Company's managed
credit card receivables in 1994 resulted from balance transfers. The Company
intends to continue exploring new approaches to the credit card market.
The interest rates on the majority of the Company's credit card
receivables are variable, tied to the prime rate. This helps the Company
maintain net interest margins in both rising and declining interest rate
environments. As Delaware, Colonial National's state of domicile, does not
have a usury ceiling applicable to banks, there is no statutory maximum
interest rate that the Company may charge its credit cardholders, nor does
Delaware law limit the amount of any annual fees, late charges and other
ancillary charges which may be assessed. While the state in which an
individual cardholder resides may seek to regulate the annual fees and
ancillary charges which Colonial National may charge to that state's residents,
the enforceability of such regulation is unclear and is currently the subject
of litigation in certain states. At the present time, the only Federal
appellate decision addressing this issue held such regulation to be
unenforceable. See "Government Regulation--Colonial National."
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The following table shows the geographic distribution by state of
total managed credit card receivables among the top five states, together with
the impaired credit card receivables in those states, as of December 31, 1994.
PERCENT OF PERCENT OF PERCENT OF
CREDIT TOTAL TOTAL IMPAIRED TO
CARD TOTAL PORTFOLIO IMPAIRED TOTAL
RECEIVABLES IMPAIRED BY STATE BY STATE RECEIVABLES
----------- -------- -------- -------- -----------
(Dollars in millions)
California $ 1,125.8 $12.6 17.2% 23.0% .2%
New York 460.8 4.9 7.0 8.9 .1
Texas 420.3 4.3 6.4 7.8 .1
Florida 369.8 4.0 5.7 7.3 .0
Illinois 304.9 2.4 4.7 4.4 .0
Other 3,856.8 26.7 59.0 48.6 .4
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--
TOTAL $ 6,538.4 $ 54.9 100.0% 100.0% .8%
============= ========== ========= ========== =========
Since 1988, Colonial National has been active in the credit card
securitization market, securitizing $2.2 billion of credit card receivables in
1994 and $5.4 billion since 1988. The Company continues to recognize income on
a monthly basis from the securitized receivables. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Notes 1 and
3 of the Notes to Consolidated Financial Statements.
Colonial National's securitization program provides a number of
benefits: diversifying its funding base, providing liquidity, reducing the
bank's regulatory capital requirements, lowering its cost of funds, providing a
source of variable rate funding to complement the variable rate credit card
portfolio and helping to limit the on-balance sheet growth of Colonial National
to not more than 7% per annum. See "Government Regulation--The Company."
Furthermore, Colonial National continues to own the credit card accounts and
customer relationships, which the Company believes continue to build
significant long-term value. While the Company believes that securitization
will continue to be a reliable source of funding, there is no assurance that
the Company will be able to continue securitizations in amounts or under terms
comparable to its securitizations to date.
A securitization involves the transfer by the Company of the
receivables generated by a pool of credit card accounts to a securitization
trust. Certificates issued by the trust and sold to investors represent
undivided ownership interests in receivables transferred to the trust. The
securitization results in removal of receivables from the Company's balance
sheet for financial and regulatory accounting purposes. For tax purposes, the
investor certificates are characterized as a collateralized debt financing of
the Company.
The trust receives finance and other charges paid by the credit card
customers and pays a rate of return on a monthly basis to the certificate
holders. While in most cases the rate of return paid to investors is variable
in order to match the pricing dynamics of the underlying receivables, the
Company also uses fixed rate securitizations in certain circumstances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management." Credit losses on the securitized
receivables are paid from the funds in the trust. The Company continues to
service the accounts for a fee, generally two percent per annum of the
securitized receivables. Excess funds (defined as finance charges plus
miscellaneous fees less interest paid to certificate holders, credit losses and
servicing fees) are first retained to build up a reserve fund to a certain
level, after which amounts are remitted to the Company. The Company's
relationship with its credit card customers is not affected by the
securitization.
Investors in the trust receive payments only of interest during the
first two to four years of the trust. Thereafter, an amortization period
(generally between six and ten months) commences, during which the certificate
holders are entitled to payment of principal and interest. Acceleration of the
commencement of the amortization period (which may occur in limited
circumstances) on a securitization would accelerate the Company's funding
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Advanta Corp. and Subsidiaries
requirement. Upon full repayment of principal to the certificate holders,
whether as a result of normal or accelerated amortization, the trust's lien on
the accounts terminates and all related receivables and funds held in the
trust, including the reserve fund, are transferred to the Company.
In February 1995, Advanta National Bank ("ANB"), a new federally
chartered institution organized by the Company, opened for business.
Currently, ANB assets do not represent a significant portion of the Company's
assets. However, the Company does anticipate that ANB will, in the future,
become the originator of a substantial portion of the Company's credit card
assets.
MORTGAGE LOANS
The Company's subsidiary, Advanta Mortgage Corp. USA ("Advanta Mortgage"),
originates, purchases, securitizes and services non-conforming credit first and
second mortgage loans for itself and for Colonial National's "Advanta Mortgage
USA" Division. Loan production is generated through a centralized direct
origination center, a broker network serviced by selected sales locations, and
correspondent relationships.
Advanta Mortgage and Colonial National originate or purchase loans and
then sell or securitize them, generally retaining servicing rights and the
related excess cash flows. Consequently, the mortgage loan receivables on the
Company's balance sheet are generally its most recently originated loans being
held for sale. Thus, while mortgage loan receivables owned at December 31,
1994 were $143 million, during 1994 the Company originated or purchased $493
million and securitized $456 million of such receivables. At the time the
receivables are sold or securitized, the Company recognizes a gain which is
included in its mortgage banking income. See Note 1 to the Consolidated
Financial Statements.
While the Company has not historically offered mortgage lines of
credit, which involve the extension of a revolving amount of credit to a
borrower, the Company is planning to offer a home equity line of credit product
beginning in 1995. The Company is also in the process of establishing a new
consumer finance company, Advanta Finance Corp., which will provide another
loan origination source, with loans marketed directly to the consumer through a
branch office system. The first Advanta Finance Corp. branch offices will open
in the first half of 1995.
Advanta Mortgage services Colonial National's mortgage loan portfolio,
packages Colonial National's mortgage loans for sale, and performs the
servicing on loans sold by Colonial National where Colonial National retains
the servicing rights and obligations. In addition, Advanta Mortgage performs
fee-based servicing on loans originated and owned by unrelated third party
mortgage lenders. Therefore, Advanta Mortgage and Colonial National's Advanta
Mortgage USA Division have the following basic sources of income: net interest
income on loans outstanding pending their sale, gains on sales and
securitizations of loans, and loan servicing fees. The Company generally
charges loan origination fees and incurs certain direct costs associated with
loan originations. These fees and costs are netted against the gain income
when the mortgage loans are sold. Interest income earned on loans prior to
their sale or securitization is included in the Company's interest revenues, as
detailed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Net Interest Income."
Advanta Mortgage and Colonial National began securitizing mortgage
loans in 1988, when they privately placed with institutional investors $72
million of certificates representing fractional ownership interests in
securitization trusts. Since 1991, Advanta Mortgage and Colonial National have
securitized loans through publicly offered mortgage securitization
transactions. They publicly securitized $385 million in 1992, $608 million in
1993 and $456 million in 1994.
A securitization involves the transfer of specified pools of mortgage
loans to a trust which issues certificates representing undivided ownership
interests in the loans. The Company acts as servicing agent for the trust,
providing customer service and collection efforts, and receives loan servicing
fees equal to .5% per annum of the securitized receivables. Finance and other
charges paid to the trust are used to pay the investors interest on their
certificates and other costs of the trust. Excess amounts, net of credit
losses, are ultimately paid to the Company. Credit losses on the securitized
loans reduce the amount of these payments to the Company.
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Significant differences from the Company's credit card securitizations,
however, include: (1) while in most cases the credit card securitization
certificates pay a variable interest rate (which complements the variable rate
pricing on the Company's credit cards), the mortgage securitization
certificates generally carry a fixed rate of interest (as do most of the
mortgage loans held by the trust), and (2) payments to investors in the
mortgage loan securitizations include both principal and interest from the
outset, since the loans held by the trust are not revolving credit lines.
At December 31, 1994, Advanta Mortgage and Colonial National had
approximately $143 million of mortgage loan receivables outstanding secured by
mortgages. Additionally, as of that date, Advanta Mortgage was servicing
approximately $1.2 billion in mortgage loans sold by the Company's
subsidiaries, as well as $190 million of "contract servicing" receivables.
Contract servicing receivables are not included in the Company's "managed
portfolio," as the performance of such loans does not have a material impact on
either the Company's net income or its credit risk profile. In contrast, the
performance of the managed portfolio, including loans sold by the Company, can
materially impact ongoing mortgage banking income. See Note 1 to the
Consolidated Financial Statements.
Approximately 71% of the managed portfolio is secured by first
mortgages and the balance is secured by second mortgages. At December 31,
1994, total mortgage loans managed, and the nonperforming loans included in
these totals, are concentrated in the following five states:
PERCENT OF
PERCENT OF PERCENT OF NONPERFORMING
MORTGAGE TOTAL PORTFOLIO BY NONPERFORMING TO TOTAL
RECEIVABLES NONPERFORMING STATE BY STATE RECEIVABLES
----------- ------------- --------- -------- -----------
(Dollars in
millions)
California $316.3 $7.5 23.5% 16.8% 0.5%
New York 165.1 7.8 12.3 17.5 0.6
New Jersey 154.0 11.8 11.4 26.4 0.9
Maryland 138.1 3.5 10.3 7.8 0.3
Pennsylvania 107.6 4.2 8.0 9.4 0.3
Other 465.0 9.9 34.5 22.1 0.7
----- --- ---- ---- ---
TOTAL $1,346.1 $44.7 100.0% 100.0% 3.3%
======== ===== ====== ====== ====
Geographic concentration carries a risk of increased delinquency
and/or loss if an area suffers an economic downturn. Advanta Mortgage monitors
economic conditions in those regions through market and trend analyses. A
Credit Policy Committee meets through the year to update lending policies based
on the results of analyses, which may include abandoning lending activities in
economically unstable areas of the country. The Company believes that the
concentrations of nonperforming loans reflected in the preceding table are not
necessarily reflective of general economic conditions in each region, but
rather reflect the credit risk inherent in the different grades of loans
originated in each area. The interest rate charged and the maximum
loan-to-value ratio permitted with respect to each grade of loans are adjusted
to compensate for the credit risk inherent in that loan grade. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Credit Losses" and "-- Credit Risk Management --
Asset Quality."
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EQUIPMENT LEASING AND OTHER SMALL BUSINESS SERVICES
The Company's subsidiary, Advanta Business Services ("ABS"), formerly Advanta
Leasing Corp., engages primarily in non-cancelable financing leases of
equipment, including computers, fax machines, copiers and commercial cleaning
equipment, primarily to professionals and small businesses. The average initial
cost of leased equipment is approximately $7,000. Costs relating to equipment
maintenance, insurance and personal property taxes are the responsibility of
the lessee. In October 1991, ABS closed its first securitization of lease
receivables with a private placement of $74.5 million of certificates and
closed a similar transaction in the amount of $53 million in September 1992.
ABS securitized $68 million and $102 million of lease receivables in 1993 and
1994, respectively. Securitization of lease receivables is substantially
similar to mortgage loan securitization as described above, except that the
servicing fee payable to ABS is 1.25% per annum of the securitized lease
receivables.
In the third quarter of 1994, ABS began marketing business credit
cards which are issued through Advanta Financial Corp. ("AFC"), formerly known
as Colonial National Finance Corp., to its small business customers. As of
December 31, 1994, the receivables on these cards issued were immaterial to the
Company.
The Company anticipates ABS's origination volume increasing in 1995.
ABS's 1994 originations, including $29 million of portfolio acquisitions,
totaled $190 million. At December 31, 1994, ABS serviced a portfolio of $265
million of net lease receivables, including $179 million of securitized
receivables
CREDIT INSURANCE AND CREDIT PROTECTION
Through unaffiliated insurance carriers, the Company offers credit life,
disability and unemployment insurance to its credit cardholders and credit life
insurance and a limited life/disability/unemployment insurance product to its
mortgage loan customers. The unaffiliated insurers reinsure 100% of the risk
on the credit card credit and limited mortgage life, disability and
unemployment insurance (but not the mortgage loan credit life insurance) with
one or more of the Company's insurance subsidiaries. Such subsidiaries receive
reinsurance premiums approximating 94% of the net premiums written. The
subsidiaries are obligated to pay all losses and refunds, and have amounts
withheld by the insurance carriers or maintain amounts in separate trust
accounts for the benefit of these insurance carriers in an amount equal to
statutory reserves as defined by the reinsurance agreements. In addition, in
1992, one of the insurance subsidiaries began direct underwriting of an
indemnity policy protecting certain interests in the business equipment leased
to customers of ABS against sudden and accidental loss.
The credit card credit life insurance insures the life of the borrower
(and any joint borrower) and provides for the payment to the primary
beneficiary (the lender) in the event of the borrower's death, an amount equal
to the unpaid loan balance and accrued interest (subject to a maximum amount
equal to the lesser of the borrower's balance at the date of death or $5,000).
The credit disability and unemployment insurance pays the minimum monthly
payment required by the credit card loan with respect to the debt outstanding
at the commencement of a period of the primary borrower's disability or
unemployment until the time the customer is able to return to work up to a
maximum amount equal to the lesser of the borrower's balance at the date of
unemployment or disability or $5,000.
Commencing in 1992, Colonial National began offering its credit card
customers in certain states the option to purchase a debt cancellation
agreement entitled Credit Protection Plus(R). Under the terms of the contract,
Colonial National will forgive the borrower's balance in the event of the death
or permanent disability of either the primary or joint credit card borrower up
to the lesser of $10,000, the customer's balance or the customer's credit
limit at the time of death or disability. In addition, Colonial National will
freeze the contractual principal payment obligation and waive all interest and
service fees in the event that either the primary or joint
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Advanta Corp. and Subsidiaries
credit card borrower is unable to work due to involuntary unemployment or
short-term disability, commencing from the period of unemployment or
disability and extending to the lesser of twelve months or the time the customer
is able to return to work. Colonial National has purchased insurance protection
against excess losses incurred for providing these services, which insurance
protection is directly underwritten by one of the Company's insurance
subsidiaries.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured savings and transaction accounts through
Colonial National, and offers uninsured investment products through the direct
and brokered public sale of its debt securities. Bank deposit services
include demand deposits, money market savings accounts, statement savings
accounts, retail certificates of deposit, and large denomination certificates
of deposit (certificates of $100,000 or more). During 1993, both the senior
debt securities of Advanta Corp. and the senior debt securities and deposits of
Colonial National achieved investment-grade ratings from the nationally
recognized rating agencies. These ratings have allowed the Company to further
diversify its funding sources. In November 1993, the Company filed a shelf
registration statement with the Securities and Exchange Commission for $1
billion of senior debt securities, and subsequently sold $150 million of
three-year notes in an underwritten transaction. The Company established a
$500 million medium-term note program, Series A, under this registration
statement. As of March 1, 1995, all of the Series A notes have been issued.
In addition, the Company established a $350 million medium-term note program,
Series B, of which $15 million has been issued as of March 1, 1995.
Consumer deposit business at Colonial National is generated from
repeat sales to existing customers and new deposits from individuals attracted
by newspaper advertising and direct mail solicitations. Also, Colonial
National offers retail certificates of deposit to customers through several
nationally recognized broker/dealer firms which offer "Master Certificate of
Deposit" programs to banks throughout the nation. Under these programs, the
customers of the broker/dealer firms may purchase Colonial National
certificates of deposit in $1,000 increments, from $1,000 to $100,000. The
award of investment grade ratings to Colonial National's senior debt securities
has allowed the bank to acquire additional sources of institutional funds
through both deposit and non-deposit products. Colonial National has
established a $500 million short-term note program, whereby debt of Colonial
National is sold to institutional investors. Under this program, $85 million
was issued and outstanding as of December 31, 1994. Together, these various
programs provide Colonial National and Advanta with diverse cost effective
sources of funding. Additionally, in 1994 further diversification was achieved
when the Company obtained revolving credit facilities totaling $255 million
from a consortium of banks and $255 million in money market bid lines.
Investments in the Company's senior debt securities are marketed
primarily to institutional investors through underwritten offerings as well as
direct placements pursuant to the Company's medium-term note and Colonial
National's short-term note programs. Investments in the Company's subordinated
debt securities are generated from newspaper advertisements and direct mail
marketing efforts to existing and prospective investors. These subordinated
debt securities historically have been and continue to be offered to investors
with a variety of maturities (currently ranging from demand to five years) and
yield options. Further, a wholly-owned subsidiary of the Company, Advanta
Financial Corp. ("AFC"), began taking deposits in the form of certificates of
deposit in January 1992. AFC is an FDIC-insured industrial loan corporation
organized under the laws of the State of Utah. The activities of AFC are not
currently material to the Company's business.
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GOVERNMENT REGULATION
THE COMPANY
The Company is not required to register as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company owns
Colonial National, which is a "bank" as defined under the BHCA as amended by
the Competitive Equality Banking Act of 1987 ("CEBA"). However, under certain
grandfathering provisions of CEBA, the Company is not required to register as a
bank holding company under the BHCA, because Colonial National, which takes
demand deposits but does not make commercial loans, did not come within the
BHCA's definition of the term "bank" prior to the enactment of CEBA and it
complies with certain restrictions set forth in CEBA, such as limiting its
activities to those in which it was engaged prior to March 5, 1987 and limiting
its growth rate to not more than 7% per annum. Such restrictions also prohibit
Colonial National from cross-marketing products or services of an affiliate
that are not permissible for bank holding companies under the BHCA. In
addition, the Company complies with certain other restrictions set forth in
CEBA, such as not acquiring control of more than 5% of the stock or assets of
an additional "bank" or "savings association" as defined for these purposes
under the BHCA. Consequently, the Company is not subject to examination by the
Federal Reserve Board (other than for purposes of assuring continued compliance
with the CEBA restrictions referenced in this paragraph). Should the Company
or Colonial National cease complying with the restrictions set forth in CEBA,
registration as a bank holding company under the BHCA would be required.
Registration as a bank holding company is not automatic. The Federal
Reserve Board may deny an application if it determines that control of a bank
by a particular company will cause undue interference with competition or that
such company lacks the financial or managerial resources to serve as a source
of strength to its subsidiary bank. While the Company believes that it meets
the Federal Reserve Board's managerial standards and that its ownership of
Colonial National has improved the bank's competitiveness, should the Company
be required to apply to become a bank holding company the outcome of any such
application cannot be certain.
Registration as a bank holding company would subject the Company and
its subsidiaries to inspection and regulation by the Federal Reserve Board.
Although the Company has no plans to register as a bank holding company at this
time, the Company believes that registration would not restrict, curtail, or
eliminate any of its activities at current levels, except that some portions of
the current business operations of the Company's insurance subsidiaries would
have to be discontinued, the effects of which would not be material.
COLONIAL NATIONAL BANK USA
The Company conducts substantially all its deposit-taking activities and credit
card lending business, as well as a large portion of its mortgage lending
business, through Colonial National. Under Federal law, Colonial National may
"export" (i.e., charge its customers resident in other states) the finance
charges permissible under the law of its state of domicile, Delaware, which
state has no usury statute applicable to banks. Consistent with prevailing
industry practice, the Company also exports credit card fees (including, for
example, annual fees, late charges and fees for exceeding credit limits)
permitted under Delaware law. There is no precedent clearly applicable to
Colonial National as to the permissibility of exporting such fees. In a case
involving this issue (to which the Company was not a party), the United States
Court of Appeals for the First Circuit ruled that the Commonwealth of
Massachusetts did not have the power to prevent a Delaware state-chartered
financial institution from charging Massachusetts residents credit card fees in
excess of those allowed under Massachusetts law. The United States Supreme
Court declined to consider an appeal of the First Circuit's decision, and so
that decision became final in 1992. However, litigation involving this issue
has been initiated against other credit card issuers in several states, and it
is possible that a contrary appellate decision could be reached in a
jurisdiction where the judgment of the First Circuit Court of Appeals is not
binding. The Company cannot quantify the impact on its business, as a result
of possible loss of fees,
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Advanta Corp. and Subsidiaries
penalties or other sanctions, that could result from an adverse determination
on this issue in one or more states.
Colonial National is subject primarily to regulation and periodic
examination by the Office of the Comptroller of the Currency (the
"Comptroller"). Such regulation relates to the maintenance of reserves for
certain types of deposits, the maintenance of certain financial ratios,
transactions with affiliates and a broad range of other banking practices. As
a national bank, Colonial National is subject to provisions of federal law
which restrict its ability to extend credit to its affiliates or pay dividends
to its parent company. See "Dividends and Transfers of Funds."
Colonial National is subject to capital adequacy guidelines approved
by the Comptroller. These guidelines make regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations and
consider off-balance sheet exposures in determining capital adequacy. As of
December 31, 1994, the minimum required ratio of total capital to risk-weighted
assets (including certain off-balance sheet items) was 8%. At least half of
the total capital is to be comprised of common equity, retained earnings and a
limited amount of non-cumulative perpetual preferred stock ("Tier 1 capital").
The remainder may consist of other preferred stock, certain hybrid debt/equity
instruments, a limited amount of term subordinated debt or a limited amount of
the reserve for possible credit losses ("Tier 2 capital"). In addition, the
Comptroller has also adopted a minimum leverage ratio (Tier 1 capital divided
by total average assets) of 3% for national banks that meet certain specified
criteria, including that they have the highest regulatory rating. Under this
guideline, the minimum leverage ratio would be at least 1 or 2 percentage
points higher for national banks that do not have the highest regulatory
rating, for national banks undertaking major expansion programs, and for other
national banks in certain circumstances. As of December 31, 1994, Colonial
National's Tier 1 capital ratio was 7.95%. The combined Tier 1 and Tier 2
capital ratio was 12.04%, and the leverage ratio was 8.15%.
Recognizing that the risk-based capital standards address only credit
risk (and not interest rate, liquidity, operational or other risks), the
Comptroller has indicated that many national banks will be expected to maintain
capital in excess of the minimum standards. As indicated above, Colonial
National's capital levels currently exceed the minimum standards. To date, the
Comptroller has not required Colonial National to maintain capital in excess of
the minimum standards. However, there can be no assurance that such a
requirement will not be imposed in the future, or if it is, what higher
standard will be applicable.
In addition, pursuant to certain provisions of the FDIC Improvement
Act of 1991 ("FDICIA") and regulations promulgated thereunder, FDIC insured
institutions such as Colonial National may only accept brokered deposits
without FDIC permission if they meet certain capital standards, and are subject
to restrictions with respect to the interest they may pay on deposits unless
they are "well-capitalized." To be "well-capitalized," a bank must have a
ratio of total capital to risk-weighted assets of not less than 10%, Tier 1
capital to risk-weighted assets of not less than 6%, and a Tier 1 leverage
ratio of not less than 5%. Based on the applicable standards under these
regulations, Colonial National is currently "well-capitalized," and the Company
intends to maintain Colonial National as a "well-capitalized" institution.
OTHER FDIC-INSURED DEPOSITORY INSTITUTIONS
In January 1992, Advanta Financial Corp. ("AFC") opened for business and began
taking deposits. AFC is an FDIC-insured industrial loan corporation organized
under the laws of the State of Utah and is subject to examination and
regulation by both the FDIC and the Utah Department of Financial Institutions.
At December 31, 1994, AFC had deposits of $33 million and total assets of $49
million. Currently, AFC's principal activity consists of small ticket
equipment lease financing. AFC is also the issuer of the small business credit
cards marketed by ABS.
In February 1995, Advanta National Bank ("ANB") opened for business.
As a national bank, ANB, like Colonial National, is subject primarily to
regulation and periodic examination by the Comptroller, and the
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Advanta Corp. and Subsidiaries
regulations described above with respect to Colonial National apply equally to
ANB. As with Colonial National, the Company intends to maintain ANB as a
"well-capitalized" institution.
