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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 for the fiscal year ended December 31, 1996 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 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)
Welsh & McKean Roads, P. O. Box