Under CEBA, neither AFC nor ANB is considered a "bank" for purposes of
the BHCA, and so the Company's ownership of these institutions does not impact
the Company's exempt status under the BHCA. ANB is a "credit card bank" under
CEBA, and as such is subject to certain restrictions, including that it may
only engage in credit card operations, it may not offer checking or transaction
accounts, and it may only accept time deposits in amounts of $100,000 or more.
However, unlike Colonial National, ANB's growth will not be limited to 7% per
annum. Consequently, the Company anticipates that in the future, a substantial
portion of the Company's credit card receivables may be originated by ANB.
LENDING AND LEASING ACTIVITIES
The Company's activities as a lender are also subject to regulation under
various federal and state laws including the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Home Mortgage Disclosure Act, the Community
Reinvestment Act, the Electronic Funds Transfer Act, and the Fair Credit
Reporting Act. Provisions of those statutes, and related regulations, among
other matters, require disclosure to borrowers of finance charges in terms of
an annual percentage rate, prohibit certain discriminatory practices in
extending credit, require the Company's FDIC-insured depository institutions to
serve the banking needs of their local communities, and regulate the
dissemination and use of information relating to a borrower's creditworthiness.
Certain of these statutes and regulations also apply to the Company's leasing
activities. In addition, Advanta Mortgage and its subsidiaries are subject to
licensure and regulation in various states as mortgage bankers, mortgage
brokers, and originators, sellers and servicers of mortgage loans.
DIVIDENDS AND TRANSFERS OF FUNDS
There are various legal limitations on the extent to which Colonial National,
AFC or ANB can finance or otherwise supply funds through dividends, loans or
otherwise to the Company and its affiliates. The prior approval of the
Comptroller is required if the total of all dividends declared by Colonial
National in any calendar year exceeds its net profits (as defined) for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus accounts. In addition, Colonial National may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts. The Comptroller also has authority
under the Financial Institutions Supervisory Act to prohibit a national bank
from engaging in any unsafe or unsound practice in conducting its business. It
is possible, depending upon the financial condition of the bank in question and
other factors, that the Comptroller could claim that a dividend payment might
under some circumstances be an unsafe or unsound practice. All of these
restrictions also apply to ANB.
Colonial National, AFC and ANB are also subject to restrictions under
Sections 23A and 23B of the Federal Reserve Act. These restrictions limit the
transfer of funds by the depository institution to the Company and certain
other affiliates, as defined in that Act, in the form of loans, extensions of
credit, investments or purchases of assets, and they require generally that the
depository institution's transactions with its affiliates be on terms no less
favorable to the bank than comparable transactions with unrelated third
parties. These transfers by any one institution to the Company or any single
affiliate are limited in amount to 10% of the depository institution's capital
and surplus and transfers to all affiliates are limited in the aggregate to 20%
of the depository institution's capital and surplus. Furthermore, such loans
and extensions of credit are also subject to various collateral requirements.
In addition, in order for the Company to maintain its grandfathered exemption
under CEBA, neither Colonial National nor ANB may make any loans to the Company
or any of its subsidiaries.
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Advanta Corp. and Subsidiaries
The Company's insurance subsidiaries are insurance companies organized
under and regulated by Arizona law. Arizona insurance regulations restrict the
amount of dividends which an insurance company may distribute without the prior
consent of the Director of Insurance.
GENERAL
Because the banking and finance businesses in general are the subject of such
extensive regulation at both the state and federal levels, and because numerous
legislative and regulatory proposals are advanced each year which, if adopted,
could affect the Company's profitability or the manner in which the Company
conducts its activities, the Company cannot now predict the extent of the
impact of any such new laws or regulations.
Various legislative proposals have been introduced in Congress in
recent years, including, among others, proposals relating to imposing a
statutory cap on credit card interest rates, permitting affiliations between
banks and commercial or securities firms, and proposals which would place new
restrictions on a lender's ability to utilize pre-screening of consumers'
credit reports through credit reporting agencies (credit bureaus) in connection
with the lender's direct marketing efforts. It is impossible to determine
whether any of these proposals will become law and, if so, what impact they
will have on the Company.
In September 1992, the Federal Communications Commission established
rules implementing the Telephone Consumer Protective Act of 1991 which limits
telephone solicitations to residences. Because the statute exempts
telemarketing to existing or former customers, it does not materially impact
the Company's current business operations. In 1994, Congress adopted the
Interstate Banking and Branching Efficiency Act, which statute permits
nationwide interstate bank acquisitions beginning in 1995, and interstate bank
branching in 1997 (or earlier at a state's option). The Company does not
currently believe that the changes in the country's banking system wrought by
this statute will materially impact the Company's business.
COMPETITION
As a marketer of credit products, the Company faces intense competition from
numerous providers of financial services. Many of these companies are
substantially larger and have more capital and other resources than the
Company. Competition among lenders can take many forms including convenience
in obtaining a loan, customer service, size of loans, interest rates and other
types of finance or service charges, duration of loans, the nature of the risk
which the lender is willing to assume and the type of security, if any,
required by the lender. Although the Company believes it is generally
competitive in most of the geographic areas in which it offers its services,
there can be no assurance that its ability to market its services successfully
or to obtain an adequate yield on its loans will not be impacted by the nature
of the competition that now exists or may develop.
In the VISA and MasterCard market, the Company competes with national,
regional, and local issuers. Additionally, American Express, Discover Card and
Diners Club represent additional competition in the general purpose credit card
markets in the Unites States. The Company does not believe that single purpose
credit cards such as oil company, department store or telephone credit cards
represent a significant competitive threat.
In seeking investment funds from the public, the Company faces
competition from banks, savings institutions, money market funds, credit unions
and a wide variety of private and public entities which sell debt securities,
some of which are publicly traded. Many of the competitors are larger and have
more capital and other resources than the Company. Competition relates to such
matters as rate of return, collateral, insurance or guarantees applicable to
the investment (if any), the amount required to be invested, convenience and
the cost to and conditions imposed upon the investor in investing and
liquidating his investment (including any commissions which must be paid or
interest forfeited on funds withdrawn), customer service, service charges, if
any, and the taxability of interest.
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Advanta Corp. and Subsidiaries
EMPLOYEES
As of December 31, 1994, the Company had 1,753 employees, up from 1,614
employees at the end of 1993. The Company believes that it has good
relationships with its employees. None of its employees are represented by a
collective bargaining unit.
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Advanta Corp. and Subsidiaries
ITEM 2. PROPERTIES.
The Company leases an aggregate of approximately 155,000 square feet of office
space in five office buildings located in Horsham, Pennsylvania, a Philadelphia
suburb, and owns two buildings in Horsham aggregating approximately 128,000
square feet. The Company also leases an aggregate of approximately 60,000
square feet of office space for its Advanta Mortgage and Advanta Finance Corp.
offices in California, New Jersey, New York and Maryland. In New Jersey,
Advanta Business Services owns a 56,000 square foot building.
The Company's principal executive offices and Colonial National's
principal operating offices are currently located in approximately 83,000
square feet of leased space in two office buildings in Delaware.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Registrant or any
of its subsidiaries is a party or of which any of their property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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Advanta Corp. and Subsidiaries
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers of the Company listed below was elected by the
Board of Directors, to serve at the pleasure of the Board in the capacities
indicated.
Date Elected to
Name Age Office Current Position
- --------------------------------------------------------------------------------------------------------------
Dennis Alter 52 Chairman of the Board 1972
and Chief Executive Officer
Alex W. "Pete" Hart 55 Executive Vice Chairman and 1994
Director
Richard A. Greenawalt 51 President, Chief Operating 1987
Officer and Director
Ronald W. Averett 38 Vice President, Credit Card 1988
Operations/Collections
Jeffrey D. Beck 46 Vice President and Treasurer 1992
Anthony P. Brenner 37 Senior Managing Director, 1994
Advanta Partners LP
John J. Calamari 40 Vice President, Finance 1988
Stewart Dougherty 41 Senior Vice President, 1994
Strategic Business Development
Katharin S. Dyer 37 Vice President, Marketing 1992
Michael A. Girman 45 Vice President, Audit and Control 1991
John Hofmann 48 Vice President, Human Resources 1987
James W. John 44 Senior Vice President, 1994
Corporate Administration
Albert E. Lindenberg 42 President and Director, 1988
Advanta Business Services
Robert A. Marshall 54 Executive Vice President and 1993
Group Executive,
Consumer Financial Services
Edward Millman 43 Vice President and Chief Financial 1993
Officer, Consumer Financial Services
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Advanta Corp. and Subsidiaries
Milton Riseman 58 Senior Vice President and President, 1994
Advanta Mortgage Corp. USA
John Roblin 49 Senior Vice President and
Chief Information Officer, 1994
Consumer Financial Services
Gene S. Schneyer 41 Vice President, Secretary 1989
and General Counsel
David D. Wesselink 52 Senior Vice President and 1993
Chief Financial Officer
Mr. Alter became Executive Vice President and a director of the
Company in 1967. He was elected President and Chief Executive Officer in 1972,
and Chairman of the Board of Directors in August 1985. In February 1986, he
relinquished the title of President, retaining the positions of Chairman and
Chief Executive Officer.
Mr. Hart joined the Company in March 1994 as Executive Vice Chairman.
For the five years prior to that he had been President and Chief Executive
Officer of MasterCard International, Inc., a worldwide association of over
29,000 member financial institutions. Prior to joining MasterCard in November
1988, Mr. Hart was Executive Vice President of First Interstate Bancorp, Los
Angeles, California.
Mr. Greenawalt was elected President and Chief Operating Officer of
the Company in November 1987. Prior to joining the Company, Mr. Greenawalt
served as President of Transamerica Financial Corp., Los Angeles, California,
from May 1986. For the 15 years prior to that, Mr. Greenawalt served in
various capacities with Citicorp, including most recently as Chairman and Chief
Executive Officer of Citicorp Person-to-Person, Inc., St. Louis, Missouri, and,
prior to that, as President and Chief Executive Officer of Citicorp Retail
Services, Inc., New York, New York.
Mr. Averett came to the Company as Vice President in January 1988.
Prior to joining the Company, Mr. Averett worked with Citicorp from 1980 to
1987. Most of this tenure was in a retail credit card division (CRS) holding a
wide array of positions from financial analyst to credit cycle manager and
eventually Regional Collections Manager.
Mr. Beck joined the Company in 1986 as Senior Vice President of
Colonial National and was elected Vice President and Treasurer in 1992. Prior
to joining the Company, he was Vice President, Fidelity Bank, N.A., responsible
for asset/liability planning, as well as for managing a portfolio of investment
securities held at the bank. From 1970 through 1980, he served in various
treasury and planning capacities for Wilmington Trust Company.
Mr. Brenner was elected as Senior Managing Director, Advanta Partners
LP in 1994. Prior to his joining Advanta Partners LP, Mr. Brenner has served
on the Company's Board of Directors since May 1992. Prior to joining Advanta
Partners LP, he had been president of Cedar Capital Investors, LTD, the
managing partner of a private venture capital partnership, since 1989.
Concurrently, Mr. Brenner served as Chairman and Chief Executive Officer of
Liebhardt Mills, Inc. and Chairman of Servomation International, LP.
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Advanta Corp. and Subsidiaries
Mr. Calamari joined the Company in May 1988. From May 1985 through
April 1988, Mr. Calamari served in various capacities in the accounting
departments of Chase Manhattan Bank, N.A. and its subsidiaries, culminating in
the position of Chief Financial Officer of Chase Manhattan of Maryland. From
1976 until May 1985, Mr. Calamari was an accountant with the public accounting
firm of Peat, Marwick, Mitchell in New York.
Mr. Dougherty was elected Senior Vice President, Strategic Business
Development in September 1994. Mr. Dougherty came to the Company from MCI
Telecommunications, where he held the position of Vice President, International
Brand Marketing. Prior to joining MCI in April 1983, Mr. Dougherty served as
Vice President, Business Development at Fidelity Capital.
Ms. Dyer joined the Company as Vice President, Marketing in 1992.
Prior to joining the Company, she was Vice President and Director of Marketing
for the Retail Finance Division of MNC Financial. From 1985 to 1989, she was
Director, Product Development and Management at the Student Loan Marketing
Association and had previously held marketing management positions with
Citicorp in their credit card, mortgage and consumer finance businesses.
Mr. Girman joined the Company as Vice President, Accounting
Operations, Policies and Procedures in July 1988, and was elected Vice
President, Audit and Control, in April 1991. Prior thereto, Mr. Girman served
as Vice President, Management Accounting and Accounting Policies and Procedures
for The Chase Manhattan Bank (USA), N.A. from April 1985 until joining the
Company.
Mr. Hofmann came to the Company as Director of Human Resources in
November 1986 and was elected Vice President, Human Resources in March 1987.
Prior to joining the Company, he was Manager, Human Resources Planning and
Development for Subaru of America, Inc. from October 1984, and Manager,
Management and Organization Development for Shared Medical Systems, Inc. from
March 1981 until October 1984.
Mr. John was elected as Senior Vice President of Corporate
Administration in June 1994. Prior to joining the Company, Mr. John served as
Executive Vice President for MasterCard International from April 1989. Before
going to MasterCard International, Mr. John served eleven years at First
Interstate Bancorp, holding a variety of senior level financial positions.
Mr. Lindenberg had been the Chairman of the Board and President of an
equipment leasing business, LeaseComm Financial Corporation, from that
Company's inception in June 1985 until its purchase by the Company in 1987.
Following the acquisition, Mr. Lindenberg was elected President and Chief
Executive Officer of Advanta Business Services, formerly Advanta Leasing Corp.,
the successor to LeaseComm. Prior to starting LeaseComm, Mr. Lindenberg had
been with First Pennsylvania Bank, Philadelphia, Pennsylvania since 1982, where
he had served in various capacities, most recently as Vice President of the
national division responsible for that bank's commercial lending activities in
leasing and electronics.
Mr. Marshall joined the Company in January 1988 and was elected Senior
Vice President in February 1988 and Executive Vice President in 1993. Prior to
joining the Company, from July 1987 he was Chief Operations Officer of a
Scudder, Stevens & Clark joint venture. Prior to that, Mr. Marshall served in
various capacities at Citibank from 1976. At the time he left Citibank, he was
a Senior Vice President of Citicorp Retail Services, managing a major portion
of its client relationships.
Mr. Millman joined the Company in September 1989 and was elected
Assistant Treasurer in July 1990 and Vice President, Corporate Funds Management
in August 1991. In November 1993, he became Chief Financial Officer of the
Consumer Financial Services unit. Prior to joining the Company, Mr. Millman
served as Director of Financial Planning for Knight Ridder, Inc. from March
1987 to January 1988, and as Chief Financial Officer of Osteotech, Inc. from
January 1988 to September 1989.
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Advanta Corp. and Subsidiaries
Mr. Riseman came to the Company in June 1992 as Senior Vice President,
Administration. He was appointed to his present position in February 1994.
Prior to joining the Company, Mr. Riseman had 27 years experience with
Citicorp, most recently as Director of Training and Development. Prior to that
he held Citicorp positions as Business Manager for the Long Island Region, Head
of Policy and Administration for New York's Retail Bank, and Chairman of
Citicorp Acceptance Co. which was involved in the financing and leasing of
autos and financing of mobile homes.
Mr. Roblin joined the Company in November 1994 as Senior Vice
President and Chief Information Officer for the Consumer Financial Services
unit. Prior to joining the Company, Mr. Roblin served The Traveler's Personal
Lines Insurance Company, briefly, as Chief Information Officer from May 1994.
Prior to that, Mr. Roblin was Senior Vice President and Chief Information
Officer for U.S. Fidelity and Guaranty Company from April 1991. Before Joining
U.S. Fidelity and Guaranty Company, Mr. Roblin spent 19 years with Chubb and
Sons Inc., serving as the Chief Information Officer from June 1986 until
December 1992.
Mr. Schneyer joined the Company as Associate General Counsel in
September 1986 and was elected to the offices of Vice President, Secretary and
General Counsel in March 1989. Prior to joining the Company, from October
1983, Mr. Schneyer was an attorney in the Legal Department of Allied-Signal,
Inc., Morristown, New Jersey.
Mr. Wesselink joined the Company in November 1993 as Senior Vice
President and Chief Financial Officer. Prior to joining the Company, Mr.
Wesselink was Vice President and Treasurer of Household International.
Previous positions held by Mr. Wesselink in his 23 years at Household included
Vice President-Director of Research, Group Vice President-Chief Financial
Officer of Household Finance Corporation (HFC) and Senior Vice President-Chief
Financial Officer of HFC.
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Advanta Corp. and Subsidiaries
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDEND POLICY.
In April 1992, the Company approved a dual class stock plan which resulted in
an effective two-for-one stock split and established two classes of common
stock effective May 5, 1992. On September 23, 1993, the Board of the Directors
approved a three-for-two stock split effected in the form of a 50% stock
dividend on both the Class A and Class B common stock to shareholders of record
as of October 4, 1993, which dividend was paid on October 15, 1993. All share
and per share amounts have been adjusted to reflect this stock split as a
result of the stock dividend. Both classes of the Company's common stock are
traded on the NASDAQ National Market System under the trading symbols of ADVNB
(non-voting common stock) and ADVNA (voting common stock). Following are the
high and low sale prices and cash dividends declared for the last two years as
they apply to each class of stock:
Cash Dividends
Quarter Ended: High Low Declared
-------------------------------------------------------------------
Class B:
--------
March 1993 $25.33 $16.00 $.04
June 1993 26.50 20.17 .05
September 1993 36.50 25.33 .05
December 1993 38.50 25.00 .06
March 1994 33.25 26.00 .06
June 1994 37.50 28.75 .06
September 1994 34.75 26.50 .06
December 1994 30.50 23.25 .08
Class A:
--------
March 1993 $29.33 $19.00 $.033
June 1993 32.50 24.17 .042
September 1993 41.50 29.83 .042
December 1993 46.75 29.25 .050
March 1994 36.00 26.50 .050
June 1994 41.75 30.50 .050
September 1994 37.50 28.25 .050
December 1994 33.50 24.25 .067
At December 31, 1994, the Company had approximately 930 and 750
holders of record of Class B and Class A common stock, respectively.
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Advanta Corp. and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts) Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
Five Year
1994 1993 1992 1991 1990 1989 CAGR(3)
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net interest income(1) $ 70,381 $ 78,644 $ 73,176 $ 73,990 $ 62,964 $ 52,466 6.1%
Noninterest revenues 395,808 255,580 193,144 133,357 85,894 67,200 42.6
Net operating revenues(2) 447,837 334,224 266,320 207,347 139,948 101,080 34.7
Provision for credit losses 34,198 29,802 47,138 55,461 42,411 26,047 5.6
Operating expenses(1) 266,784 181,167 142,082 112,567 83,917 81,005 26.9
Income before income taxes
and extraordinary items 165,207 123,255 77,100 39,319 22,530 12,614 67.3
Income before
extraordinary items 106,063 77,920 48,037 25,165 15,095 8,765 64.7
Net income 106,063 76,647 48,037 25,165 15,095 12,033 54.5
- -------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Income before
extraordinary items $ 2.58 $ 1.95 $ 1.38 $ .81 $ .53 $ .31 53.1%
Net income 2.58 1.92 1.38 .81 .53 .42 43.8
Cash dividends declared(4)
Class A .217 .167 .107 .063 .037 .033 45.5
Class B .260 .200 .104 N/A N/A N/A *
Book value 11.12 8.82 5.22 3.70 2.60 2.17 38.7
Average common shares
outstanding(5) 41,046 39,777 34,590 31,044 28,053 28,389 7.7
Closing stock price
Class A 26.25 33.25 21.58 11.50 3.33 3.29 51.5
Class B 25.25 29.00 19.33 N/A N/A N/A *
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION-YEAR END
Investments and money
market instruments $ 671,661 $ 542,222 $ 521,567 $ 270,267 $ 187,631 $ 241,869 22.7%
Gross receivables
Owned 1,964,444 1,277,305 998,244 1,273,420 1,129,493 947,002 15.7
Securitized 6,190,793 3,968,856 2,721,726 1,573,164 980,856 590,020 60.0
Managed 8,155,237 5,246,161 3,719,970 2,846,584 2,110,349 1,537,022 39.6
Total assets
Owned 3,113,048 2,140,195 1,775,067 1,716,350 1,450,942 1,297,788 19.1
Managed 9,303,841 6,109,051 4,496,793 3,289,514 2,431,798 1,887,808 37.6
Deposits 1,159,358 1,254,881 1,204,486 1,205,035 1,052,322 976,641 3.5
Long-term debt 666,033 368,372 173,668 112,609 80,990 79,030 53.2
Stockholders' equity 441,690 342,741 174,870 118,859 70,895 61,595 48.3
Stockholders' equity
and long-term debt 1,107,723 711,113 348,538 231,468 151,885 140,625 51.1
- -------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Return on average assets 4.47% 3.91% 2.82% 1.63% 1.09% .92% *
Return on average equity 26.97 27.50 33.32 27.09 23.28 21.53 *
Equity/Owned assets 14.27 16.01 9.85 6.93 4.88 4.75 *
Dividend payout 9.24 9.56 7.69 7.85 6.90 7.67 *
Owned net interest
margin 3.67 4.85 5.07 5.68 5.48 4.92 *
Managed net interest
margin(6) 6.72 7.77 8.05 7.54 6.70 6.04 *
As a percentage of gross
managed receivables:
Total loans 30 days or
more delinquent 2.7% 3.6% 5.0% 5.6% 6.0% 5.6% *
Net charge-offs 2.3% 2.9% 3.4% 3.2% 2.7% 2.7% *
=========================================================================================================================
(1) 1989-1993 have been restated reflecting the reclassification of the
amortization of credit card net deferred origination costs from net
interest income to operating expenses.
(2) Excludes gains on sales of credit card accounts in 1989, 1990 and 1994.
(3) Compound annual growth rate from December 31, 1989.
(4) 1992 cash dividends include dividends for three quarters on the Class B
common stock and the full year on the Class A common stock, adjusted to
reflect the effective stock split.
(5) Includes common stock equivalents.
(6) Combination of owned interest-earning assets/interest-bearing liabilities
and securitized credit card assets/liabilities.
* Not meaningful.
22
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Advanta Corp. and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Net income for 1994 of $106.1 million increased $29.5 million or 38% from the
$76.6 million reported for 1993. Earnings per share of $2.58 increased 34% from
the $1.92 reported for 1993. Net income before extraordinary item was $77.9
million or $1.95 per share in 1993. The increased earnings resulted primarily
from substantial growth in average managed receivables, partially offset by the
contraction in the managed net interest margin. Additionally, continued
improvement in credit quality and disciplined cost management contributed to
the improved financial results.
Average managed receivables of $6.1 billion in 1994 increased 45% from
$4.2 billion in 1993. As a majority of the receivables continue to be
securitized, the Company records the net cash flows on these securitized
receivables as noninterest revenues. Noninterest revenues of $395.8 million in
1994 increased $140.2 million or 55% from $255.6 million in 1993. This increase
was due to the 45% increase in average managed receivables, as well as an $18.4
million gain on the sale of $150 million of credit card customer relationships.
This transaction allowed the Company to make additional investments in
marketing and developmental initiatives. Including these increases in marketing
and developmental expenses, total other operating expenses (excluding the
amortization of credit card deferred origination costs, net) increased only 30%
in 1994 despite the 45% growth in average managed receivables. The operating
expense ratio decreased to 3.7% in 1994 from 4.1% in 1993. Asset quality
indicators also continued to trend favorably. The total managed charge-off rate
for 1994 fell to 2.3% from 2.9% in 1993, and the 30-day and over delinquency
rate on managed receivables decreased to 2.7% at December 31, 1994 from 3.6% at
year end 1993.
Over the last three years, average managed receivables have grown at a
compound annual rate of 38%. This receivable growth has generated higher return
on assets, net income and earnings per share. The Company intends to continue
pursuing a strategy of receivable growth with a goal of increasing average
managed receivables by 40% or more in 1995. A significant component of this
growth strategy is the Company's marketing of "risk-adjusted" credit card
products, whereby credit cards are issued with lower rates to customers whose
credit quality is expected to result in a lower rate of credit losses (the
"risk-adjusted pricing strategy"). The Company's pricing structure on its
credit card products also reflects low "introductory" credit card rates, which
reprice upwards after an introductory period of up to one year. In 1994, the
impact of these introductory rates was to reduce the managed net interest
margin significantly, as the success of the Company's marketing campaigns
resulted in substantial new receivable growth earning interest at the
introductory rates. While the Company expects to increase earnings in 1995, it
is anticipated that the managed net interest margin will continue to decline in
1995 as the result of the impact of the introductory rates on credit cards.
Net income for 1993 rose to $76.6 million or $1.92 per share. This
reflects increases of 60% and 39%, respectively, from the $48.0 million or
$1.38 per share reported in 1992. Earnings for 1993 increased primarily as a
result of a $1.1 billion or 33% increase in average managed receivables,
improvements in credit quality with the total managed charge-off rate
decreasing from 3.4% in 1992 to 2.9% in 1993, and controlled growth in
operating expenses. The 33% increase in average managed receivables was the
main driver in the $62.5 million or 32% increase in noninterest revenues to
$255.6 million in 1993, from $193.1 million in 1992. As a result of improved
credit quality, the provision for credit losses in 1993 fell to $29.8 million
from $47.1 million in 1992. Despite a lower provision, reserve coverage of
impaired owned assets was higher at December 31, 1993 compared to a year
earlier. Disciplined cost management resulted in other operating expenses
increasing only 27%, while average managed receivables grew 33% and the
operating expense ratio fell to 4.1% for 1993 from 4.4% in 1992.
23
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Advanta Corp. and Subsidiaries
NET INTEREST INCOME
Net interest income represents the excess of income generated from
interest-earning assets, including receivables, investments and money market
instruments over the interest paid on interest-bearing liabilities, primarily
deposits and debt.
Net interest income of $70.4 million for 1994 decreased $8.2 million
or 11% from 1993 as a result of a lower owned net interest margin, which fell
to 3.67% in 1994 from 4.85% in 1993. The lower owned net interest margin
resulted from a 121 basis point decrease in the yield on interest earning
assets due to a significant increase in credit card receivables issued at low
introductory rates, partially offset by a $336 million increase in average
interest earning assets. Also affecting the owned net interest margin was a
timing lag between the adjustments in the Company's funding rates and the
repricing of the interest rates on the Company's credit cards as a result of
multiple changes in the prime rate during 1994. The Company's credit cards
(other than those with fixed rate introductory pricing) are contractually
indexed monthly to the prime rate.
Net interest income of $78.6 million for 1993 increased $5.5 million
or 7% from 1992 as a result of a $170 million increase in average earning asset
balances, offset by a 22 basis point drop in the owned net interest margin. The
Company began to execute its risk-adjusted pricing strategy during 1993. This
strategy resulted in a drop in credit card yields thereby lowering the owned
net interest margin.
Credit card, mortgage and lease receivable securitization activity
shifts revenues from interest income to noninterest revenues. This ongoing
securitization activity reduces the level of higher-yielding receivables on the
balance sheet while increasing the balance sheet levels of new lower-yielding
receivables and money market assets. Net interest income on securitized credit
card balances is reflected in credit card securitization income. Net interest
income on securitized mortgage loans is reflected in income from mortgage
banking activities, and net interest income on securitized lease receivables is
reflected in leasing revenues, net. All securitization income is included in
noninterest revenues. See Note 1 to Consolidated Financial Statements.
Average managed credit card receivables of $4.7 billion for 1994
increased $1.7 billion or 55% from 1993. This increase resulted from the very
successful marketing of low introductory rate credit cards which generated
approximately 1.5 million new accounts and a large volume of balance transfers
by cardholders. In 1994 average owned credit card receivables were $1.2 billion
compared to $900 million in 1993. Owned receivable balances would have been
higher in both years had it not been for the securitization of $2.2 billion of
credit card receivables in 1994 and $1.0 billion in 1993. A 201 basis point
decline in the yield on owned credit card receivables was the result of the
Company continuing to employ the risk-adjusted pricing strategy and the
influence of a predominance of newer, lower-yielding accounts in the owned
portfolio. A majority of these new accounts will be repricing upwards during
1995.
Average managed mortgage loans increased to $1.2 billion in 1994, a
17% increase from $1.0 billion in 1993. The average balance of owned mortgage
loans decreased to $120.0 million in 1994 from $154.2 million in 1993 primarily
due to the securitization of $456 million of receivables in 1994. Mortgage loan
originations of $493 million in 1994 were down $17 million or 3% from 1993.
Yields on owned mortgage loans decreased to 8.18% from 9.91% in 1993 reflecting
a greater proportion of nonperforming loans on the balance sheet. During 1994
the Company initiated a program to repurchase nonperforming loans from the
securitization trusts (see discussion under "Provision for Credit Losses").
24
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Advanta Corp. and Subsidiaries
Average managed lease receivables of $201.9 million increased $56.1
million or 39% from 1993. Average owned balances of leases increased only $2.6
million during 1994 due to the securitization of $101.6 million of receivables
in 1994. Yields on owned leases decreased to 14.36% in 1994 from 18.70% in 1993
primarily due to the exclusion of late fees on securitized leases from the 1994
yield.
A slight increase in the owned average cost of funds was experienced
in 1994 as the cost of funds rose to 5.22% from 5.18% in 1993. The rollover of
deposits and money market instruments at higher rates resulted from a rising
rate environment in 1994. The Company has utilized derivatives to manage the
impact on the Company from rising rates (see discussion under "Derivatives
Activities"). The achievement of investment-grade ratings in 1993 also enabled
the Company in 1994 to benefit from alternative funding vehicles not previously
available.
The following table provides an analysis of both owned and managed
interest income and expense data, average balance sheet data, net interest
spread (the difference between the yield on interest earning assets and the
average rate paid on interest-bearing liabilities), and net interest margin
(the difference between the yield on interest earning assets and the average
rate paid to fund interest earning assets) for 1992 through 1994. Average owned
loan and lease receivables and the related interest revenues include certain
loan fees.
25
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Advanta Corp. and Subsidiaries
INTEREST RATE ANALYSIS
(Dollars in thousands) Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------- ------------------------------ --------------------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
On-Balance Sheet
- ----------------
Interest-earning assets:
Receivables:
Credit cards $1,171,266 $ 117,661 10.05% $ 899,650 $ 108,518 12.06% $ 805,604 $ 116,577 14.47%
Mortgage loans 119,919 9,809 8.18 154,210 15,286 9.91 185,596 21,149 11.40
Leases 60,437 8,681 14.36 57,877 10,825 18.70 45,169 7,886 17.46
Other loans 3,893 280 7.19 1,911 177 9.26 1,625 179 11.02
---------- --------- ---------- --------- ---------- ---------
Total receivables 1,355,515 136,431 10.06 1,113,648 134,806 12.10 1,037,994 145,791 14.05
Federal funds sold 103,674 4,437 4.28 93,507 2,831 3.03 99,426 3,231 3.25
Interest-bearing
deposits 196,468 10,216 5.20 177,942 7,927 4.45 160,318 7,100 4.43
Tax-free securities(1) 81,761 4,858 5.94 42,669 2,585 6.06 2,509 241 9.61
Taxable investments 250,535 11,899 4.75 223,991 11,324 5.06 181,626 12,265 6.75
---------- --------- ---------- --------- ---------- ---------
Total interest-earning
assets(2) $1,987,953 $ 167,841 8.44% $1,651,757 $ 159,473 9.65% $1,481,873 $ 168,628 11.38%
========== ========= ===== ========== ========= ===== ========== ========= =====
Interest-bearing
liabilities:
Deposits:
Savings $ 269,583 $ 11,411 4.23% $ 214,351 $ 6,984 3.26% $ 195,814 $ 7,706 3.94%
Time deposits
under
$100,000 560,015 27,543 4.92 686,159 35,676 5.20 671,442 44,344 6.60
Time deposits
of $100,000
or more 217,683 9,314 4.28 268,064 10,729 4.00 268,853 14,476 5.38
---------- --------- ---------- --------- ---------- ---------
Total deposits 1,047,281 48,268 4.61 1,168,574 53,389 4.57 1,136,109 66,526 5.87
Debt 583,317 36,347 6.23 302,430 22,951 7.59 259,856 23,426 9.01
Other borrowings 185,298 10,143 5.47 59,957 2,963 4.94 68,032 3,593 5.28
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing
liabilities 1,815,896 94,758 5.22 1,530,961 79,303 5.18 1,463,997 93,545 6.39
Net noninterest-
bearing
liabilities 172,057 120,796 17,876
---------- ---------- ----------
Sources to fund
interest-earning
assets $1,987,953 $ 94,758 4.77% $1,651,757 $ 79,303 4.80% $1,481,873 $ 93,545 6.31%
========== ========= ===== ========== ========= ===== ========== ========= =====
Net interest spread 3.22% 4.47% 4.99%
===== ===== =====
Net interest margin 3.67% 4.85% 5.07%
===== ===== =====
Off-Balance Sheet
- -----------------
Average balance on
securitized:
Credit cards $3,507,801 $2,110,583 $1,449,681
Mortgage loans 1,105,610 895,237 600,738
Leases 141,421 87,875 64,152
---------- ---------- ----------
Total average
securitized
receivables 4,754,832 3,093,695 2,114,571
---------- ---------- ----------
Total average
managed
receivables $6,110,347 $4,207,343 $3,152,565
========== ========== ==========
Managed Net Interest
- --------------------
Analysis(3)
-----------
Interest-earning
assets $5,495,754 $ 665,009 12.10% $3,762,340 $ 479,799 12.75% $2,931,554 $ 409,902 13.98%
Interest-bearing
liabilities $5,323,697 $ 295,880 5.56% $3,641,544 $ 187,269 5.14% $2,913,678 $ 173,885 5.97%
Net interest spread 6.54% 7.61% 8.01%
Net interest margin 6.72% 7.77% 8.05%
===================================================================================================================================
(1) Interest and average rate computed on a tax equivalent basis using a
statutory rate of 35% in 1994 and 1993 and 34% in 1992.
(2) Includes assets held and available for sale, and nonaccrual loans and
leases.
(3) Combination of owned interest-earning assets/owned interest-bearing
liabilities and securitized credit card assets/liabilities.
26
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Advanta Corp. and Subsidiaries
INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
1994 VS. 1993 1993 vs. 1992
----------------------------------- -------------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO Due to
----------------------------------- -------------------------------------
VOLUME RATE TOTAL Volume Rate Total
-----------------------------------------------------------------------------
Interest income from:
Loan and lease receivables:
Credit cards $29,193 $(20,050) $ 9,143 $12,680 $(20,739) $(8,059)
Mortgage loans (3,068) (2,409) (5,477) (3,307) (2,556) (5,863)
Leases 505 (2,649) (2,144) 2,347 592 2,939
Other loans 150 (47) 103 29 (31) (2)
Federal funds sold 335 1,271 1,606 (187) (213) (400)
Interest-bearing deposits 874 1,415 2,289 794 33 827
Tax-free securities 2,325 (52) 2,273 2,465 (121) 2,344
Taxable investments 1,294 (719) 575 2,503 (3,444) (941)
------- -------- ------- ------- -------- -------
Total interest income(1) 31,608 (23,240) 8,368 17,324 (26,479) (9,155)
------- -------- ------- ------- -------- -------
Interest expense on:
Deposits:
Savings 2,055 2,372 4,427 876 (1,598) (722)
Time deposits under
$100,000 (6,291) (1,842) (8,133) 949 (9,617) (8,668)
Time deposits of
$100,000 or more (2,256) 841 (1,415) (42) (3,705) (3,747)
Debt 18,125 (4,729) 13,396 3,519 (3,994) (475)
Other borrowings 6,829 351 7,180 (408) (222) (630)
------- -------- ------ ------- -------- -------
Total interest expense 18,462 (3,007) 15,455 4,894 (19,136) (14,242)
------- -------- ------- ------- -------- -------
Net interest income $13,146 $(20,233) $(7,087) $12,430 $(7,343) $ 5,087
=============================================================================================================
(1) Includes income from assets held and available for sale.
MANAGED PORTFOLIO DATA
The following table provides selected information on a managed basis, as well
as a summary of the effects of credit card securitizations on selected line
items of the Company's consolidated statements of income for the past three
years.
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Average managed receivables $6,110,347 $4,207,343 $3,152,565
Managed receivables 8,155,237 5,246,161 3,719,970
Total managed assets 9,303,841 6,109,051 4,496,793
Managed net interest margin (on a
fully tax equivalent basis) 6.72% 7.77% 8.05%
As a percentage of gross managed receivables:
Total loans 30 days or more delinquent 2.7% 3.6% 5.0%
Net charge-offs 2.3% 2.9% 3.4%
Effects of Credit Card Securitizations on:
Net interest income $ (296,046) $ (212,360) $ (160,934)
Provision for credit losses 92,530 82,343 63,083
=========================================================================================================
With respect to the above information on the effects of credit card
securitizations, net interest income represents the amount by which net
interest income would have been higher had the securitized receivables remained
on the balance sheet. In addition, provision for credit losses represents the
amount by which provision for credit losses would have been higher had the
securitized receivables remained as owned and provision for credit losses been
equal to charge-offs. Both net interest income and provision for credit losses
described above are netted and included in other noninterest revenues in the
Consolidated Income Statements.
27
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Advanta Corp. and Subsidiaries
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $34.2 million in 1994 increased $4.4 million
or 15% from $29.8 million in 1993. Net charge-offs on owned receivables for
1994 were $35.3 million, exceeding the provision for credit losses by $1.1
million. In 1993, the Company transferred $11 million of on-balance sheet
reserves to off-balance sheet mortgage loan recourse reserves. In 1994, the
Company initiated a program to repurchase nonperforming mortgages from the
securitization trusts in order to lower funding costs on those mortgages. As a
result, in 1994, the Company repurchased approximately $50 million of
nonperforming mortgages and transferred approximately $13 million of
off-balance sheet recourse reserves related to these loans to on-balance sheet
reserves. When these mortgages were charged off in 1994, the Company did not
need to provide additional amounts for them since reserves had been
specifically provided for these mortgages at their repurchase date. These
repurchases increased the owned impaired asset level while having no impact on
either the level of managed impaired assets or the provision for credit losses.
The owned impaired asset level was $43.3 million at December 31, 1994, compared
to $22.5 million a year ago.
The provision for credit losses of $29.8 million in 1993 decreased
$17.3 million or 37% from $47.1 million in 1992. This decrease was primarily
due to lower charge-offs on owned receivables and lower impaired asset levels.
A description of the credit performance of the loan portfolio is set
forth under the section entitled "Credit Risk Management."
NONINTEREST REVENUES
(Dollars in thousands)
- ---------------------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------
Gain on sale of
credit cards $ 18,352 $ 0 $ 0
Other noninterest revenues:
Credit card securitization
income 210,339 135,785 80,761
Credit card servicing
income 68,960 41,593 28,634
Income from mortgage
banking activities 37,586 24,146 24,633
Leasing revenues, net 21,551 10,317 6,170
Other credit card
revenues 14,209 11,545 11,752
Insurance revenues,
net 12,734 9,249 7,406
Credit card interchange
income 10,444 18,843 30,693
Other 1,633 4,102 3,095
- ---------------------------------------------------------------------------------------
Total other noninterest
revenues $377,456 $255,580 $193,144
- ---------------------------------------------------------------------------------------
Total noninterest
revenues $395,808 $255,580 $193,144
=======================================================================================
Noninterest revenues of $395.8 million in 1994 increased $140.2 million
or 55% from $255.6 million in 1993. This improvement resulted from a 66% growth
in average securitized credit card receivables, from an $18.4 million gain on
the sale of credit card customer relationships (see Note 13 to Consolidated
Financial Statements), and from a 61% growth in average securitized lease
receivables.
Due to the securitization of credit card receivables, activity from
securitized account balances normally reported as net interest income and
charge-offs is reported in securitization income and servicing income, both of
which are included in noninterest revenues. Credit card securitization income
increased 55% to $210.3 million from $135.8 million in 1993 while average
securitized credit card receivables increased 66% to $3.5 billion in 1994 from
$2.1 billion in the prior year. See Note 1 to Consolidated Financial Statements
for further description of securitization income.
Credit card securitization income is the excess of revenue collected on
the securitized receivables, including interest, interchange income and
certain fees, over the related securitization trust expenses, including interest
payments to investors in the trusts, charge-offs, servicing costs and
transaction expenses. Credit card servicing income which represents fees paid to
the Company for continuing to service accounts which have
28
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Advanta Corp. and Subsidiaries
been securitized, increased to $69.0 million in 1994 from $41.6 million in
1993. Such fees normally approximate 2% of securitized receivables.
Interchange income represents fees that are payable by merchants to
the credit card issuer for sale transactions. Total interchange income earned
approximates 1.4% of credit card purchases. The amount of interchange paid to
the securitization trusts ranges from 1% to 2% of securitized balances and is
included in credit card securitization income. Interchange income decreased 45%
to $10.4 million in 1994 from $18.8 million in 1993 due to a larger proportion
of interchange revenues being included in securitization income. Other credit
card revenues, which include credit insurance, cash advance fees and other
credit card related revenues, increased $2.7 million to $14.2 million in 1994
from $11.5 million in 1993.
During 1994, the Company securitized $456 million of mortgage loans
compared to $608 million in 1993. Mortgage banking income of $37.6 million for
1994 increased from $24.1 million in 1993. In 1993, increased credit losses on
the securitized portfolio reduced income from mortgage banking activities by
approximately $14 million. Increased prepayments also reduced income from
mortgage banking activities by $14 million in 1993. In 1994, although credit
losses on the managed portfolio increased, the Company did not need to add
additional amounts to off-balance sheet reserves as in previous years. Also,
the Company did not experience the degree of increased prepayments that it did
in 1993. See Note 1 to Consolidated Financial Statements for a description of
mortgage banking income.
Noninterest revenues of $255.6 million in 1993 increased $62.5 million
or 32% from $193.1 million in 1992, primarily due to increases in credit
card securitization and servicing income, and leasing and insurance revenues.
These increases were partially offset by a decrease in credit card interchange
income.
29
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Advanta Corp. and Subsidiaries
OPERATING EXPENSES
(Dollars in thousands)
- ------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------
Amortization of credit card
deferred origination
costs, net $ 39,381 $ 6,566 $ 4,482
Other operating expenses:
Salaries and employee
benefits 88,681 65,469 51,599
Marketing 32,339 18,742 13,845
External processing 22,618 16,604 12,993
Credit card fraud
losses 16,654 13,779 13,134
Postage 12,732 9,818 7,806
Professional fees 10,985 10,761 5,700
Equipment expense 9,293 6,550 5,629
Telephone expense 8,615 5,402 4,379
Occupancy expense 8,425 6,247 5,272
Credit and collection
expense 7,604 7,055 5,273
Other 9,457 14,174 11,970
- ------------------------------------------------------------------------------
Total other operating
expenses $227,403 $174,601 $137,600
- ------------------------------------------------------------------------------
Total operating
expenses $266,784 $181,167 $142,082
==============================================================================
At year end:
Number of accounts
managed (000's) 3,965 2,827 2,252
Number of employees 1,753 1,614 1,327
For the year:
Other operating expenses
as a percentage of
average managed
receivables 3.7% 4.1% 4.4%
==============================================================================
The amortization of credit card deferred origination costs, net, increased from
$6.6 million in 1993 to $39.4 million in 1994. In May 1993, the Emerging Issues
Task Force (the "EITF") of the Financial Accounting Standards Board (the
"FASB") reached a consensus regarding the deferral of amounts paid to a third
party to acquire individual credit card accounts and the amortization period
for such costs. As a result of this consensus, deferred origination costs and
the amortization thereof are now linked to the privilege period of the card
(which is normally 12 months), rather than to the related receivable. In 1994,
the Company began including the amortization of these costs as an operating
expense rather than a component of net interest income, as the costs no longer
relate to the receivables. All prior periods have been reclassified for this
change. Costs incurred for credit card originations initiated after the May
1993 EITF consensus date are being amortized over 12 months, rather than
pursuant to the previous policy of 60 months. Due to the fact that 1993 was a
transition year, the full impact of this change did not occur until 1994. Also
affecting the increase in amortization was a $25.7 million increase in amounts
deferred under these third party arrangements in 1994.
Total other operating expenses of $227.4 million for 1994 were up
$52.8 million or 30% from $174.6 million in 1993. The increase in total other
operating expenses primarily resulted from: (a) a $23.2 million or 35% increase
in salaries and employee benefits, (b) a $13.6 million increase in marketing
expenses as the Company promoted its financial products as well as enhanced its
general public visibility, (c) a $6.0 million increase in external processing
resulting primarily from a 40% increase in the number of accounts managed
year-to-year, and (d) an overall increase in credit card related costs due to a
42% increase in the number of managed credit card accounts.
The amortization of credit card deferred origination costs, net, rose
to $6.6 million in 1993 from $4.5 million in 1992, due to the change in the
amortization period discussed above. Total other operating expenses of $174.6
million for 1993 rose $37.0 million or 27% from $137.6 million in 1992, driven
by a 33% growth in average managed receivables. The overall growth in operating
expenses was reflected in a $13.9 million or 27% increase in salaries and
employee benefits, as well as increases in marketing expenses, external
processing and other credit card related costs due to the 27% increase in the
number of managed credit card accounts during 1993.
30
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Advanta Corp. and Subsidiaries
INCOME TAXES
The Company's consolidated income tax expense was $59.1 million for 1994, or an
effective tax rate of 36%, compared to tax expense of $45.3 million, or a 37%
effective rate, in 1993 and tax expense of $29.1 million, or a 38% effective
rate, in 1992. The decrease in the effective tax rate from 1993 to 1994
resulted from a higher level of tax-free income and lower levels of state
taxes. The decrease in the effective tax rate from 1992 to 1993 resulted from a
higher level of tax-free income.
ASSET/LIABILITY MANAGEMENT
The financial condition of Advanta Corp. is managed with a focus on maintaining
high credit quality standards, disciplined interest rate risk management and
prudent levels of leverage and liquidity.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to net interest income variability resulting
from mismatches between asset and liability indices (basis risk) and the
effects which these changes in market interest rates have on asset and
liability maturity mismatches (gap risk).
The Company attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating the
risk inherent in its asset and liability structure, including securitized
assets. This risk arises from continuous changes in the Company's
asset/liability mix, market interest rates, the yield curve, prepayment trends
and the timing of cash flows. Computer simulations are used to evaluate net
interest income volatility under varying rate, spread and volume projections
over monthly time periods of up to two years.
In managing its interest rate sensitivity position, the Company
periodically securitizes, sells and purchases assets, alters the mix and term
structure of its funding base, changes its investment portfolio and short-term
investment position, and uses derivative financial instruments. Derivative
financial instruments are used for the express purpose of managing exposure to
changes in interest rates and, by policy, are not used for any speculative
purposes (see discussion under "Derivatives Activities"). The Company has
primarily utilized variable rate funding in pricing its credit card
securitization transactions in an attempt to match the variable rate pricing
dynamics of the underlying receivables sold to the trusts. Variable rate
funding is used on the balance sheet as well, in support of unsecuritized
receivables which carry variable rates. Although credit card receivable rates
are generally set at a spread over the prime rate, they often contain interest
rate floors. These floors have the impact of converting the credit card
receivables to fixed rate receivables in a low interest rate environment. In
instances when a significant portion of credit card receivables are at their
floors, the Company may convert part of the underlying funding to a fixed rate
by using interest rate hedges, swaps and fixed rate securitizations. In pricing
mortgage and lease securitizations, both fixed rate and variable rate funding
are used depending upon the characteristics of the underlying receivables.
Additionally, basis risk exists in on-balance sheet funding as well as
securitizing credit card receivables at a spread over LIBOR when the rate on
the underlying assets is indexed to the prime rate. The underlying liability or
coupon on a securitization is often indexed to LIBOR, and LIBOR does not
perfectly correlate to prime. The Company measures the basis risk resulting
from potential variability in the spread between prime and LIBOR and
incorporates such risk into the asset and liability management process. During
1994, $425 million in prime-LIBOR corridors were executed in order to provide
protection against narrowing of these spreads. The Company continues to seek
cost-effective alternatives towards minimizing this risk.
Interest rate fluctuations affect net interest income at virtually all
financial institutions. While interest rate volatility does have an effect on
net interest income, other factors also contribute significantly to changes in
net interest income. Specifically, within the credit card portfolio, pricing
decisions and customer behavior regarding convenience usage affect the yield on
the portfolio. These factors may counteract or exacerbate income
31
31
Advanta Corp. and Subsidiaries
changes due to fluctuating interest rates. The Company closely monitors
interest rate movements, competitor pricing and consumer behavioral changes in
its ongoing analysis of net interest income sensitivity.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, both long and
short-term, through active management of both assets and liabilities. During
1994, the Company, through its subsidiaries, securitized $2.2 billion of credit
card receivables, $456 million of mortgage loans and $102 million of lease
receivables. Cash generated from these transactions was temporarily invested in
short-term, high quality investments at money market rates awaiting
redeployment to pay down borrowings and to fund future credit card, mortgage
loan and lease receivable growth. See the Consolidated Statements of Cash Flows
for more information regarding liquidity, funding and capital resources. In
addition, see Note 5 to Consolidated Financial Statements and Supplemental
Schedules thereto for additional information regarding the Company's investment
portfolio.
Over the last seven years, the Company has successfully accessed the
securitization market to efficiently support its growth strategy. While
securitization should continue to be a reliable source of funding for the
Company, other funding sources are available and include deposits, medium-term
notes, subordinated debt, repurchase agreements, committed and uncommitted bank
lines, bank notes, federal funds purchased and the ability to sell assets and
raise additional equity. Funding diversification is an essential component of
the Company's liquidity management. During 1993, the debt securities of Advanta
Corp. and Colonial National Bank USA ("Colonial National" or the "Bank"), the
principal operating subsidiary, achieved investment-grade ratings from the
nationally recognized rating agencies. These ratings have allowed the Company
to further diversify its funding sources. Efforts continue to develop new
sources of funding, either through previously untapped customer segments or
through developing new financing structures.
In November 1993, the Company filed a shelf registration statement
with the Securities and Exchange Commission for $1 billion of debt securities.
In the fourth quarter of 1993, the Company sold $150 million of three-year
notes under this registration statement and it sold $360 million of medium-term
notes under this registration statement through 1994. The Company may sell up
to an additional $490 million of medium-term notes as needed. Further
diversification was achieved in 1994 when the Company obtained revolving credit
facilities totaling $255 million from a consortium of banks and $255 million in
money market bid lines. In addition, steady building of liquidity and capital
in 1994 and 1993 was achieved as a result of $39.6 million of dividends from
subsidiaries in 1994 and $76.5 million in 1993, and retained earnings of $96.2
million in 1994 and $69.3 million in 1993. The Board of Directors currently
intends to have the Company pay regular quarterly dividends to its
shareholders, maintaining an approximate 20% premium on the dividend paid on
the Class B shares; however, the Company plans to reinvest the majority of its
earnings to support future growth.
At December 31, 1994, the Company was carrying $573 million of loans
available for sale. The fair value of such loans was in excess of their
carrying value at year end. In connection with liquidity and asset/liability
management, the Company had $319 million of investments available for sale at
December 31, 1994. See Note 19 to Consolidated Financial Statements for fair
value disclosures.
32
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Advanta Corp. and Subsidiaries
In August 1993, Colonial National sold $50 million of subordinated
notes which had received an investment-grade rating and qualified as Tier 2
capital for bank regulatory purposes. In December 1994, Colonial National sold
$85 million of short-term bank notes which have maturities ranging from seven
days to one year from date of issuance. These notes are not subordinated and do
not qualify as Tier 2 capital.
As a grandfathered institution under the Competitive Equality Banking
Act of 1987 ("CEBA"), the Company must limit the Bank's average on-balance
sheet asset growth to 7% per annum. For the fiscal CEBA year ended September
30, 1994, the Bank's average assets did not exceed the allowable amount and,
accordingly, the Bank was in full compliance with CEBA growth limits. The
timing and size of securitizations, on-balance sheet liability structure and
rapid changes in balance sheet structure are frequently due to the management
of the Bank's balance sheet within this growth constraint.
Deposits at December 31, 1994 include $33 million of deposits at
Advanta Financial Corp. ("AFC"), a Utah state-chartered, FDIC-insured
industrial loan corporation (a wholly-owned subsidiary of the Company, formerly
named Colonial National Financial Corp.). AFC's assets and operations are not
currently material to the Company, and the Company does not expect them to
become material in the near term.
During 1993, the Company raised $90 million in new equity through a
3.0 million share (pre-split) Class B common stock offering. Proceeds were
used to support future growth.
While there are no specific capital requirements for Advanta Corp.,
the Office of the Comptroller of the Currency requires that Colonial National
maintain a risk-based capital ratio of at least 8%. Colonial National's
risk-based capital ratio of 12.04% at December 31, 1994 was in excess of the
required level and exceeded the minimum capital level of 10% required for the
designation as a "well-capitalized" depository institution. The Company intends
to take the necessary actions to maintain Colonial National as a
"well-capitalized" bank. In addition, the Company's insurance subsidiaries are
subject to certain capital, deposit and dividend rules and regulations as
prescribed by state jurisdictions in which they are authorized to operate. At
December 31, 1994 and 1993 the insurance subsidiaries were in compliance with
all requisite rules and regulations.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the
past five years.
COMPOSITION OF DEPOSIT BASE
(Dollars in millions) As of December 31,
- -------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------- -------------- -------------- --------------- ---------------
AMOUNT % Amount % Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------
Demand deposits $ 64.5 5% $ 33.4 3% $ 24.8 2% $ 20.2 2% $ 8.5 1%
Money market savings 301.7 26 220.7 17 210.7 17 197.1 16 192.8 18
Time deposits of
$100,000 or less 691.0 60 961.4 77 926.8 77 932.5 77 762.9 73
Time deposits of more
than $100,000 102.2 9 39.4 3 42.2 4 55.2 5 88.1 8
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $1,159.4 100% $1,254.9 100% $1,204.5 100% $1,205.0 100% $1,052.3 100%
=========================================================================================================================
33
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Advanta Corp. and Subsidiaries
COMPOSITION OF DEBT AND OTHER BORROWINGS
(Dollars in millions) As of December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------- --------------- -------------- --------------- ------------------
AMOUNT % Amount % Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------------
Subordinated notes and
certificates $ 272.1 19% $ 291.1 61% $ 260.4 80% $ 185.5 53% $137.2 47%
Subordinated debentures 0 0 0 0 33.2 10 33.2 10 33.2 11
Short-term bank notes 85.0 6 0 0 0 0 0 0 0 0
5 1/8% notes, due 1996 149.9 11 149.9 32 0 0 0 0 0 0
Medium-term notes 359.7 25 15.0 3 0 0 0 0 0 0
Other notes 10.0 1 10.2 2 10.7 3 7.1 2 4.2 1
Term fed funds 309.0 22 0 0 0 0 0 0 0 0
Securities sold under
agreements to repurchase 86.5 6 0 0 0 0 101.8 29 30.9 11
Lines of credit and term
funding arrangements 50.0 4 7.5 2 16.5 5 14.0 4 73.2 25
Other borrowings 80.9 6 0 0 7.1 2 6.3 2 15.5 5
- -------------------------------------------------------------------------------------------------------------------------------
Total debt and other
borrowings $1,403.1 100% $ 473.7 100% $ 327.9 100% $ 347.9 100% $294.2 100%
===============================================================================================================================
CAPITAL EXPENDITURES
The Company spent $24.1 million for capital expenditures in 1994, primarily for
the purchase of two buildings, improvements to those buildings, additional
space in other buildings, office and voice communication equipment and
furniture and fixtures. This compared to $13.3 million for capital expenditures
in 1993 and $5.3 million in 1992.
In 1995, the Company anticipates capital expenditures to exceed those
of 1994 as its facilities are expanding and the Company is continuing to
upgrade its voice and communication systems. The Company also anticipates that
its 1995 marketing expenditures will exceed those of 1994 as the Company
continues to originate new accounts, manage account retention and develop new
consumer products for its customers.
DERIVATIVES ACTIVITIES
The Company utilizes derivative financial instruments for the purpose of
managing its exposure to interest rate risk. The Company has a number of
mechanisms in place that enable it to monitor and control both market and
credit risk from these derivatives activities. At the broader level, all
derivatives strategies are managed under the hedging policy approved by the
Board of Directors that details the use of such derivatives and the individuals
authorized to execute derivatives transactions. All derivatives strategies must
be approved by a senior management team (President, Chief Financial Officer and
Treasurer).
As part of this approval process, a market risk analysis is completed
to determine the potential impact on the Company from severe negative
(stressed) movements in the market. By policy, derivatives transactions may
only be used to manage the Company's exposure to interest rate risk and may not
be used for speculative purposes. As such, the impact of any derivatives
transaction is calculated using the Company's asset/liability model to
determine its suitability.
The Company's Board has approved a counterparty credit policy. This
policy details the maximum transaction limit and transaction term for
counterparties with a given credit rating (from nationally recognized rating
agencies) and the maximum allowable exposure amounts. The exposure amount is
calculated in a stress environment and represents the maximum aggregate credit
exposure from derivatives transactions the Company is willing to accept from a
rated counterparty. Under negotiated agreements with the counterparties, once
the aggregate exposure exceeds this level, the Company has the right to call
for and receive collateral for the amount of such excess, thereby limiting its
exposure to the threshold amount. The threshold levels can be fixed or may
change as the credit rating of the counterparty changes.
34
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Advanta Corp. and Subsidiaries
Under the credit policy, the Company's Investment Committee (a
management committee) approves each specific derivatives counterparty,
including its respective term and transaction limits, and the actual threshold
amounts to be set within the Company's bilateral collateral agreements. Each
counterparty's credit quality is reviewed as new market information becomes
available, and, in any case, at least semi- annually. Counterparties will be
dropped if there is reason to believe that their credit quality is below the
Company's set standards.
Counterparty master agreements and any collateral agreements, by
policy, must be signed prior to the execution of any derivatives transactions
with a counterparty. To date, all master agreements with counterparties have
included bilateral collateral agreements. As such, the potential exposure to a
particular counterparty is limited to the maximum threshold level for that
counterparty.
The Company has established an independent treasury accounting group
which measures, monitors, and reports on credit, market, and liquidity risk
exposures from hedging and derivative product activities. It is the
responsibility of this department to ensure compliance with respect to the
hedging policy, including the counterparty transaction limits, transaction
terms and trader authorizations. In addition, this department marks each
derivatives position to market on a weekly basis using both internal and
external models that have been benchmarked against the derivatives dealers'
monthly valuations. Position and counterparty exposure reports are generated
and used to manage collateral requirements of the counterparty and the Company.
All of these procedures and processes are designed to provide
reasonable assurance that prior to and after the execution of any derivatives
strategy, market, credit and liquidity risks are fully analyzed and
incorporated into the Company's asset/liability and risk measurement models and
the proper accounting treatment for the transaction is identified.
CREDIT RISK MANAGEMENT
Management regularly reviews the loan portfolio in order to evaluate the
adequacy of the reserve for credit losses. The evaluation includes such factors
as the inherent credit quality of the loan portfolio, past experience, current
economic conditions, projected credit losses and changes in the composition of
the loan portfolio. The reserve for credit losses is maintained for on-balance
sheet receivables. The on-balance sheet reserve is intended to cover all credit
losses inherent in the owned loan portfolio. With regard to securitized assets,
anticipated losses and related recourse reserves are reflected in the
calculations of Securitization Income, Amounts Due from Credit Card
Securitizations and Other Assets. Recourse reserves are intended to cover all
probable credit losses over the life of the securitized receivables. Management
evaluates both its on-balance sheet and recourse reserve requirements and, as
appropriate, effects transfers between these accounts.
The reserve for credit losses on a consolidated basis was $41.6
million, or 2.1% of receivables, at December 31, 1994, compared to $31.2
million, or 2.4% of receivables, in 1993. Due to the increase in the proportion
of owned impaired mortgages, which have a lower level of reserve coverage, the
reserve coverage of impaired assets (nonperforming assets and accruing loans
past due 90 days or more on credit cards) dropped to 96.1% at December 31,
1994, from 138.6% at December 31, 1993. Reserve coverage of impaired credit
card assets was 186.5% at December 31, 1994, up slightly from 183.7% at year
end 1993.
The reserve for credit losses on a consolidated basis was $31.2
million, or 2.4% of receivables, in 1993 down from $40.2 million, or 4.0% of
receivables, in 1992. Due to improved credit quality, this reserve level
resulted in higher reserve coverage of impaired assets.
35
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Advanta Corp. and Subsidiaries
ASSET QUALITY
Impaired assets include both nonperforming assets (mortgage loans and leases
past due 90 days or more, real estate owned, credit card receivables due from
cardholders in bankruptcy, and off-lease equipment) and accruing loans past due
90 days or more on credit cards. The carrying values for both real estate owned
and equipment held for lease or sale are based on net realizable value after
taking into account holding costs and costs of disposition and are reflected in
other assets.
On the total managed portfolio, impaired assets were $102.4 million,
or 1.3% of receivables, at year end 1994 compared to $95.1 million, or 1.8% of
receivables, in 1993. Nonperforming assets on the total managed portfolio were
$61.6 million, or .8% of receivables, compared to $63.6 million, or 1.2%, in
1993. A key credit quality statistic, the 30-day and over delinquency rate on
managed credit cards, dropped to 2.0% from 2.4% a year ago. The total managed
charge-off rate for 1994 was 2.3%, compared to 2.9% for 1993. The charge-off
rate on managed credit cards was 2.5% for 1994, down from 3.5% for 1993.
On the total owned portfolio, impaired assets were $43.3 million, or
2.2% of receivables in 1994, compared to $22.5 million, or 1.8%, in 1993. This
increase was due to the repurchase of the nonperforming mortgages from the
securitization trusts (see "Provision for Credit Losses"). Gross interest
income that would have been recorded in 1994 and 1993 for owned nonperforming
assets, had interest been accrued throughout the year in accordance with the
assets' original terms, was approximately $5.1 million and $1.5 million,
respectively. The amount of interest on nonperforming assets included in income
for 1994 and 1993 was $1.7 million and $.3 million, respectively.
Past due loans represent accruing loans that are past due 90 days or
more as to collection of principal and interest. Credit card receivables,
except those on bankrupt, decedent and fraudulent accounts, continue to accrue
interest until the time they are charged off at 186 days contractual
delinquency. In contrast, all mortgage loans and leases are put on nonaccrual
when they become 90 days past due. Owned credit card receivables past due 90
days or more and still accruing interest were $11.2 million or .6% of
receivables at December 31, 1994, compared to $11.0 million, or 1.0% of
receivables, a year ago.
Through 1990, when the Company received notice that a credit
cardholder had filed a bankruptcy petition or was deceased, the Company
established a reserve equal to the full balance of the receivable. The
receivable, if not paid, would be charged off in accordance with the Company's
normal credit card charge-off policy at 186 days contractual delinquency.
Likewise, receivables in accounts identified as fraudulent would be reserved
against and written off (as an operating expense) when they became 186 days
contractually delinquent. These policies are consistent with many leading
competitors in the credit card industry.
During 1991, the Company adopted a new policy for the charge-off of
bankrupt, decedent and fraudulent credit card accounts. Under the new policy,
the Company charges off bankrupt or decedent accounts within 30 days of
notification and accounts suspected of being fraudulent after a 90 day
investigation period, unless the investigation shows no evidence of fraud.
Consequently, in 1991, both newly identified bankrupt, decedent and fraudulent
accounts, as well as those previously identified, were written off. The 1991
charge-off rates included in the following tables exclude the effect of this
acceleration.
During 1994, the Company implemented a new policy for the charge-off
of mortgage loans. Under this policy, when a nonperforming mortgage loan
becomes twelve months delinquent, the Company writes down the loan to its net
realizable value, regardless of anticipated collectibility. Consequently, in
1994 all mortgage loans that had been twelve or more months delinquent, as well
as any mortgages that became twelve months delinquent during the year were
written down to their net realizable value. Thus, the managed mortgage loan
charge-off rate increased from 1.3% in 1993 to 1.7% in 1994. The managed
mortgage charge-off rate in 1995 is anticipated to be closer to the 1.0% level.
36
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Advanta Corp. and Subsidiaries
The following tables provide a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years.
(Dollars in thousands) December 31,
- ----------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED-MANAGED
Nonperforming assets $ 61,587 $ 63,589 $ 57,797 $ 47,587 $ 41,126
Accruing loans past due 90 days or more 40,837 31,514 34,890 33,250 21,463
Impaired assets 102,424 95,103 92,687 80,837 62,589
Total loans 30 days or more delinquent 220,390 186,297 184,670 159,345 126,977
As a percentage of gross receivables:
Nonperforming assets .8% 1.2% 1.6% 1.7% 2.0%
Accruing loans past due 90 days or more .5% .6% .9% 1.2% 1.0%
Impaired assets 1.3% 1.8% 2.5% 2.8% 3.0%
Total loans 30 days or more delinquent 2.7% 3.6% 5.0% 5.6% 6.0%
Net charge-offs:
Amount $139,890 $122,715 $108,606 $ 89,072 $ 46,270
As a percentage of average gross
receivables 2.3% 2.9% 3.4% 3.2% (1) 2.7%
- ----------------------------------------------------------------------------------------------------------------------
CREDIT CARDS-MANAGED
Nonperforming assets $ 14,227 $ 10,881 $ 7,592 $ 5,586 $ 13,615
Accruing loans past due 90 days or more 40,721 31,489 34,890 33,239 21,424
Impaired assets 54,948 42,370 42,482 38,825 35,039
Total loans 30 days or more delinquent 133,121 94,035 99,308 97,100 77,712
As a percentage of gross receivables:
Nonperforming assets .2% .3% .3% .3% .9%
Accruing loans past due 90 days or more .6% .8% 1.3% 1.6% 1.5%
Impaired assets .8% 1.1% 1.6% 1.9% 2.4%
Total loans 30 days or more delinquent 2.0% 2.4% 3.7% 4.8% 5.4%
Net charge-offs:
Amount $115,218 $105,966 $100,465 $ 84,113 $ 43,115
As a percentage of average gross
receivables 2.5% 3.5% 4.5% 4.4% (1) 3.8%
- ----------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS-MANAGED(2)
Nonperforming assets $ 44,678 $ 50,418 $ 46,755 $ 37,371 $ 22,703
Total loans 30 days or more delinquent 65,966 75,747 69,962 51,137 39,001
As a percentage of gross receivables:
Nonperforming assets 3.3% 4.4% 5.1% 5.2% 3.9%
Total loans 30 days or more delinquent 4.9% 6.6% 7.7% 7.1% 6.6%
Net charge-offs:
Amount $ 20,709 $ 13,991 $ 5,924 $ 3,031 $ 1,335
As a percentage of average gross
receivables 1.7% 1.3% .8% .5% .3%
- ----------------------------------------------------------------------------------------------------------------------
LEASES-MANAGED
Nonperforming assets $ 2,682 $ 2,290 $ 3,432 $ 4,625 $ 4,808
Total loans 30 days or more delinquent 20,972 16,476 15,320 11,048 10,212
As a percentage of receivables:
Nonperforming assets 1.0% 1.3% 2.5% 4.5% 5.8%
Total loans 30 days or more delinquent 7.9% 9.7% 11.1% 10.8% 12.2%
Net charge-offs:
Amount $ 3,961 $ 2,759 $ 2,352 $ 2,130 $ 2,226
As a percentage of average
receivables 2.0% 1.9% 2.2% 2.5% 2.8%
======================================================================================================================
(1) The 1991 charge-off rates are normalized to exclude the acceleration of the
charge-off of bankrupt and decedent accounts related to the adoption of a
new credit card charge-off policy in 1991. Including these amounts, the
charge-off rates for 1991 were 3.8% and 5.3% on a consolidated-managed and
credit card-managed basis, respectively.
(2) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
37
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Advanta Corp. and Subsidiaries
(Dollars in thousands) December 31,
- -------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED-OWNED
Reserve for credit losses $41,617 $31,227 $40,228 $36,355 $31,701
Nonperforming assets 31,949 11,487 15,318 18,367 25,765
Accruing loans past due 90 days or more 11,354 11,038 16,270 20,989 17,118
Impaired assets 43,303 22,525 31,588 39,356 42,883
Reserve as a percentage of impaired
assets 96.1% 138.6% 127.4% 92.4% 73.9%
As a percentage of gross receivables:
Reserve 2.1% 2.4% 4.0% 2.9% 2.8%
Nonperforming assets 1.6% .9% 1.5% 1.4% 2.3%
Accruing loans past due 90 days or
more .6% .9% 1.6% 1.7% 1.5%
Impaired assets 2.2% 1.8% 3.2% 3.1% 3.8%
Net charge-offs:
Amount $35,293 $26,776 $39,965 $50,807 $33,435
As a percentage of average
gross receivables 2.6% 2.4% 3.9% 4.0% (1) 3.4%
- -------------------------------------------------------------------------------------------------------------------
CREDIT CARDS-OWNED
Reserve for credit losses $27,486 $25,859 $35,743 $31,193 $27,247
Nonperforming assets 3,502 3,062 2,780 3,008 9,354
Accruing loans past due 90 days or more 11,238 11,013 16,270 20,978 17,079
Impaired assets 14,740 14,075 19,050 23,986 26,433
Reserve as a percentage of impaired
assets 186.5% 183.7% 187.6% 130.0% 103.1%
As a percentage of gross receivables:
Reserve 1.6% 2.3% 4.8% 3.0% 3.4%
Nonperforming assets .2% .3% .4% .3% 1.2%
Accruing loans past due 90 days
or more .6% 1.0% 2.2% 2.0% 2.2%
Impaired assets .9% 1.2% 2.6% 2.3% 3.3%
Net charge-offs:
Amount $22,688 $23,623 $37,382 $47,252 $30,445
As a percentage of average gross
receivables 1.9% 2.6% 4.6% 4.9% (1) 4.4%
- -------------------------------------------------------------------------------------------------------------------
MORTGAGE LOANS-OWNED(2)
Reserve for credit losses $ 5,164 $ 2,706 $ 2,926 $ 2,447 $ 1,766
Nonperforming assets 27,379 7,090 10,266 11,801 11,603
Reserve as a percentage of impaired
assets 18.9% 38.2% 28.5% 20.7% 15.2%
As a percentage of gross receivables:
Reserve 3.6% 3.0% 1.4% 1.3% .7%
Nonperforming assets 19.2% 7.8% 4.8% 6.3% 4.6%
Net charge-offs:
Amount $11,689 $ 2,207 $ 1,451 $ 1,627 $ 1,170
As a percentage of average gross
receivables 9.7% 1.4% .8% .8% .5%
- -------------------------------------------------------------------------------------------------------------------
LEASES-OWNED
Reserve for credit losses $ 1,076 $ 1,826 $ 1,442 $ 1,119 $ 1,594
Nonperforming assets 1,068 1,335 2,254 3,553 4,808
Reserve as a percentage of impaired
assets 100.7% 136.8% 64.0% 31.5% 33.2%
As a percentage of receivables:
Reserve 1.2% 3.6% 3.1% 3.1% 1.9%
Nonperforming assets 1.2% 2.6% 4.8% 9.7% 5.8%
Net charge-offs:
Amount $ 914 $ 947 $ 1,267 $ 2,130 $ 2,226
As a percentage of average receivables 1.5% 1.6% 2.8% 3.1% 2.8%
===================================================================================================================
(1) The 1991 charge-off rates are normalized to exclude the acceleration of the
charge-off of bankrupt and decedent accounts related to the adoption of a
new credit card charge-off policy in 1991. Including these amounts, the
charge-off rates for 1991 were 4.7% and 5.8% on a consolidated-owned and
credit card-owned basis, respectively.
(2) In 1994, the Company initiated a program for repurchasing nonperforming
assets from the securitized portfolios and implemented a new mortgage loan
charge-off policy (see Asset Quality).
38
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Advanta Corp. and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) December 31,
- ------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------
ASSETS
Cash $ 43,706 $ 31,162
Federal funds sold 39,050 83,700
Interest-bearing deposits 313,852 150,496
Investments available for sale 318,759 308,026
Loan and lease receivables, net:
Available for sale 573,076 667,774
Other loan and lease receivables, net 1,406,378 614,879
------------------------------
Total loan and lease receivables, net 1,979,454 1,282,653
Premises and equipment (at cost, less accumulated
depreciation of $28,906 in 1994 and $25,163
in 1993) 33,219 17,045
Amounts due from credit card securitizations 144,483 117,764
Other assets 240,525 149,349
- ------------------------------------------------------------------------------------
Total assets $ 3,113,048 $ 2,140,195
====================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 64,510 $ 33,446
Interest-bearing 1,094,848 1,221,435
------------------------------
Total deposits 1,159,358 1,254,881
Other borrowings 737,095 105,327
Long-term debt 666,033 368,372
Other liabilities 108,872 68,874
- ------------------------------------------------------------------------------------
Total liabilities 2,671,358 1,797,454
- ------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (See Notes 7 and 9)
Preferred stock 1,010 1,010
Class A common stock, $.01 par value;
Authorized - 200,000,000 shares;
Issued - 17,347,468 shares in 1994
and 17,240,064 shares in 1993 173 172
Class B common stock, $.01 par value;
Authorized - 200,000,000 shares;
Issued - 23,131,498 shares in 1994
and 22,603,088 shares in 1993 231 226
Additional paid-in capital, net 176,465 166,646
Retained earnings, net 263,811 174,687
- ------------------------------------------------------------------------------------
Total stockholders' equity 441,690 342,741
- ------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,113,048 $ 2,140,195
====================================================================================
See Notes to Consolidated Financial Statements.
39
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Advanta Corp. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data) Year Ended December 31,
- ---------------------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------
Interest income:
Loans and leases $135,429 $134,184 $143,970
Investments:
Taxable 26,552 22,083 22,596
Exempt from federal
income tax 3,158 1,680 155
-------------------------------------------------
Total investments 29,710 23,763 22,751
-------------------------------------------------
Total interest income 165,139 157,947 166,721
-------------------------------------------------
Interest expense:
Deposits 48,268 53,389 66,526
Debt 36,347 22,951 23,426
Other borrowings 10,143 2,963 3,593
-------------------------------------------------
Total interest expense 94,758 79,303 93,545
-------------------------------------------------
Net interest income 70,381 78,644 73,176
Provision for credit losses 34,198 29,802 47,138
-------------------------------------------------
Net interest income after
provision for
credit losses 36,183 48,842 26,038
-------------------------------------------------
Noninterest revenues:
Gain on sale of credit cards 18,352 0 0
Other noninterest revenues 377,456 255,580 193,144
-------------------------------------------------
Total noninterest revenues 395,808 255,580 193,144
-------------------------------------------------
Operating expenses:
Amortization of credit
card deferred origination
costs, net 39,381 6,566 4,482
Other operating expenses 227,403 174,601 137,600
--------------------------------------------------
Total operating expenses 266,784 181,167 142,082
--------------------------------------------------
Income before income taxes
and extraordinary item 165,207 123,255 77,100
Provision for income taxes 59,144 45,335 29,063
--------------------------------------------------
Net income before
extraordinary item 106,063 77,920 48,037
Extraordinary item, net
(See Note 10) 0 (1,273) 0
--------------------------------------------------
Net income $106,063 $ 76,647 $ 48,037
=======================================================================================
Earnings per common
share before
extraordinary item
(See Note 1) $ 2.58 $ 1.95 $ 1.38
=======================================================================================
Earnings per common share
(See Note 1) $ 2.58 $ 1.92 $ 1.38
======================================================================================
Weighted average common
shares outstanding 41,046 39,777 34,590
=======================================================================================
See Notes to Consolidated Financial Statements.
40
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Advanta Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Investment
Class A Class A Class B Additional Holding Total
Preferred Common Common Paid-In Deferred Gains Retained Treasury Stockholders'
Stock Stock Stock Capital Compensation (Losses) Earnings Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1991 $ 1,010 $ 166 $ 166 $ 62,613 $ (5,668) $ (233) $ 60,805 $ 0 $ 118,859
Change in unrealized
appreciation of equity
investments 194 194
Preferred and common cash
dividends declared (4,028) (4,028)
Exercise of stock options 4 3 1,724 1,731
Issuance of stock:
Benefit plans 3 3,512 (2,025) 156 1,646
Amortization of deferred
compensation 2,338 2,338
Termination/Tax
benefit-benefit plans 6,462 218 (587) 6,093
Net Income 48,037 48,037
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1992 1,010 170 172 74,311 (5,137) (39) 104,814 (431) 174,870
Change in unrealized
appreciation of equity
investments 563 563
Preferred and common cash
dividends declared (7,298) (7,298)
Exercise of stock options 2 4 1,866 1,872
Issuance of stock:
Public offering 45 89,980 90,025
Benefit plans 5 9,575 (7,934) 419 2,065
Amortization of deferred
compensation 1,960 1,960
Termination/Tax
benefit-benefit plans 1,922 103 12 2,037
Net Income 76,647 76,647
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1993 1,010 172 226 177,654 (11,008) 524 174,163 0 342,741
Change in unrealized
appreciation of equity
investments (7,062) (7,062)
Preferred and common cash
dividends declared (9,877) (9,877)
Exercise of stock options 1 2 1,671 184 1,858
Issuance of stock:
Benefit plans 3 11,543 (9,542) 636 2,640
Amortization of deferred
compensation 5,327 5,327
Termination-benefit plans (190) 1,010 (820) 0
Net Income 106,063 106,063
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1994 $ 1,010 $ 173 $ 231 $190,678 $(14,213) $(6,538) $270,349 $ 0 $ 441,690
==================================================================================================================================
See Notes to Consolidated Financial Statements.
41
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Advanta Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 106,063 $ 76,647 $ 48,037
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sales/securitizations of receivables 2,738,740 1,686,913 1,396,011
Purchase of mortgage/lease portfolios (143,804) (70,014) (25,159)
Principal collected on mortgages 25,753 21,257 24,294
Mortgages made to customers (451,892) (472,099) (441,633)
Depreciation and amortization of intangibles 7,907 5,206 4,855
Provision for credit losses 34,198 29,802 47,138
Change in other assets and amounts due from securitizations (43,599) (19,549) (41,182)
Change in other liabilities 27,616 16,952 31,792
Gain on securitization of mortgages and leases (27,189) (19,127) (15,209)
Loss on repurchase of senior subordinated debentures 0 1,928 0
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,273,793 1,257,916 1,028,944
INVESTING ACTIVITIES
Purchase of investments available for sale (1,804,963) (1,020,355) (502,853)
Proceeds from sales of investments available for sale 623,663 840,936 352,980
Proceeds from maturing investments available for sale 1,159,702 81,592 87,361
Change in fed funds sold and interest-bearing deposits (34,973) 78,089 (188,777)
Change in credit card receivables, excluding sales (2,790,421) (1,441,397) (692,582)
Purchase of premises and equipment (24,088) (13,271) (5,302)
Proceeds from sale of premises and equipment 647 930 285
Excess of cash collections over income
recognized on direct financing leases 21,691 20,493 16,907
Equipment purchased for direct financing lease contracts (160,080) (90,002) (63,571)
Net change in other loans (75) (1) 127
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,008,897) (1,542,986) (995,425)
FINANCING ACTIVITIES
Increase in demand and savings deposits 112,048 18,666 18,171
Proceeds from sales of time deposits 448,624 820,904 621,456
Payments for maturing time deposits (656,195) (789,175) (640,176)
Change in repurchase agreements and term fed funds 395,455 0 (101,847)
Proceeds from issuance of subordinated debt 39,437 135,000 177,321
Payments on redemption of subordinated debt (58,618) (103,480) (98,711)
Redemption of senior subordinated debentures 0 (36,404) 0
Proceeds from issuance of medium-term notes 344,787 15,000 0
Proceeds from issuance of 5 1/8% notes 0 149,851 0
Proceeds from issuance of notes payable to banks 137,276 121,069 193,977
Repayment of notes payable to banks (9,787) (137,196) (190,663)
Proceeds from issuance of stock 4,498 93,542 3,377
Cash dividends paid (9,877) (7,298) (4,028)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 747,648 280,479 (21,123)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 12,544 (4,591) 12,396
Cash at beginning of year 31,162 35,753 23,357
Cash at end of year $ 43,706 $ 31,162 $ 35,753
==================================================================================================================================
See Notes to Consolidated Financial Statements.
42
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Advanta Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Advanta
Corp. (the "Company") and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
RECLASSIFICATION
Certain prior-period amounts have been reclassified to conform with
current-year classifications. As indicated in Management's Discussion and
Analysis under the caption "Operating Expenses," the Company is including the
amortization of credit card deferred origination costs, net of deferred fees,
in operating expenses rather than as a component of interest income as these
net costs are linked to the privilege period of the cards and not to the credit
card receivables.
CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES
CREDIT CARD ORIGINATION COSTS
The Company accounts for credit card origination costs under Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases" ("SFAS 91"). This accounting standard requires certain loan and
lease origination fees and costs to be deferred and amortized over the life of
a loan or lease as an adjustment to interest income. Origination costs are
defined under this standard to include costs of loan origination associated
with transactions with independent third parties and certain costs relating to
underwriting activities and preparing and processing loan documents. The
Company engages third parties to solicit and originate credit card account
relationships. Amounts deferred under these arrangements approximated $55.2
million in 1994, $29.5 million in 1993 and $20.3 million in 1992.
The company amortizes deferred credit card origination costs under the
consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board regarding the acquisition
of individual credit card accounts from independent third parties (EITF Issue
93-1). The consensus stated that credit card accounts acquired individually
should be accounted for as originations under SFAS 91 and EITF Issue 92-5.
Amounts paid to a third party to acquire individual credit card accounts should
be deferred and netted against the related credit card fee, if any, and the net
amount should be amortized on a straight line basis over the privilege period.
If a significant fee is charged, the privilege period is the period that the
fee entitles the cardholder to use the card. If there is no significant fee,
the privilege period should be one year. In accordance with this consensus,
direct origination costs incurred related to credit card account originations
initiated after the May 20, 1993 consensus date are deferred and amortized over
12 months. Costs incurred for originations which were initiated prior to May
20, 1993 will continue to be amortized over a 60 month period as was the
practice prior to the EITF 93-1 consensus.
Prior to the EITF Issue 93-1 consensus, it was the Company's practice
to write off deferred origination costs related to credit card receivables that
have been securitized. This practice had effectively written off credit card
origination costs much more quickly than the 60 month period previously
utilized. In connection with the prospective adoption of a 12 month
amortization period for deferred credit card account origination costs, the
Company no longer writes off deferred origination costs related to credit card
receivables being securitized as under the EITF 93-1 consensus, such costs are
not directly associated with the receivables.
43
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Advanta Corp. and Subsidiaries
CREDIT CARD SECURITIZATION INCOME
Since 1988, the Company, through its subsidiary Colonial National Bank USA
("Colonial National" or the "Bank"), has completed 22 credit card
securitizations totaling $5.4 billion in receivables. See Note 3 and Note 17.
In each transaction, credit card receivables were transferred to a trust and
interests in the trust were sold to investors for cash. The Company records
excess servicing income on credit card securitizations representing additional
cash flow from the receivables initially sold based on the repayment term,
including prepayments. Prior to the EITF Issue 93-1 consensus, net gains were
not recorded at the time each transaction was completed as excess servicing
income was offset by the write-off of deferred origination costs and the
establishment of recourse reserves. Subsequent to the prospective adoption
discussed above, excess servicing income has been recorded at a lower level at
the time of each transaction, and is predominantly offset by the establishment
of recourse reserves. The lower level of excess servicing income corresponds
with the discontinuance of deferred origination cost write-offs upon
securitization of receivables, as discussed above. During the "revolving
period" of each trust, income is recorded based on additional cash flows from
the new receivables which are sold to the trusts on a continual basis to
replenish the investors' interest in trust receivables which have been repaid
by the credit cardholders.
CREDIT CARD FEES
Annual fees on credit cards are deferred and amortized on a straight-line basis
over the fiscal year of the account.
The changes relating to origination costs and securitization income, as
discussed above, in the aggregate did not have a material effect on the
Company's 1993 financial statements.
MORTGAGE LOAN ORIGINATION FEES
The Company generally charges origination fees ("points") for mortgage loans
where permitted under state law. Origination fees, net of direct origination
costs, are deferred and amortized over the contractual life of the loan.
However, upon the sale or securitization of the loans, the unamortized portion
of such fees is recognized and included in the computation of the gain on sale.
LOAN AND LEASE RECEIVABLES AVAILABLE FOR SALE
Loan and lease receivables available for sale represent receivables currently
on the balance sheet that the Company generally intends to sell or securitize
within the next six months. These assets are reported at the lower of cost or
fair market value.
INVESTMENTS HELD TO MATURITY
Investments held to maturity include those investments that the Company has the
positive intent and ability to hold to maturity. These investments are reported
at cost, adjusted for the amortization of premiums or the accretion of
discounts. At December 31, 1994 and 1993 the Company had no investments
classified as held to maturity.
INVESTMENTS AVAILABLE FOR SALE
Investments available for sale include securities that the Company sells from
time to time to provide liquidity and in response to changes in the market. In
1993, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). This statement requires that debt and
equity securities classified as Available for Sale be reported at market value.
This Statement is effective for fiscal years beginning after December 15, 1993.
The Company elected to adopt this statement as of December 31, 1993, and as
such, these securities are recorded at market value at that date. Unrealized
holding gains and losses on these securities are reported as a separate
component of stockholders' equity and included in retained earnings.
44
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Advanta Corp. and Subsidiaries
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various derivative financial instruments ("derivatives") such
as interest rate swaps and caps, forward contracts, options on securities, and
financial futures as part of its interest rate risk management strategy.
Derivatives are classified as hedges or synthetic alterations of specific
on-balance sheet items, off-balance sheet items or anticipated transactions. In
order for derivatives to qualify for hedge accounting treatment the following
conditions must be met: 1) the underlying item being hedged by derivatives
exposes the Company to interest rate risk, 2) the derivative used serves to
reduce the Company's sensitivity to interest rate risk, and 3) the derivative
used is designated and deemed effective in hedging the Company's exposure to
interest rate risk. In addition to meeting these conditions, anticipatory
hedges must demonstrate that the anticipated transaction being hedged is
probable to occur and the expected terms of the transaction are identifiable.
For derivatives designated as hedges, gains or losses are deferred and
included in the carrying amounts of the related item exposing the Company to
interest rate risk and ultimately recognized in income as part of those
carrying amounts. Accrual accounting is applied for derivatives designated as
synthetic alterations with income and expense recorded in the same category as
the related underlying on-balance sheet or off-balance sheet item synthetically
altered. Gains or losses resulting from early terminations of derivatives are
deferred and amortized over the remaining term of the underlying balance sheet
item or the remaining term of the derivative, as appropriate.
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in noninterest revenues. At December 31, 1994, 1993 and 1992, all
derivatives qualified as hedges or synthetic alterations.
INCOME FROM MORTGAGE BANKING ACTIVITIES
The Company, through its subsidiaries, sells mortgage loans through both
secondary market securitizations and whole loan sales, typically with servicing
retained. Income is recognized at the time of sale approximately equal to the
present value of the anticipated future cash flows resulting from the retained
yield adjusted for an assumed prepayment rate, net of any anticipated
charge-offs, and allowing for a normal servicing fee. Changes in the
anticipated future cash flows, as well as the receipt of cash flows which
differ from those projected, affect the recognition of current and future
mortgage banking income. Also included in income is any difference between the
net sales proceeds and the carrying value of the mortgage loans sold at the
time of the transaction. See Note 3 and Note 17. The carrying value includes
deferred loan origination fees and costs which include certain fees and costs
related to acquiring and processing a loan held for resale. These deferred
origination fees and costs are netted against income from mortgage banking
activities when the loans are sold. Mortgage banking income also includes loan
servicing fees equal to .5% of the outstanding balance of securitized loans
and, beginning in 1992, loan servicing fees on mortgage loan portfolios which
were never owned by the Company ("contract servicing").
INCOME FROM LEASE SECURITIZATIONS
The Company, through its subsidiaries, sells equipment lease receivables
through secondary market securitizations. Income is recorded at the time of
sale approximately equal to the present value of the anticipated future cash
flows net of anticipated charge-offs, partially offset by deferred initial
direct costs, transaction expenses and estimated credit losses under certain
recourse requirements of the trust. Also included in income is the difference
between the net sales proceeds and the carrying amount of the receivables sold.
Subsequent to the initial sale, securitization income is recorded in proportion
to the actual cash flows received from the trusts. See Note 3 and Note 17.
45
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Advanta Corp. and Subsidiaries
INSURANCE
Reinsurance premiums, net of commissions on credit life, disability and
unemployment policies on credit cards, are earned monthly based upon the
outstanding balance of the underlying receivables. The cost of acquiring new
reinsurance is deferred and amortized over the reinsurance period in order to
match the expense with the anticipated premium revenue. Insurance claim
reserves are based on estimated settlement amounts for both reported and
incurred but not reported losses.
CREDIT LOSSES
During 1991, the Company adopted a new charge-off policy related to bankrupt,
decedent and fraudulent credit card accounts. Under the previous policy,
whenever the Company received notification that a credit cardholder had filed a
bankruptcy petition or was deceased, a reserve was established equal to the
full balance of the receivable. The receivable, if not paid, would be charged
off at 186 days contractual delinquency. Likewise, receivables in accounts
identified as fraudulent would be reserved against and written off (as an
operating expense) when they became 186 days contractually delinquent. Under
the policy adopted in 1991, bankrupt and decedent accounts are written off
within 30 days of notification, and accounts suspected of being fraudulent are
written off after a 90 day investigation period, unless the investigation shows
no evidence of fraud. During the 1991 transition period, both newly identified
bankrupt, decedent and fraudulent accounts, as well as those previously
identified, were written off.
During 1994, the Company implemented a new policy for the charge-off
of mortgage loans. Under this policy, the Company charges off potential losses
on all nonperforming mortgages that have become twelve months delinquent,
regardless of anticipated collectibility. During the 1994 transition period,
both mortgages that became twelve months delinquent in 1994, as well as those
mortgages that had been twelve months or more delinquent, were charged off.
PREMISES AND EQUIPMENT
Premises, equipment, computers and software are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Repairs and
maintenance are charged to expense as incurred.
GOODWILL
Goodwill, representing the cost of investments in subsidiaries and affiliated
companies in excess of net assets acquired at acquisition, is amortized on a
straight-line basis over 25 years.
INCOME TAXES
Effective January 1, 1993, the Company implemented the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") with no material effect on the financial statements. SFAS 109 utilizes
the liability method and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax basis
of assets and liabilities given the provisions of the enacted tax laws. Prior
to the implementation of SFAS 109, the Company accounted for income taxes using
Accounting Principles Board Opinion No. 11.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net earnings after preferred
stock dividends by the average number of shares of common stock and common
stock equivalents outstanding during each year. The outstanding preferred stock
is not a common stock equivalent.
46
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Advanta Corp. and Subsidiaries
CASH FLOW REPORTING
For purposes of reporting cash flows, cash includes cash on hand and amounts
due from banks. Cash paid during 1994, 1993 and 1992 for interest was $91.5
million, $78.8 million and $94.4 million, respectively. Cash paid for taxes
during these periods was $60.9 million, $30.0 million and $17.7 million,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114") and SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures" ("SFAS 118"), an amendment of SFAS
114. Both statements are effective for fiscal years beginning after December
15, 1994. By their terms, SFAS 114 and SFAS 118 do not apply either to a large
group of smaller-balance homogeneous loans that are collectively evaluated for
impairment (such as the Company's credit card loans), or to leases. While SFAS
114 and SFAS 118 may apply to a portion of the Company's mortgage loan
portfolio, its adoption will not have a material effect on the Company's
financial statements.
NOTE 2. LOAN AND LEASE RECEIVABLES
Loan and Lease Receivables consisted of the following:
December 31,
- --------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------
Credit cards(A) $1,730,176 $1,131,367
Mortgage loans(B) 142,874 91,340
Leases(C) 86,157 51,008
Other loans 5,237 3,590
- --------------------------------------------------------------------------
Gross loan and
lease receivables 1,964,444 1,277,305
- --------------------------------------------------------------------------
Add: Deferred origination costs,
net of deferred fees(D) 56,627 36,575
Less: Reserve for credit losses:
Credit cards (27,486) (25,859)
Mortgage loans (5,164) (2,706)
Leases (1,076) (1,826)
Other (7,891) (836)
- --------------------------------------------------------------------------
Total (41,617) (31,227)
- --------------------------------------------------------------------------
Net loan and lease receivables $1,979,454 $1,282,653
==========================================================================
(A) Includes credit card receivables available for sale of $420.0
million and $564.0 million in 1994 and 1993, respectively.
(B) Includes mortgage loan receivables available for sale of $116.1
million and $74.6 million in 1994 and 1993, respectively.
(C) Includes lease receivables available for sale of $36.0 million
and $28.6 million in 1994 and 1993, respectively, and is net of
unearned income of $17.9 million and $11.9 million in 1994 and
1993, respectively, and also includes residual interest for both
years.
(D) Includes approximately $1.0 million and $.6 million in 1994 and
1993, respectively, related to loan and lease receivables
available for sale.
Receivables serviced for others consisted of the following items:
December 31,
- --------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------
Credit cards $4,808,257 $2,790,719
Mortgage loans 1,203,226 1,058,524
Leases 179,310 119,613
- --------------------------------------------------------------------------
Total $6,190,793 $3,968,856
==========================================================================
47
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Advanta Corp. and Subsidiaries
The geographic concentration of managed receivables was as follows:
December 31,
- -------------------------------------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------------------------------------
RECEIVABLES % Receivables %
- -------------------------------------------------------------------------------------------------------------
California $1,491,094 18.3% $ 988,178 18.8%
New York 648,746 8.0 455,036 8.7
New Jersey 443,784 5.4 333,064 6.3
Texas 442,185 5.4 261,991 5.0
Florida 406,240 5.0 251,238 4.8
All other 4,723,188 57.9 2,956,654 56.4
- -------------------------------------------------------------------------------------------------------------
Total managed
receivables $8,155,237 100.0% $5,246,161 100.0%
=============================================================================================================
In the normal course of business, the Company makes commitments to
extend credit to its credit card customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
conditions established in the contract. The Company does not require collateral
to support this financial commitment. At December 31, 1994 and 1993, the
Company had $24.7 billion and $16.0 billion, respectively, of commitments to
extend credit outstanding for which there is potential credit risk. The Company
believes that its customers' utilization of these lines of credit will continue
to be substantially less than the amount of the commitments, as has been the
Company's experience to date. At December 31, 1994 and 1993, outstanding
managed credit card receivables represented 26% and 24%, respectively, of
outstanding commitments.
NOTE 3. CREDIT CARD, MORTGAGE LOAN AND EQUIPMENT LEASE SECURITIZATIONS
Colonial National has completed 22 sales of credit card receivables through
asset-backed securitizations aggregating $5.4 billion. In each transaction,
credit card receivables were transferred to a trust which issued certificates
representing ownership interests in the trust to institutional investors.
Colonial National retained a participation interest in each trust, reflecting
the excess of the total amount of receivables transferred to the trust over the
portion represented by certificates sold to investors. The retained
participation interests in the credit card trusts were $1.3 billion and $371.8
million at December 31, 1994 and 1993, respectively. Although Colonial National
continues to service the underlying credit card accounts and maintain the
customer relationships, these transactions are treated as sales for financial
reporting purposes to the extent of the investors' interests in the trusts.
Accordingly, the associated receivables are not reflected on the balance sheet.
Colonial National is subject to certain recourse provisions in
connection with these securitizations. At December 31, 1994 and 1993, Colonial
National had reserves of $74.5 million and $96.4 million, respectively, related
to these recourse provisions. These reserves are netted against the amounts due
from credit card securitizations. At December 31, 1994, the Company had amounts
receivable from credit card securitizations, which include the related
interest-bearing deposits, and amounts due from credit card securitizations of
$318.6 million, $174.1 million of which was subject to liens by the providers
of the credit enhancement facilities for the individual securitizations. At
December 31, 1993, the amounts receivable and amounts subject to lien were
$222.5 million and $104.7 million, respectively.
Through December 31, 1994, the Company had sold, through
securitizations and whole loan sales, approximately $2.2 billion of mortgage
loan receivables which sales are subject to certain recourse provisions. The
Company had reserves of $17.3 million and $32.1 million at year end 1994 and
1993, respectively, related to these recourse provisions which are netted
against the excess mortgage servicing rights. See Note 17. At December 31,
1994, the Company had amounts receivable from mortgage loan sales and
securitizations of $128.6 million, $49.1 million of which was subject to liens.
At December 31, 1993, the amounts receivable and amounts subject to lien were
$102.8 million and $39.7 million, respectively.
48
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Advanta Corp. and Subsidiaries
Through December 31, 1994, the Company had securitized approximately
$298 million of equipment lease receivables which are subject to certain
recourse provisions. The asset-backed certificates carry both fixed and
variable rates to investors. There were reserves of $9.7 million and $5.3
million at year end 1994 and 1993, respectively, related to these recourse
provisions which are netted against the excess servicing on lease
securitizations. See Note 17. The Company had accounts receivable from lease
securitizations of $14.4 million at year end 1994 and $8.5 million at year end
1993, of which $6.4 million and $5.9 million, respectively, were subject to
liens by providers of the credit enhancement facilities. Total interest in
residuals for lease assets sold was $12.0 million and $9.6 million at December
31, 1994 and 1993, respectively, and is also subject to recourse provisions.
NOTE 4. RESERVE FOR CREDIT LOSSES
The reserve for credit losses for lending and leasing transactions is
established to reflect losses anticipated from delinquencies that have already
occurred. Any adjustments to the reserves are reported in the Income Statements
in the periods they become known.
During 1994, the Company initiated a mortgage loan repurchase program
in which nonperforming mortgage loans were repurchased from the securitization
trusts in order to lower the net funding costs
The following table displays five years of reserve history:
RESERVE FOR CREDIT LOSSES Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 31,227 $ 40,228 $ 36,355 $ 31,701 $ 23,108
Provision for credit losses 34,198 29,802 47,138 55,461 42,411
Reserve on other receivables sold 0 0 0 0 (383)
Transfer of reserves from/(to)
recourse reserves 11,485 (12,027) (3,300) 0 0
Gross credit losses:
Credit cards (28,646) (33,805) (46,477) (52,798) (34,848)
Mortgage loans (11,731) (2,247) (1,488) (1,635) (1,188)
Leases (1,053) (1,376) (1,930) (3,205) (4,038)
Other loans (44) (93) (73) (155) (126)
- ---------------------------------------------------------------------------------------------------------------------------------
Total credit losses (41,474) (37,521) (49,968) (57,793) (40,200)
Recoveries:
Credit cards 5,958 10,182 9,095 5,546 4,403
Mortgage loans 42 40 37 8 18
Leases 139 429 663 1,075 1,811
Other loans 42 94 208 357 533
- ---------------------------------------------------------------------------------------------------------------------------------
Total recoveries 6,181 10,745 10,003 6,986 6,765
- ---------------------------------------------------------------------------------------------------------------------------------
Net credit losses (35,293) (26,776) (39,965) (50,807) (33,435)
Balance at December 31 $ 41,617 $ 31,227 $ 40,228 $ 36,355 $ 31,701
=================================================================================================================================
on these managed assets. In accordance with this program, the Company
transferred approximately $13 million of the off-balance sheet mortgage loan
recourse reserves associated with these repurchased mortgages to on-balance
sheet mortgage loan reserves (see discussion in Management's Discussion and
Analysis under the caption "Provision for Credit Losses"). During 1993, the
Company used $11 million of on-balance sheet unallocated reserves to increase
off-balance sheet mortgage loan recourse reserves, which are a component of
excess mortgage servicing rights.
49
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Advanta Corp. and Subsidiaries
NOTE 5. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
December 31,
- -----------------------------------------------------------------------------------------------------------------
1994 1993
--------------------------------------------- -------------------------------------------
GROSS GROSS Gross Gross
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
COST GAINS LOSSES VALUE Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury
& other U.S.
government
securities $192,994 $0 $ (4,509) $188,485 $154,873 $ 225 $(177) $154,921
State and
municipal
securities 78,884 0 (1,676) 77,208 75,797 868 0 76,665
Collateralized
mortgage
obligations 8,584 0 (672) 7,912 21,288 42 (60) 21,270
Mortgage-backed
securities 34,555 0 (2,829) 31,726 45,611 0 (42) 45,569
Equity
securities 12,430 0 (250) 12,180 6,947 0 0 6,947
Other 1,371 0 (123) 1,248 2,704 0 (50) 2,654
- -----------------------------------------------------------------------------------------------------------------
Total $328,818 $0 $(10,059) $318,759 $307,220 $1,135 $(329) $308,026
=================================================================================================================
December 31,
- ----------------------------------------------------------------------
1992
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ----------------------------------------------------------------------
U.S. Treasury
& other U.S.
government
securities $ 38,575 $ 248 $ (73) $ 38,750
State and
municipal
securities 2,942 13 90 3,081
Collateralized
mortgage
obligations 101,913 902 (319) 102,496
Mortgage-backed
securities 58,089 232 (66) 58,255
Equity
securities 5,539 32 0 5,571
Other 2,224 0 0 2,224
- ----------------------------------------------------------------------
Total $209,282 $1,553 $(458) $210,377
======================================================================
At December 31, 1994, investment securities with a book value of $106,582 were
pledged as collateral for repurchase and derivatives transactions. At December
31, 1993, investment securities with a book value of $17,473 were pledged as
collateral for derivatives transactions. At December 31, 1994, 1993 and 1992,
investment securities with a book value of $7,133, $7,927 and $9,147,
respectively, were deposited with insurance regulatory authorities to meet
statutory requirements or held by a trustee for the benefit of primary
insurance carriers. At December 31, 1994, $10,059 of net unrealized losses on
securities were included in investments available for sale. During 1994, the
net change in unrealized losses on available for sale securities included as a
separate component of stockholders' equity was $7,062.
Maturity of investments available for sale at December 31, 1994 was as
follows:
- -----------------------------------------------------------------------------
Amortized Market
Cost Value
- -----------------------------------------------------------------------------
Due in 1 year $100,250 $ 99,874
Due after 1 but within 5 years 172,415 166,500
Due after 5 but within 10 years 584 567
Due after 10 years 0 0
- -----------------------------------------------------------------------------
Subtotal 273,249 266,941
Mortgage-backed CMO and MBS 43,139 39,638
Equity securities 12,430 12,180
- -----------------------------------------------------------------------------
Total investments $328,818 $318,759
=============================================================================
During 1994, proceeds from sales of available for sale securities were
$624,000. Gross gains of $118 and losses of $596 were realized on these sales.
Proceeds during 1993 were $841,000. Gross gains of $3,430 and losses of $888
were realized on these sales. Proceeds during 1992 were $353,000. Gross gains
of $2,414 and losses of $427 were realized on these sales. The specific
identification method was the basis used to determine the amortized cost in
computing realized gains and losses. Equity securities primarily include FRB,
FHLB and FNMA stock that the Company is required to hold.
50
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Advanta Corp. and Subsidiaries
NOTE 6. DEBT
Debt consisted of the following:
December 31,
- -------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------
7% CNB subordinated notes,
due 2003 $ 49,659 $ 49,620
Short-term CNB bank notes 84,977 0
5 1/8% notes, due 1996 149,903 149,851
RediReserve money market
subordinated certificates 4,829 5,843
Six-month subordinated notes 5,422 7,354
One-year subordinated notes 34,082 39,436
Eighteen-month subordinated
notes 10,113 14,261
Two-, four- and five-year
subordinated notes 130,213 133,401
Thirty-month subordinated notes 37,858 41,281
Medium-term notes 359,735 15,000
Other notes 10,003 10,165
- -------------------------------------------------------------------------
Total debt 876,794 466,212
Less short-term debt
and certificates (210,761) (97,840)
- -------------------------------------------------------------------------
Long-term debt $ 666,033 $ 368,372
=========================================================================
The annual maturities of long-term debt at December 31, 1994 for the years
ending December 31 are as follows: $425.6 million in 1996; $142.7 million in
1997; $27.7 million in 1998; $15.1 million in 1999; and $54.9 million
thereafter. The average interest cost of the Company's debt during 1994, 1993
and 1992 was 6.23%, 7.59% and 9.01%, respectively.
NOTE 7. STOCK DIVIDENDS
On September 23, 1993, the Board of Directors approved a three-for-two stock
split in the form of a 50% stock dividend on both the Class A and Class B
Common Stock to shareholders of record as of October 4, 1993, which dividend
was paid on October 15, 1993. All share and per share amounts have been
adjusted to reflect the three-for-two stock split as a result of the stock
dividend.
NOTE 8. CAPITAL STOCK
The number of shares of capital stock was as follows:
Issued and Outstanding
- -------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------
(In thousands)
Class A preferred--$1,000 par value;
Authorized, 1,010 1 1
=========================================================================
Class B preferred--$.01 par value;
Authorized, 1,000,000 0 0
=========================================================================
Class A voting common stock--
$.01 par value;
Authorized, 200,000,000 17,347 17,240
Class B non-voting common stock--
$.01 par value;
Authorized, 200,000,000 23,132 22,603
- -------------------------------------------------------------------------
Total common stock 40,479 39,843
=========================================================================
51
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Advanta Corp. and Subsidiaries
The Class A Preferred Stock is entitled to 1/2 vote per share and a
non-cumulative dividend of $140 per share per year, which must be paid prior to
any dividend on the common stock. Dividends were declared on the Class A
Preferred Stock for the first time in 1989 and have continued through 1994 as
the Company paid dividends on its common stock. The redemption price of the
Class A Preferred Stock is equivalent to the par value.
NOTE 9. ISSUANCE OF COMMON STOCK
On March 24, 1993, in a public offering, the Company sold 2,575,000 shares
(pre-split) of Class B Common Stock. Proceeds from the offering, net of the
underwriting discount, were $77.5 million. On April 21, 1993, the underwriters
of the offering purchased an additional 450,000 shares (pre-split) of Class B
Common Stock, pursuant to the overallotment option granted to them by the
Company. This brought the Company's total proceeds of the offering, net of
related expenses, to approximately $90 million. The Company used the proceeds
of the offering for general corporate purposes, including financing the growth
of its subsidiaries.
NOTE 10. EXTRAORDINARY ITEM
In April of 1993, the Company repurchased the remaining $33.2 million of its
12 3/4% Senior Subordinated Debentures at a price equal to 104% of par. This
transaction resulted in an extraordinary loss of $1.3 million (net of a tax
benefit of $.7 million) or $.03 per share for the year ended December 31, 1993.
NOTE 11. INCOME TAXES
Income tax expense consisted of the following components:
Year Ended December 31,
- ------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------
Current:
Federal $54,246 $40,736 $21,853
State 4,948 4,184 3,077
- ------------------------------------------------------------------------------------------------
59,194 44,920 24,930
- ------------------------------------------------------------------------------------------------
Deferred:
Federal (613) (1,829) 2,999
State 563 2,244 1,134
- ------------------------------------------------------------------------------------------------
(50) 415 4,133
- ------------------------------------------------------------------------------------------------
Total tax expense before
extraordinary item $59,144 $45,335 $29,063
================================================================================================
Current taxes payable include the earnings of certain subsidiaries
which are not included in the consolidated federal income tax return.
The reconciliation of the statutory federal income tax to the
consolidated tax expense is as follows:
Year Ended December 31,
------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------------------------------
Statutory federal
income tax $57,822 $43,139 $26,217
State income taxes,
net of federal income
tax benefit 3,582 4,178 2,784
Nontaxable investment
income (1,149) (675) (46)
Other (1,111) (1,307) 108
------------------------------------------------------------------------------------------------------
Consolidated tax
expense before
extraordinary item $59,144 $45,335 $29,063
------------------------------------------------------------------------------------------------------
Tax benefit on loss from
repurchase of debentures 0 (656) 0
------------------------------------------------------------------------------------------------------
Consolidated tax expense $59,144 $44,679 $29,063
======================================================================================================
52
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Advanta Corp. and Subsidiaries
Deferred taxes are determined based on the estimated future tax
effects of the differences between the financial statement and tax basis of
assets and liabilities given the provisions of the enacted tax laws. The net
deferred tax asset/(liability) is comprised of the following:
- --------------------------------------------------------------------------------------
DECEMBER 31, January 1,
1994 1994
- --------------------------------------------------------------------------------------
Deferred taxes:
GROSS ASSETS $78,602 $ 25,755
Gross liabilities (52,344) (43,815)
- --------------------------------------------------------------------------------------
Total deferred taxes $26,258 $(18,060)
======================================================================================
The Company did not record any valuation allowances against deferred
tax assets at December 31, 1994 and 1993.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
- --------------------------------------------------------------------------------------
DECEMBER 31, January 1,
1994 1994
- --------------------------------------------------------------------------------------
SFAS 91 $(20,034) $(13,344)
Loan losses 14,965 23,631
Mortgage banking income 10,174 (2,395)
Securitization income (28,949) (25,817)
Leasing income 42,473 0
Insurance underwriting (3,361) (2,258)
Deferred compensation 1,388 592
Mark to market adjustment 3,021 0
Change in accounting method 1,008 0
Other 5,573 1,531
- --------------------------------------------------------------------------------------
Net deferred tax
assets/(liabilities) $ 26,258 $(18,060)
======================================================================================
NOTE 12. BENEFIT PLANS
The Company has adopted several management incentive plans designed to provide
incentives to participating employees to remain in the employ of the Company
and devote themselves to its success. Under these plans, eligible employees
were given the opportunity to elect to take portions of their anticipated or
"target" bonus payments for future years in the form of restricted shares of
common stock. To the extent that such elections were made (or, for executive
officers, were required by the terms of such plans), restricted shares were
issued to employees, with the number of shares granted to employees determined
by dividing the amount of future bonus payments the employee had elected to
receive in stock by the market price as determined under the incentive plans.
The restricted shares are subject to forfeiture should the employee terminate
employment with the Company prior to vesting. Restricted shares vest 10 years
from the date of grant, but with respect to the restricted shares issued under
each plan, vesting was and will be accelerated annually with respect to
one-third of the shares, to the extent that the employee and the Company met or
meet their respective performance goals for a given plan performance year. When
newly eligible employees elect to participate in a plan, the number of shares
issued to them with respect to their "target" bonus payments for the relevant
plan performance years is determined based on the average market price of the
stock for the 90 days prior to eligibility.
53
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Advanta Corp. and Subsidiaries
The following table summarizes the Company's incentive plans:
- ------------------------------------------------------------------------------------------------------
Plan
Performance Original
Years Stock Shares Shares
Plan Covered Price Issued Vested
- ------------------------------------------------------------------------------------------------------
AMIPWISE II 1993-1995 $ 4.75 1,031,092 283,130
KEIPWISE 1992-1995 $ 7.07 78,126 35,531
AMIPWISE III 1996-1998 $17.00 440,895 0
======================================================================================================
At December 31, 1994, a total of 1,240,619 shares issued under these
and the predecessor plan to AMIPWISE II (for "target" bonuses for 1990-1992)
were subject to restrictions and were included in the number of shares
outstanding.
The Company has an Employee Stock Purchase Plan which allows employees
and directors to purchase Class B common stock at a 15% discount from the
market price without paying brokerage fees. The Company reports this 15%
discount as compensation expense. During 1994, shares were issued under the
plan from unissued stock or from treasury stock at the average market price on
the day of purchase.
The Company has two Stock Option Plans which together authorize the
grant to employees and directors of options to purchase an aggregate of
7,425,000 shares of common stock. In connection with the October 15, 1993 stock
dividend, the number of outstanding options and the exercise price of each
option were modified to reflect the three-for-two stock split. The Company
presently intends only to issue options to purchase Class B common stock.
Beginning in 1992, options generally vest over a four-year period, and expire
10 years after the date of grant.
Shares available for future grant aggregated 1,362,508 at December 31,
1994, and 2,051,508 at December 31, 1993. Transactions under the plans for the
two years ended December 31, 1994, were as follows:
- ------------------------------------------------------------------------
Number of Price Range
Shares Per Share
- ------------------------------------------------------------------------
(In thousands)
Options outstanding at
December 31, 1992 3,048 $ .98 - $16.33
Options granted 588 $19.33 - $27.50
Options exercised (586) $ .98 - $12.83
Options terminated (11) $12.33 - $20.92
- ------------------------------------------------------------------------
Options outstanding at
December 31, 1993 3,039 $ .98 - $27.50
Options granted 762 $23.50 - $35.00
Options exercised (313) $ .98 - $24.67
Options terminated (73) $11.58 - $27.38
- ------------------------------------------------------------------------
OPTIONS OUTSTANDING AT
DECEMBER 31, 1994 3,415 $ .98 - $35.00
========================================================================
The Company also has outstanding options to purchase 691,500 shares of
common stock at a price range of $1.52 to $4.75 per share, which were not
issued pursuant to either of the Stock Option Plans.
At December 31, 1994, 2,144,591 of the 3,415,000 outstanding options
issued under the Stock Options Plans had vested and all 691,500 options issued
outside the Plans had vested.
The Company has a tax-deferred employee savings plan which provides
employees savings and investment opportunities, including the ability to invest
in the Company's Class B common stock. The employee savings plan provides for
discretionary Company contributions equal to a portion of the first 5% of an
employee's compensation contributed to the plan. For the three years ended
December 31, 1994, 1993 and 1992, the Company contributions equaled 100% of the
first 5% of participating employees' compensation contributed to the plan. The
expense for this plan totaled $1,565, $1,189 and $882 in 1994, 1993 and 1992,
54
54
Advanta Corp. and Subsidiaries
respectively. At December 31, 1994, 168,592 of the 337,500 shares of common
served for issuance under the employee savings plan had been purchased by the
plan from the Company at the market price on each purchase date. All other
shares purchased by the plan for the three years ended December 31, 1994, 1993
and 1992 were purchased on the open market or issued from treasury stock.
NOTE 13. CREDIT CARD SALE
In April 1994, the Company, through its subsidiary, Colonial National Bank USA,
reached an agreement with NationsBank of Delaware, N.A., to sell certain credit
card customer relationships which at that time represented approximately $150
million of securitized credit card receivables (less than 4% of the Company's
managed credit card receivables as of June 30, 1994). The receivables
associated with these relationships will continue to be serviced by Colonial
National until the securitization trust terminates. The Company anticipates
this will occur in the second quarter of 1995. In the second quarter of 1994,
the Company recorded an $18.4 million pretax gain on the sale. In addition, the
Company deferred a portion of the proceeds related to the excess spread of the
receivables to be generated over the remaining life of the trust. These
proceeds are being recognized as securitization income over the related period.
NOTE 14. COMMITMENTS AND CONTINGENCIES
The Company leases office space in several states under leases accounted for as
operating leases. Total rent expense for all of the Company's locations for the
years ended December 31, 1994, 1993 and 1992 was $5.4 million, $4.8 million and
$3.5 million, respectively. The future minimum lease payments of all
non-cancelable operating leases are as follows:
Year Ended December 31,
- -------------------------------------------------------------------------
1995 $4,336
- -------------------------------------------------------------------------
1996 4,173
- -------------------------------------------------------------------------
1997 2,704
- -------------------------------------------------------------------------
1998 1,009
- -------------------------------------------------------------------------
1999 179
- -------------------------------------------------------------------------
Thereafter 0
=========================================================================
NOTE 15. OTHER BORROWINGS
The Company had revolving credit facilities of $255 million and money market
bid lines of $255 million at December 31, 1994. There is a quarterly facility
fee of up to 1/3 of 1% of the unused portion of the revolving credit
facilities. There is no facility fee on the money market bid lines as they are
uncommitted facilities. At December 31, 1994 the Company had borrowed $50
million on the money market bid lines. Under the revolving credit facilities,
the Company is subject to various loan covenants, including the maintenance of
certain fixed financial ratios and conditions, limitations on mergers and
acquisitions, and limitations on liens on property and other assets. One of the
two revolving credit facilities (constituting one half of the available
principal amount) extends through March 1997; the other is renewable annually.
At December 31, 1993 the Company had lines of credit and term funding
arrangements of $63.5 million which were collateralized by lease receivables,
as well as equipment under operating leases.
The composition of other borrowings was as follows:
December 31,
- -------------------------------------------------------------
1994 1993
- -------------------------------------------------------------
Term fed funds $309,000 $ 0
Securities sold under
repurchase agreements 86,455 0
Short-term debt 210,761 97,840
Lines of credit and
term funding
arrangements 50,000 7,487
Other borrowings 80,879 0
- -------------------------------------------------------------
Total $737,095 $105,327
=============================================================
55
55
Advanta Corp. and Subsidiaries
The following table displays information related to selected types of
short-term borrowings:
- ----------------------------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------------------------
AMOUNT RATE Amount Rate
- ----------------------------------------------------------------------------------------
At year end:
Securities sold
under repurchase
agreements $ 86,455 6.26% $ 0 0%
Term fed funds 309,000 6.13 0 0
- ----------------------------------------------------------------------------------------
Total $ 395,455 6.16% $ 0 0%
========================================================================================
Average for the year:
Securities sold
under repurchase
agreements $ 14,111 5.07% $ 42,649 3.07%
Term fed funds
and fed funds
purchased 154,299 4.74 0 0
Other short-term
borrowings 0 0 17,337 5.62
- ----------------------------------------------------------------------------------------
Total $ 168,410 4.77% $ 59,986 3.81%
========================================================================================
Maximum month-
end balance:
Securities sold
under repurchase
agreements $ 86,455 $166,481
Term fed funds
and fed funds
purchased 309,000 0
Other short-term
borrowings 0 45,355
========================================================================================
The weighted average interest rates were calculated by dividing the
interest expense for the period for such borrowings by the average amount of
short-term borrowings outstanding during the period.
NOTE 16. SELECTED INCOME STATEMENT INFORMATION
NONINTEREST REVENUES Year Ended December 31,
- -------------------------------------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------------------------------
Gain on sale of
credit cards $ 18,352 $ 0 $ 0
Other noninterest revenues:
Credit card securitization
income 210,339 135,785 80,761
Credit card servicing
income 68,960 41,593 28,634
Income from mortgage
banking activities 37,586 24,146 24,633
Leasing revenues, net 21,551 10,317 6,170
Other credit card revenues 14,209 11,545 11,752
Insurance revenues, net 12,734 9,249 7,406
Credit card interchange
income 10,444 18,843 30,693
Other 1,633 4,102 3,095
- -------------------------------------------------------------------------------------------------------
Total other noninterest
revenues $ 377,456 $ 255,580 $ 193,144
- -------------------------------------------------------------------------------------------------------
Total noninterest revenues $ 395,808 $ 255,580 $ 193,144
=======================================================================================================
56
56
Advanta Corp. and Subsidiaries
OPERATING EXPENSES Year Ended December 31,
- -------------------------------------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------------------------------
Amortization of
credit card deferred
origination costs, net $ 39,381 $ 6,566 $ 4,482
Other operating expenses:
Salaries and employee benefits 88,681 65,469 51,599
Marketing 32,339 18,742 13,845
External processing 22,618 16,604 12,993
Credit card fraud losses 16,654 13,779 13,134
Postage 12,732 9,818 7,806
Professional fees 10,985 10,761 5,700
Equipment expense 9,293 6,550 5,629
Telephone expense 8,615 5,402 4,379
Occupancy expense 8,425 6,247 5,272
Credit and collection expense 7,604 7,055 5,273
Other 9,457 14,174 11,970
- -------------------------------------------------------------------------------------------------------
Total other operating
expenses $227,403 $174,601 $137,600
- -------------------------------------------------------------------------------------------------------
Total operating expenses $266,784 $181,167 $142,082
=======================================================================================================
NOTE 17. SELECTED BALANCE SHEET INFORMATION
INTEREST-BEARING DEPOSITS December 31,
- --------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------
Amounts due from credit card trusts(A) $174,147 $104,714
Amounts due from mortgage trusts(A) 49,097 39,718
Amounts due from leasing trusts(A) 6,398 5,915
Other interest-bearing deposits 84,210 149
- --------------------------------------------------------------------------------------
Total interest-bearing deposits $313,852 $150,496
======================================================================================
(A) Represents initial deposits and subsequent excess collections up to the
required amount on each of the credit card, mortgage and leasing
securitizations.
OTHER ASSETS December 31,
- --------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------
Excess mortgage servicing rights $ 73,223 $ 57,017
Accrued interest receivable 39,353 25,735
Prepaid assets 28,516 16,307
Current and deferred federal
income taxes 18,658 0
Investments in operating leases 13,123 0
Deferred costs 9,500 5,583
Due from trustees - mortgage 6,295 6,040
Excess servicing - leasing 5,949 1,287
Goodwill 5,318 5,648
Other real estate(A) 4,564 1,447
Due from trustees - leasing 2,010 1,297
Other 34,016 28,988
- --------------------------------------------------------------------------------------
Total other assets $240,525 $149,349
======================================================================================
(A) Carried at the lower of cost or fair market value.
57
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Advanta Corp. and Subsidiaries
At December 31, 1994 and 1993, the Company had $144.5 million and $117.8
million, respectively, of amounts due from credit card securitizations. These
amounts include excess servicing, accrued interest receivable and other amounts
related to these securitizations and are net of recourse reserves established.
OTHER LIABILITIES December 31,
- --------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------
Deferred fees and other reserves $ 42,855 $ 18
Accounts payable and accrued
expenses 31,380 15,139
Accrued interest payable 10,640 8,387
Current and deferred state
income taxes 6,813 37,844
Other 17,184 7,486
- --------------------------------------------------------------------------------------
Total other liabilities $108,872 $68,874
======================================================================================
NOTE 18. CASH, DIVIDEND AND LOAN RESTRICTIONS
In the normal course of business, the Company and its subsidiaries enter into
agreements, or are subject to regulatory requirements, that result in cash,
debt and dividend restrictions.
The Federal Reserve Act imposes various legal limitations on the
extent to which banks that are members of the Federal Reserve System can
finance or otherwise supply funds to certain of their affiliates. In
particular, Colonial National is subject to certain restrictions on any
extensions of credit to, or other covered transactions, such as certain
purchases of assets, with the Company or its affiliates. Such restrictions
prevent Colonial National from lending to the Company and its affiliates unless
such extensions of credit are secured by U.S. Government obligations or other
specified collateral. Further, such secured extensions of credit by Colonial
National are limited in amount: (a) as to the Company or any such affiliate, to
10 percent of Colonial National's capital and surplus, and (b) as to the
Company and all such affiliates in the aggregate, to 20 percent of Colonial
National's capital and surplus.
Under certain grandfathering provisions of the Competitive Equality
Banking Act of 1987, the Company is not required to register as a bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so
long as the Company and Colonial National continue to comply with certain
restrictions on their activities. With respect to Colonial National, these
restrictions include limiting the scope of its activities to those in which it
was engaged prior to March 5, 1987. Since Colonial National was not making
commercial loans at that time, it must continue to refrain from making
commercial loans which would include any loans to the Company or any of its
subsidiaries in order for the Company to maintain its grandfathered exemption
under the BHCA. The Company has no present plans to register as a bank holding
company under the BHCA. Colonial National is subject to various legal
limitations on the amount of dividends that can be paid to its parent, Advanta
Corp. Colonial National is eligible to declare a dividend provided that it is
not greater than the current year's net profits plus net profits of the
preceding two years, as defined. During 1994, Colonial National paid $24
million of dividends to Advanta Corp., while $75 million of dividends were paid
during 1993.
The Office of the Comptroller of the Currency requires that Colonial
National maintain a risk-based capital ratio of at least 8%. Colonial
National's risk-based capital ratio of 12.04% at December 31, 1994 was in
excess of the required level and exceeded the minimum required capital level of
10% for designation as a "well capitalized" depository institution.
58
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Advanta Corp. and Subsidiaries
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
- ----------------------------------------------------------------------------------------------------------------------
1994 1993
----------------------------- ------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ----------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash $ 43,706 $ 43,706 $ 31,162 $ 31,162
Federal funds sold 39,050 39,050 83,700 83,700
Interest-bearing
deposits 313,852 313,852 150,496 150,496
Investments
available for sale 318,759 318,759 308,026 308,026
Loans, net of reserve
for credit losses 1,979,454 2,019,418 1,282,653 1,327,455
Amounts due
from credit card
securitizations 144,483 210,107 117,764 178,764
Excess mortgage
servicing rights 73,223 89,600 57,017 59,217
Financial liabilities:
Demand and
savings deposits $ 366,201 $ 366,201 $ 254,153 $ 254,153
Time deposits and
debt 1,669,951 1,653,979 1,466,940 1,488,660
Other borrowings 526,334 526,441 7,487 7,487
Off-balance sheet
financial instruments-
Asset/(Liability):
Interest rate swaps $ 0 $ (21,818) $ 0 $ (5,693)
Interest rate options:
Caps purchased 3,297 6,032 0 0
Caps written (5,801) (5,767) 0 0
Corridors 0 785 0 0
Forward contracts 32 26 (175) (64)
Intangibles:
Credit card customer
relationships - on-
and off-balance sheet $ 0 $1,135,200 $ 0 $ 502,670
======================================================================================================================
The above values do not necessarily reflect the premium or discount
that could result from offering for sale at one time the Company's entire
holdings of a particular instrument. In addition, these values, derived from
the methods and assumptions described below, do not consider the potential
income taxes or other expenses that would be incurred on an actual sale of an
asset or settlement of a liability. With respect to the fair value of
liabilities, the above table is prepared on the basis that the amounts
necessary to discharge such liabilities represent fair value.
The fair value of the Company's off-balance sheet financial
instruments relates to managing the interest rate sensitivity position as
described in Note 21.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
CASH, FEDERAL FUNDS SOLD AND INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable estimate
of the fair value.
59
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Advanta Corp. and Subsidiaries
INVESTMENTS
For investment securities held to maturity and those available for sale, the
fair values are based on quoted market prices, dealer quotes or estimated using
quoted market prices for similar securities.
LOANS, NET OF RESERVE FOR CREDIT LOSSES
For credit card receivables and mortgage loans, the fair value is estimated
using quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value for credit card receivables
and mortgage loans also includes the estimated value of the portion of the
interest payments and fees which are not sold with the securities backed by
these types of loans. The value of the retained interest payments (i.e., excess
servicing) is estimated by discounting the future cash flows, adjusted for
prepayments, net of anticipated charge-offs and allowing for the value of the
servicing. The value of direct finance lease receivables and other loans is
estimated based on the market prices of similar receivables with similar
characteristics.
AMOUNTS DUE FROM CREDIT CARD SECURITIZATIONS AND EXCESS MORTGAGE SERVICING
RIGHTS
The fair values of the excess servicing rights component of amounts due from
credit card securitizations and excess mortgage servicing rights are estimated
by discounting the future cash flows at rates which management believes to be
reasonable. However, because there is no active market for these financial
instruments, management has no basis to determine whether the fair values
presented above would be indicative of the value negotiated in an actual sale.
The future cash flows used to estimate the fair values of these financial
instruments are adjusted for prepayments, net of anticipated charge-offs under
recourse provisions, and allow for the value of servicing. For the other
components of amounts due from credit card securitizations, the carrying amount
is a reasonable estimate of the fair value.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. This fair value does not
include the benefit that results from the low cost of funding provided by these
deposits compared to the cost of borrowing funds in the market.
TIME DEPOSITS AND DEBT
The fair value of fixed-maturity certificates of deposit and notes is estimated
using the rates currently offered for deposits and notes of similar remaining
maturities.
OTHER BORROWINGS
The other borrowings are all at variable interest rates and therefore the
carrying value approximates a reasonable estimate of the fair value.
INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS
The fair value of interest rate swaps, options and forward contracts (used for
managing interest rate risk) is the estimated amount that the Company would pay
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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Advanta Corp. and Subsidiaries
CREDIT CARD CUSTOMER RELATIONSHIPS (BOTH ON- AND OFF-BALANCE SHEET)
The fair value of the credit card relationships, which are not financial
instruments, is estimated using a credit card valuation model which considers
the value of the existing receivables together with the value of new
receivables and the associated fees generated from existing cardholders over
the remaining life of the portfolio.
COMMITMENTS TO EXTEND CREDIT
Although the Company had $18.2 billion of unused commitments to extend credit,
there is no market value associated with these commitments, as any fees charged
are consistent with the fees charged by other companies at the reporting date
to enter into similar agreements.
NOTE 20. CALCULATION OF EARNINGS PER COMMON SHARE
The following table shows the calculation of earnings per common share for the
years ended December 31, 1994, 1993 and 1992:
- ------------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------
Net income $106,063 $ 76,647 $ 48,037
less: preferred dividends (141) (141) (141)
- ------------------------------------------------------------------------------------------------------
Net income available to
common shares $105,922 $ 76,506 $ 47,896
Average common stock
outstanding 38,877 37,170 32,054
Common stock equivalents 2,169 2,607 2,536
- ------------------------------------------------------------------------------------------------------
Weighted average
shares outstanding 41,046 39,777 34,590
- ------------------------------------------------------------------------------------------------------
Earnings per common share $ 2.58 $ 1.92 $ 1.38
======================================================================================================
NOTE 21. DERIVATIVE FINANCIAL INSTRUMENTS
In managing its interest rate sensitivity position, the Company may use
derivative financial instruments. These instruments are used for the express
purpose of managing exposure to changes in interest rates and are not used for
any trading or speculative activities. As of December 31, 1994 and 1993, all of
the Company's derivatives were designated as hedges or synthetic alterations
and were accounted for as such. For the years ended December 31, 1994, 1993 and
1992, there were no derivatives contracts terminated prior to scheduled
maturity.
The following table summarizes by notional amounts the Company's
derivatives instruments as of December 31, 1994 and 1993:
- --------------------------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------------------------
Interest rate swaps $ 459,735 $650,000
Interest rate options:
Caps written 1,100,000 0
Caps purchased 110,000 0
Corridors 425,000 0
Forward contracts 39,000 72,000
- --------------------------------------------------------------------------------------
$2,133,735 $722,000
======================================================================================
The notional amounts of derivatives do not represent amounts exchanged
by the counterparties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives
contracts.
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Advanta Corp. and Subsidiaries
Credit risk associated with derivatives arises from the potential for
a counterparty to default on its obligations. The Company attempts to limit
credit risk by only transacting with highly creditworthy counterparties and
requiring master netting and collateral agreements for all interest rate swap
and interest rate option contracts. All counterparties are associated with
organizations having securities rated as investment grade by independent rating
agencies. The list of eligible counterparties, setting of counterparty limits,
and monitoring of credit exposure is controlled by the Investment Committee, a
management committee. The Company's credit exposure to derivatives, with the
exception of caps written, is represented by contracts with a positive fair
value without giving consideration to the value of any collateral exchanged -
see Note 19. For caps written, no credit expense exposure exists since the
counterparty has performed its obligation to pay the Company a premium payment.
Interest rate swap agreements generally involve the exchange of fixed
and floating rate interest payments without the exchange of the underlying
notional amount on which the interest payments are calculated. Based on its
interest rate sensitivity analyses, the Company enters into interest rate swaps
to more effectively manage the impact of fluctuating interest rates on its net
interest income and noninterest revenues. The Company has used interest rate
swaps to synthetically alter its cash flow obligations on certain debt and off-
balance sheet credit card securitizations.
As of December 31, 1994, the Company used $460 million in notional
amounts of interest rate swaps to effectively convert certain fixed rate debt
to a LIBOR based variable rate. As of December 31, 1993, $150 million in
notional amounts of interest rate swaps were used to convert certain fixed rate
debt to a LIBOR based variable rate and $500 million in notional amounts of
interest rate swaps were used to convert certain off-balance sheet variable
pass-through rate credit card securitizations to a fixed pass-through rate of
4.95%.
The following table summarizes by notional amounts the Company's interest rate
swap activity by major category for the periods presented:
Receive Pay
Fixed Rate Fixed Rate Total
- -------------------------------------------------------------------------------------------------------
Balance at 1/01/92 $ 0 $ 0 $ 0
Additions 0 500,000 500,000
- -------------------------------------------------------------------------------------------------------
Balance at 12/31/92 0 500,000 500,000
Additions 150,000 0 150,000
- -------------------------------------------------------------------------------------------------------
Balance at 12/31/93 150,000 500,000 650,000
Additions 309,735 0 309,735
Maturities 0 (500,000) (500,000)
- -------------------------------------------------------------------------------------------------------
BALANCE AT 12/31/94 $ 459,735 $ 0 $ 459,735
=======================================================================================================
The following table discloses the Company's interest rate swaps by major
category, notional value, weighted average interest rates, and annual
maturities for the periods presented:
Balances Maturing In:
BALANCE AT -----------------------------------------------------------
12/31/94 1996 1997 1998 1999 2003
- --------------------------------------------------------------------------------------------------------------
Receive Fixed Rate:
Notional Value $459,735 $311,900 $76,835 $16,000 $5,000 $50,000
Average Fixed Receive 5.85% 5.38% 6.70% 7.05% 7.95% 6.90%
Average Variable Pay 6.17% 6.19% 6.19% 6.19% 6.19% 6.00%
==============================================================================================================
Interest rate options are contracts that grant the purchaser, for a
premium payment, the right to either purchase or sell a financial instrument at
a future date for a specified price from the writer of the option. Interest
rate caps are option-like contracts that require the seller (writer) to pay the
purchaser at specified future dates the amount by which a specified market
interest rate exceeds the cap rate applied to a notional amount. A corridor is
also an option-like contract which is the simultaneous purchase and sale of
separate interest rate caps where each cap is referenced to a different
interest rate index.
As part of managing its balance sheet and liquidity position, the
Company periodically securitizes and sells credit card and lease receivables.
For credit enhancement purposes, certain variable pass-through rate credit
card and lease securitizations were issued with embedded or purchased interest
rate caps. These rate caps, however, were not needed to satisfy asset/liability
management strategies. In order to achieve its
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Advanta Corp. and Subsidiaries
desired interest rate sensitivity structure and further reduce the effective
pass-through rate of the securitization, the Company has synthetically altered
the interest rate structure on certain off-balance sheet credit card and lease
securitizations by writing interest rate caps to offset the embedded and
purchased rate caps attached to them.
The premiums received or paid for writing or purchasing such cap
contracts are included in other assets and are amortized to noninterest
revenues over the life of the contract. Any obligations which may arise under
these contracts are recorded in noninterest revenues on an accrual basis. As of
December 31, 1994, unamortized premiums for caps written and purchased amounted
to $5.8 million and $3.3 million, respectively. The weighted average maturity
for caps written and purchased was 3.8 years and 3.6 years, respectively.
When the Company periodically securitizes and sells credit card
receivables, the receivables sold to the securitization trust may carry rates
which are indexed to the prime rate, whereas the securitization certificates
issued from the trust may be priced at a spread over LIBOR. The Company is
exposed to interest rate risk to the extent that these two rate indices react
differently to changes in market interest rates. The Company may choose to
hedge its excess servicing revenues from the risk of spread compression between
the prime rate and LIBOR by entering into corridor transactions which
effectively fix a prime/LIBOR spread.
All of the Company's corridor transactions were executed without
exchanges of premiums between counterparties. Any obligations which may arise
under these contracts are recorded to noninterest revenues on an accrual basis.
As of December 31, 1994, the weighted average maturity of corridor contracts
was 1.7 years.
Forward contracts are commitments to either purchase or sell a
financial instrument at a future date for a specified price and may be settled
in cash or through delivery of the underlying financial instrument. The Company
regularly securitizes and sells fixed rate mortgage loan receivables. The
Company may choose to hedge the changes in the market value of its fixed rate
loans and commitments designated for anticipated securitizations by selling
U.S. Treasury securities for forward settlement. The maximum and average terms
of hedges of anticipated mortgage loan sales is four and two months,
respectively. Gains and losses from forward sales are deferred and included in
the measurement of the dollar basis of the loans sold. Realized losses of $32
were deferred as of December 31, 1994 and realized gains of $6 were deferred as
of December 31, 1993.
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Advanta Corp. and Subsidiaries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF ADVANTA CORP.:
We have audited the accompanying consolidated balance sheets of Advanta Corp.
(a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Advanta Corp. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Philadelphia, PA
January 23, 1995
REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING
TO THE STOCKHOLDERS OF ADVANTA CORP.:
The management of Advanta Corp. and its subsidiaries is responsible for the
preparation, content, integrity and objectivity of the financial statements
contained in this Annual Report. These financial statements have been prepared
in accordance with generally accepted accounting principles and as such, must,
by necessity, include amounts based upon estimates and judgments made by
management. The other financial information in the Annual Report was also
prepared by management and is consistent with the financial statements.
Management maintains a system of internal controls that provides
reasonable assurance as to the integrity and reliability of the financial
statements. This control system includes: (1) organizational and budgetary
arrangements which provide reasonable assurance that errors or irregularities
would be detected promptly, (2) careful selection of personnel and
communications programs aimed at assuring that policies and standards are
understood by employees, (3) a program of internal audits, and (4) continuing
review and evaluation of the control program itself.
The financial statements in this Annual Report have been audited by
Arthur Andersen LLP, independent public accountants. Their audits were
conducted in accordance with generally accepted auditing standards and
considered the Company's system of internal controls to the extent they deemed
necessary to determine the nature, timing and extent of their audit tests.
Their report is printed herewith.
/s/ RICHARD A. GREENAWALT /s/ DAVID D. WESSELINK /s/ JOHN J. CALAMARI
- ------------------------- ---------------------- --------------------
Richard A. Greenawalt David D. Wesselink John J.Calamari
President and Chief Senior Vice President Vice President,
Operating Officer and Chief Financial Officer Finance
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Advanta Corp. and Subsidiaries
SUPPLEMENTAL SCHEDULES
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands) DECEMBER 31,
- ---------------------------------------------------------------------------------------
1994
- ---------------------------------------------------------------------------------------
Maturity:
3 months or less $118,126
Over 3 months through 6 months 15,956
Over 6 months through 12 months 24,076
Over 12 months 14,776
- ---------------------------------------------------------------------------------------
Total $172,934
=======================================================================================
COMMON STOCK PRICE RANGES AND DIVIDEND POLICY
On September 23, 1993, the Board of Directors approved a three-for-two stock
split effected in the form of a 50% stock dividend on both the Class A and
Class B common stock to shareholders of record as of October 4, 1993, which
dividend was paid on October 15, 1993. All share and per share amounts have
been adjusted to reflect this stock split as a result of the stock dividend.
The Company's common stock is traded on the NASDAQ National Market System under
the trading symbols ADVNB (non-voting common stock) and ADVNA (voting common
stock).
Following are the high and low sale prices and cash dividends declared for the
last two years as they apply to each class of stock:
Cash
Dividends
Quarter Ended: High Low Declared
- ------------------------------------------------------------------------------------------
Class B:
- ------------------------------------------------------------------------------------------
March 1993 $25.33 $16.00 $ .04
June 1993 26.50 20.17 .05
September 1993 36.50 25.33 .05
December 1993 38.50 25.00 .06
March 1994 33.25 26.00 .06
June 1994 37.50 28.75 .06
September 1994 34.75 26.50 .06
December 1994 30.50 23.25 .08
==========================================================================================
Class A:
- ------------------------------------------------------------------------------------------
March 1993 $29.33 $19.00 $.033
June 1993 32.50 24.17 .042
September 1993 41.50 29.83 .042
December 1993 46.75 29.25 .05
March 1994 36.00 26.50 .05
June 1994 41.75 30.50 .05
September 1994 37.50 28.25 .05
December 1994 33.50 24.25 .067
==========================================================================================
At December 31, 1994, the Company had approximately 930 and 750 holders of
record of Class B and Class A common stock, respectively.
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Advanta Corp. and Subsidiaries
QUARTERLY DATA (Unaudited)
(In thousands, except per share data)
1994
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------
Interest income $ 45,765 $39,350 $ 39,345 $40,679
Interest expense 29,804 22,619 21,580 20,755
-----------------------------------------------------------------
Net interest income 15,961 16,731 17,765 19,924
Provision for credit losses 6,185 5,750 15,434 6,829
-----------------------------------------------------------------
Net interest income after provision for
credit losses 9,776 10,981 2,331 13,095
Noninterest revenues:
Gain on sale of credit cards 0 0 18,352 0
Other noninterest revenues 111,320 97,202 89,154 79,780
-----------------------------------------------------------------
Total noninterest revenues 111,320 97,202 107,506 79,780
Operating expenses 77,721 66,030 69,224 53,809
-----------------------------------------------------------------
Income before income taxes 43,375 42,153 40,613 39,066
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 28,615 $26,767 $ 25,757 $24,924
=====================================================================================================================
Earnings per common share $ 0.70 $ 0.65 $ 0.63 $ 0.61
=====================================================================================================================
Weighted average common shares
outstanding 40,802 41,192 41,173 40,941
=====================================================================================================================
1993
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------
Interest income $ 39,261 $42,639 $ 39,270 $36,777
Interest expense 19,733 19,676 19,665 20,229
-----------------------------------------------------------------
Net interest income 19,528 22,963 19,605 16,548
Provision for credit losses 8,230 8,027 6,364 7,181
-----------------------------------------------------------------
Net interest income after provision for
credit losses 11,298 14,936 13,241 9,367
Noninterest revenues 75,243 64,948 58,338 57,051
Operating expenses 51,662 46,169 42,543 40,793
-----------------------------------------------------------------
Income before income taxes and
extraordinary item 34,879 33,715 29,036 25,625
Net income before extraordinary item 23,020 20,285 18,471 16,144
Extraordinary item, net 0 0 (1,273) 0
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 23,020 $20,285 $ 17,198 $16,144
=====================================================================================================================
Earnings per common share before
extraordinary item $ 0.56 $ 0.50 $ 0.46 $ 0.45
=====================================================================================================================
Earnings per common share $ 0.56 $ 0.50 $ 0.43 $ 0.45
=====================================================================================================================
Weighted average common shares
outstanding 41,243 40,732 40,299 35,829
=====================================================================================================================
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Advanta Corp. and Subsidiaries
SUPPLEMENTAL SCHEDULE
ALLOCATION OF RESERVE FOR CREDIT LOSSES
(Dollars in thousands) December 31,
- --------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------- --------------- --------------- --------------- -------------
Reserve Reserve Reserve Reserve Reserve
Amount % Amount % Amount % Amount % Amount %
- --------------------------------------------------------------------------------------------------------------------
Credit cards $27,486 66% $25,859 83% $35,743 89% $31,193 86% $27,247 86%
Mortgage loans 5,164 12 2,706 9 2,926 7 2,447 7 1,766 6
Leases 1,076 3 1,826 6 1,442 4 1,119 3 1,594 5
Other 7,891 19 836 2 117 --- 1,596 4 1,094 3
- --------------------------------------------------------------------------------------------------------------------
Total $41,617 100% $31,227 100% $40,228 100% $36,355 100% $31,701 100%
====================================================================================================================
COMPOSITION OF GROSS RECEIVABLES
(Dollars in thousands) December 31,
- ---------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------- --------------- --------------- --------------- --------------
Amount % Amount % Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------
Credit cards $1,730,176 88% $1,131,367 89% $737,485 74% $1,048,325 82% $ 791,447 70%
Mortgage loans 142,874 7 91,340 7 212,273 21 186,820 15 252,339 22
Leases 86,157 6 51,008 4 46,712 6 36,510 3 83,557 8
Other 5,237 --- 3,590 --- 1,774 --- 1,765 --- 2,150 ---
- ---------------------------------------------------------------------------------------------------------------------
Total $1,964,444 100% $1,277,305 100% $998,244 100% $1,273,420 100% $1,129,493 100%
=====================================================================================================================
YIELD AND MATURITY OF INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1994
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within One Year Within One Year After Ten Years
------------------- -------------------- -------------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other
U.S. Government
securities $78,154 5.37% $110,331 4.76% $ 0 0.00% $ 0 0.00%
State and municipal
securities (A) 20,554 5.24 56,109 6.16 545 8.44 0 0.00
Other 1,166 4.44 60 6.71 28,080 5.77 23,760 4.47
- -------------------------------------------------------------------------------------------------------------------
Total $99,874 5.33% $165,500 5.23% $28,625 5.82% $23,760 4.47%
===================================================================================================================
(A) Yield computed on a taxable equivalent basis using a statutory rate of 35%
in 1994.
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Advanta Corp. and Subsidiaries
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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Advanta Corp. and Subsidiaries
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the caption "Election of
Directors" and the last paragraph under the caption "Security Ownership of
Management" are hereby incorporated herein by reference, as is the text in Part
I of this Report under the caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive
Compensation," "Compensation Committee Report on Executive Compensation," and
"Election of Directors -- Committees, Meetings, Compensation and Other Matters
Regarding the Board of Directors" are hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The text of the Proxy Statement under the captions, "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
are hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The last three paragraphs under the caption "Election of Directors --
Committees, Meetings, Compensation and Other Matters Regarding the Board of
Directors" in the Proxy Statement are hereby incorporated herein by reference.
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Advanta Corp. and Subsidiaries
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Financial Statements, Schedules, and Other Information of the
Registrant and its subsidiaries are included in this Form 10-K:
(a) (1) Financial Statements
1. Consolidated Balance Sheets at December 31, 1994 and 1993.
2. Consolidated Income Statements for each of the three years
in the period ended December 31, 1994.
3. Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December 31,
1994.
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1994.
5. Notes to Consolidated Financial Statements.
(a) (2) Schedules
1. Schedule I -- Condensed Financial Information of
Registrant.
2. Schedule II -- Valuation and Qualifying Accounts.
3. Report of Independent Public Accountants on Supplemental
Schedules.
Other statements and schedules are not being presented
either because they are not required or the information
required by such statements and schedules is presented
elsewhere in the financial statements.
(a) (3) Exhibits.
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994).
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.ii to the Registrant's Current Report
on Form 8-K dated December 22, 1994, filed on the same date).
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Advanta Corp. and Subsidiaries
4-a* Trust Indenture dated April 22, 1981 between Registrant and
CoreStates Bank, N.A. (formerly, The Philadelphia National
Bank), as Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen
of Class B Common Stock Certificate (incorporated by
reference to Exhibit 1 of the Registrant's Amendment No. 1
to Form 8 and Exhibit 1 to Registrant's Form 8-A,
respectively, both dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the
Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on
Form S-3 (No. 33-50883), filed November 2, 1993).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by
reference to Exhibit 10-b to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989). +
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan
(filed herewith). +
10-c Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
May 1, 1991 (incorporated by reference to Exhibit 4.1 to
Colonial National's Registration Statement on Form S-1
(No. 33-40368), filed with Amendment No.1 thereto on May
21, 1991).
10-d Advanta Management Incentive Plan (incorporated by
reference to Exhibit 10-n to the Registrant's Registration
Statement on Form S-2 (File No. 33-39343), filed March 8,
1991). +
10-e* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National Bank USA
on March 25, 1983.
10-f* Application for membership in MasterCard(R) International,
Inc. and Card Member License Agreement executed by Colonial
National Bank USA on March 25, 1983.
10-g* Indenture of Trust dated May 11, 1984 between Linda M.
Ominsky, as settlor, and Dennis Alter, as trustee.
10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as
Trustee of the trust established by the Indenture of Trust
filed as Exhibit 10-g (the "Indenture"), Dennis Alter in
his individual capacity, Linda A. Ominsky, and Michael
Stolper, which Agreement modifies the Indenture
(incorporated by reference to Exhibit 10-g(i) to the
Registrant's Registration Statement on Form S-3 (File
33-58660), filed February 23, 1993).
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Advanta Corp. and Subsidiaries
10-h Agreement dated as of January 21, 1994 between the
Registrant and Alex W. Hart (incorporated by reference to
Exhibit 10-h to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, filed
March 29, 1994). +
10-i Advanta Management Incentive Plan with Stock Election
(incorporated by reference to Exhibit 4-c to Amendment
No. 1 to the Registrant's Registration Statement on
Form S-8 (No. 33-33350), filed February 21, 1990). +
10-j Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
August 1, 1990 (incorporated by reference to Exhibit 4 to
the Registrant's Report on Form 8-K filed September 11,
1990).
10-k Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
November 15, 1990 (incorporated by reference to Exhibit 4
to the Registrant's Report on Form 8-K filed November 30,
1990).
10-l Advanta Management Incentive Plan With Stock Election II
(incorporated by reference to Exhibit 10-o to the
Registrant's Registration Statement on Form S-2 (File
No. 33-39343), filed March 8, 1991). +
10-m Pooling and Servicing Agreement between Colonial National
Bank USA and Banker's Trust Company, as Trustee, dated as
of September 1, 1991 (incorporated by reference to Exhibit
4.1 to Colonial National's Registration Statement on Form
S-1 (No. 33-42682), filed with Amendment No. 1 thereto on
September 23, 1991).
10-n Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
February 1, 1992 (incorporated by reference to Exhibit 4.1
to Colonial National's Registration Statement on Form S-1
(No. 33-45306), filed with Amendment No.1 thereto on
February 3, 1992).
10-o Amended and Restated Master Pooling and Servicing Agreement
between Colonial National Bank USA and Chemical Bank, as
Trustee, dated as of April 1, 1992 (incorporated by
reference to Exhibit 4.1 to Colonial National's Registration
Statement on Form S-1 (No. 33-49602), filed with Amendment
No. 1 thereto on August 19, 1992).
10-p Advanta Management Incentive Plan With Stock Election III
(incorporated by reference to Exhibit 10-s to the
Registrant's Registration Statement on Form S-3 (File No.
33-58660), filed February 23, 1993). +
10-q Life Insurance Benefit for Certain Key Executives and
Directors (incorporated by reference to Exhibit 10-u to the
Registrant's Registration Statement on Form S-3, (File No.
33-58660), filed February 23, 1993). +
10-r $122.5 Million 364-day Unsecured Revolving Credit Agreement
dated as of March 24, 1994 among the Registrant, Mellon
Bank, N.A. as Agent and the several bank parties thereto
(incorporated by reference to Exhibit 10-r to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, filed March 29, 1994).
72
72
Advanta Corp. and Subsidiaries
10-s $122.5 Million 3-year Unsecured Revolving Credit Agreement
dated as of March 24, 1994 among the Registrant, Mellon
Bank, N.A. as Agent and the several bank parties thereto
(incorporated by reference to Exhibit 10-s to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, filed March 29, 1994).
10-t Advanta Management Incentive Plan With Stock Election IV
(filed herewith). +
10-u Agreement of Limited Partnership of Advanta Partners LP,
dated as of May 6, 1994 (incorporated by reference to
Exhibit 10(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, filed August 11,
1994).
10-v Employment Agreement by and between Advanta Partners LP and
Anthony P. Brenner, made as of May 6, 1994 (incorporated by
reference to Exhibit 10(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994,
filed August 11, 1994).
10-w Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated
December 1, 1993, as amended May 23, 1994 (incorporated by
reference to Exhibit 4.1 to Colonial National's
Registration Statement on Form S-3 (No. 33-79986), filed
June 8, 1994).
11 Inapplicable.
12 Inapplicable.
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of Independent Public Accountants (filed herewith).
24 Powers of Attorney (included on the signature page hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
* Incorporated by reference to the Exhibit with corresponding number
constituting part of the Registrant's Registration Statement on Form S-2 (No.
33-00071), filed on September 4, 1985.
+ Management contract or compensatory plan or arrangement.
73
73
Advanta Corp. and Subsidiaries
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the
Registrant on October 19, 1994 regarding
consolidated earnings of the Registrant and
its subsidiaries for the fiscal quarter ended
September 30, 1994. Summary earnings and
balance sheet information as of that date
were filed with such report.
2. A Report on Form 8-K was filed by the
Registrant on December 22, 1994 regarding the
commencement of the Registrant's $350,000,000
Medium-Term Note program, Series B. The
Registrant's By-laws, as amended, and the
Forms of Fixed and Floating Rate Notes with
respect to the Registrant's medium-term note
program were filed with such report. No
financial statements were filed with such
report.
3. A Report on Form 8-K was filed by the
Registrant on January 24, 1995 regarding
consolidated earnings for the Registrant and
its subsidiaries for the fiscal quarter and
fiscal year ended December 31, 1994. Summary
earnings and balance sheet information as of
that date were filed with such report.
74
74
Advanta Corp. and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADVANTA Corp.
Dated: March 15, 1995 By: /S/ Richard A. Greenawalt
------------------ --------------------------
Richard A. Greenawalt, President,
Chief Operating Officer and Director
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint Dennis Alter, Richard Greenawalt, Alex W. Hart,
John J. Calamari, David D. Wesselink and Gene S. Schneyer, or any of them
(with full power to each of them to act alone), his or her true and lawful
attorney-in-fact and agent, with full power of substitution, for him or her and
on his or her behalf to sign, execute and file an Annual Report on Form 10-K
under the Securities Exchange Act of 1934, as amended, for the fiscal year
ended December 31, 1994 relating to the Advanta Corp. and any or all amendments
thereto, with all exhibits and any and all documents required to be filed with
respect thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated on the 15th day of March, 1995.
Name Title
/S/ Dennis Alter Chairman of the Board and Chief
- ---------------------------------- Executive Officer
Dennis Alter
/S/ Alex W. Hart Executive Vice Chairman and
- ---------------------------------- Director
Alex W. Hart
/S/ Richard A. Greenawalt President, Chief Operating
- ---------------------------------- Officer and Director
Richard A. Greenawalt
/S/ David D. Wesselink Senior Vice President and
- ---------------------------------- Chief Financial Officer
David D. Wesselink
/S/ John J. Calamari Vice President, Finance and
- ---------------------------------- Chief Accounting Officer
John J. Calamari
/S/ Arthur P. Bellis Director
- ----------------------------------
Arthur P. Bellis
/S/ Max Botel Director
- ----------------------------------
Max Botel
75
75
Advanta Corp. and Subsidiaries
/S/ Richard Braemer Director
- -----------------------------------
Richard Braemer
/S/ Anthony Brenner Director
- ----------------------------------
Anthony Brenner
/S/ William C. Dunkelberg Director
- ----------------------------------
William C. Dunkelberg, Ph.D.
/S/ Robert C. Hall Director
- ----------------------------------
Robert C. Hall
/S/ Warren Kantor Director
- ----------------------------------
Warren Kantor
/S/ Ronald J. Naples Director
- ----------------------------------
Ronald J. Naples
/S/ Phillip A. Turberg Director
- ----------------------------------
Phillip A. Turberg
76
76
Advanta Corp. and Subsidiaries
FINANCIAL SCHEDULES AND
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT THEREON
77
77
Advanta Corp. and Subsidiaries
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL SCHEDULES
To Advanta Corp.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in this Form 10-K, and have issued
our report thereon dated January 23, 1995. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The supplemental
schedules listed in Item 14(a)(2) are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, PA
January 23, 1995
78
ADVANTA Corp. & Subsidiaries
December 31, 1994
Schedule I - Condensed Financial Information of Registrant
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands)
December 31,
1994 1993
ASSETS
Cash 28,821 44,561
Investments available for sale 199,771 136,523
Other assets, principally investments in and
advances to wholly owned subsidiaries 1,066,860 582,846
Total assets 1,295,452 763,930
LIABILITIES
Accrued expenses and other liabilities 8,628 4,597
Subordinated debt and other borrowings 845,134 416,592
Total liabilities 853,762 421,189
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 404 398
Other stockholders' equity 440,276 341,333
Total stockholders' equity 441,690 342,741
Total liabilities and stockholders'
equity 1,295,452 763,930
79
Schedule I (cont'd)
Parent Company Only
Condensed Statements Income
(Dollars in thousands)
Year Ended December 31,
1994 1993 1992
Income:
Interest $ 23,983 $ 8,545 $ 4,807
Other 15,724 4,163 5,359
Total Income 39,707 12,708 10,166
Expenses:
General and administrative 42,948 57,051 30,097
Interest 34,787 21,544 23,434
Total Expenses 77,735 78,595 53,531
Loss before income taxes,
equity in subsidiaries,
and extraordinary item (38,028) (65,887) (43,365)
Benefit for income taxes 16,419 25,147 16,728
Loss before equity in
subsidiaries and
extraordinary item (21,609) (40,740) (26,637)
Equity in net profit of
subsidiaries 127,672 118,660 74,674
Net income before
extraordinary item 106,063 77,920 48,037
Extraordinary item, net 0 (1,273) 0
Net income $ 106,063 $ 76,647 $ 48,037
80
Schedule I (Cont'd)
Parent Company Only
Statements of Cash Flows
Year Ended December 31,
1994 1993 1992
OPERATING ACTIVITIES
Net Income $ 106,063 $ 76,647 $ 48,037
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 414 335 328
Change in other assets (130,495) (101,210) (98,683)
Change in accrued liabilities 7,865 1,955 4,078
Loss on repurchase of senior
subordinated debentures 0 1,928 0
Net cash used by operating activities (16,153) (20,345) (46,240)
INVESTING ACTIVITIES
Net change in premises & equipment (2,810) (454) 39
Purchase of investments available for sale (1,161,420) (291,548) (61,119)
Proceeds from sales of investments available
for sale 295,196 186,051 0
Proceeds from maturing investments available
for sale 797,233 31,715 22,444
Dividends received from subsidiaries 39,000 61,986 25,239
Change in interest-bearing deposits 0 24,350 (22,722)
Net cash (used)/provided by investing activities (32,801) 12,100 (36,119)
FINANCING ACTIVITIES
Proceeds from line of credit 50,000 0 0
Proceeds from issuance of subordinated debt 39,398 85,380 177,321
Payments on redemption of subordinated debt (58,618) (103,480) (98,711)
Change in repurchase agreements 52,975 0 0
Increase in affiliate borrowings (389,949) (156,915) (13,114)
Redemption of senior subordinated debt 0 (36,404) 0
Proceeds from issuance of medium-term
notes 344,787 164,851 0
Cash dividends paid (9,877) (7,298) (4,028)
Issuance of stock 4,498 93,542 3,377
Net cash provided by financing activities 33,214 39,676 64,845
Net (decrease)/increase in cash (15,740) 31,431 (17,514)
Cash at beginning of year 44,561 13,130 30,644
Cash at end of year $ 28,821 $ 44,561 $ 13,130
81
Schedule II
ADVANTA Corp. & Subsidiaries
Valuation & Qualifying Accounts
($000's)
Column A Column B Column C Column D Column E
Additions
Year Balance Charged Charged to Balance
Ended at to Other at
December Beginning Costs and Accounts Deductions End
31, Description of Period Expenses (Describe) (Describe) of Period
1994 Reserve for
losses on
securitized
credit cards 96,377 0 70,624 (1) 92,530 (5) 74,471
Reserve for
credit losses and
prepayments on
securitized HEL 40,513 0 15,441 (1) 36,187 (2) (5) 19,767
Reserve for
losses on
securitized
Leases 5,298 0 7,420 (1) 3,047 (5) 9,671
Reserve for
uncollectable
receivables &
unbillable fees 23 16 0 (1) 39 (5) 0
1993 Reserve for
losses on
securitized
credit cards 108,756 0 69,964 (1) 82,343 (5) 96,377
Reserve for
credit losses and
prepayments on
securitized HEL 17,861 0 34,436 (1) (3) 11,784 (5) 40,513
Reserve for
losses on
securitized
Leases 3,100 0 4,010 (1) 1,812 (5) 5,298
Reserve for
uncollectable
receivables &
unbillable fees 97 170 0 (1) 244 (5) 23
1992 Reserve for
losses on
securitized
credit cards 48,094 0 123,745 (1) 63,083 (5) 108,756
Reserve for
credit losses and
prepayments on
securitized HEL 12,081 0 11,203 (1) (4) 5,423 (5) 17,861
Reserve for
losses on
securitized
Leases 2,400 0 1,785 (1) 1,085 (5) 3,100
Reserve for
uncollectable
receivables &
unbillable fees 0 110 0 13 (5) 97
(1) Amounts netted against securitization income.
(2) Includes $12.8MM transferred from off-balance sheet to on-balance sheet
reserves.
(3) Includes $11.0MM transferred from on-balance sheet unallocated reserves.
(4) Includes $3.3MM transferred from on-balance sheet unallocated reserves.
(5) Relates to net charge-offs.
82
Advanta Corp. and Subsidiaries
EXHIBIT INDEX
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994).
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.ii to the Registrant's Current
Report on Form 8-K dated December 22, 1994, filed on the
same date).
4-a* Trust Indenture dated April 22, 1981 between Registrant and
CoreStates Bank, N.A. (formerly, The Philadelphia National
Bank), as Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen
of Class B Common Stock Certificate (incorporated by
reference to Exhibit 1 of the Registrant's Amendment No. 1
to Form 8 and Exhibit 1 to Registrant's Form 8-A,
respectively, both dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the
Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on
Form S-3 (No. 33-50883), filed November 2, 1993).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by
reference to Exhibit 10-b to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989). +
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan
(filed herewith). +
10-c Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
May 1, 1991 (incorporated by reference to Exhibit 4.1 to
Colonial National's Registration Statement on Form S-1 (No.
33-40368), filed with Amendment No.1 thereto on May 21,
1991).
10-d Advanta Management Incentive Plan (incorporated by
reference to Exhibit 10-n to the Registrant's Registration
Statement on Form S-2 (File No. 33-39343), filed March 8,
1991). +
10-e* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National Bank USA
on March 25, 1983.
83
Advanta Corp. and Subsidiaries
10-f* Application for membership in MasterCard(R) International,
Inc. and Card Member License Agreement executed by
Colonial National Bank USA on March 25, 1983.
10-g* Indenture of Trust dated May 11, 1984 between Linda M.
Ominsky, as settlor, and Dennis Alter, as trustee.
10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as
Trustee of the trust established by the Indenture of Trust
filed as Exhibit 10-g (the "Indenture"), Dennis Alter in
his individual capacity, Linda A. Ominsky, and Michael
Stolper, which Agreement modifies the Indenture
(incorporated by reference to Exhibit 10-g(i) to the
Registrant's Registration Statement on Form S-3 (File
33-58660), filed February 23, 1993).
10-h Agreement dated as of January 21, 1994 between the
Registrant and Alex W. Hart (incorporated by reference to
Exhibit 10-h to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, filed March 29,
1994). +
10-i Advanta Management Incentive Plan with Stock Election
(incorporated by reference to Exhibit 4-c to Amendment No.
1 to the Registrant's Registration Statement on
Form S-8 (No. 33-33350), filed February 21, 1990). +
10-j Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
August 1, 1990 (incorporated by reference to Exhibit 4 to
the Registrant's Report on Form 8-K filed September 11,
1990).
10-k Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
November 15, 1990 (incorporated by reference to Exhibit 4
to the Registrant's Report on Form 8-K filed November 30,
1990).
10-l Advanta Management Incentive Plan With Stock Election II
(incorporated by reference to Exhibit 10-o to the
Registrant's Registration Statement on Form S-2 (File
No. 33-39343), filed March 8, 1991). +
10-m Pooling and Servicing Agreement between Colonial National
Bank USA and Banker's Trust Company, as Trustee, dated as
of September 1, 1991 (incorporated by reference to Exhibit
4.1 to Colonial National's Registration Statement on Form
S-1 (No. 33-42682), filed with Amendment No. 1 thereto on
September 23, 1991).
10-n Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated as of
February 1, 1992 (incorporated by reference to Exhibit 4.1
to Colonial National's Registration Statement on Form S-1
(No. 33-45306), filed with Amendment No.1 thereto on
February 3, 1992).
84
Advanta Corp. and Subsidiaries
10-o Amended and Restated Master Pooling and Servicing Agreement
between Colonial National Bank USA and Chemical Bank, as
Trustee, dated as of April 1, 1992 (incorporated by
reference to Exhibit 4.1 to Colonial National's Registration
Statement on Form S-1 (No. 33-49602), filed with Amendment
No. 1 thereto on August 19, 1992).
10-p Advanta Management Incentive Plan With Stock Election III
(incorporated by reference to Exhibit 10-s to the
Registrant's Registration Statement on Form S-3 (File No.
33-58660), filed February 23, 1993). +
10-q Life Insurance Benefit for Certain Key Executives and
Directors (incorporated by reference to Exhibit 10-u to the
Registrant's Registration Statement on Form S-3, (File No.
33-58660), filed February 23, 1993). +
10-r $122.5 Million 364-day Unsecured Revolving Credit Agreement
dated as of March 24, 1994 among the Registrant, Mellon
Bank, N.A. as Agent and the several bank parties thereto
(incorporated by reference to Exhibit 10-r to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, filed March 29, 1994).
10-s $122.5 Million 3-year Unsecured Revolving Credit Agreement
dated as of March 24, 1994 among the Registrant, Mellon
Bank, N.A. as Agent and the several bank parties thereto
(incorporated by reference to Exhibit 10-s to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, filed March 29, 1994).
10-t Advanta Management Incentive Plan With Stock Election IV
(filed herewith). +
10-u Agreement of Limited Partnership of Advanta Partners LP,
dated as of May 6, 1994 (incorporated by reference to
Exhibit 10(a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, filed August 11,
1994).
10-v Employment Agreement by and between Advanta Partners LP and
Anthony P. Brenner, made as of May 6, 1994 (incorporated by
reference to Exhibit 10(b) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994,
filed August 11, 1994).
10-w Pooling and Servicing Agreement between Colonial National
Bank USA and Bankers Trust Company, as Trustee, dated
December 1, 1993, as amended May 23, 1994 (incorporated by
reference to Exhibit 4.1 to Colonial National's
Registration Statement on Form S-3 (No. 33-79986), filed
June 8, 1994).
11 Inapplicable.
12 Inapplicable.
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
85
Advanta Corp. and Subsidiaries
23 Consent of Independent Public Accountants (filed herewith).
24 Powers of Attorney (included on the signature page hereof).
27 Financial Data Schedule (filed herewith).
28 Inapplicable.
99 Inapplicable.
* Incorporated by reference to the Exhibit with corresponding
number constituting part of the Registrant's Registration Statement on
Form S-2 (No. 33-00071), filed on September 4, 1985.
+ Management contract or compensatory plan or arrangement.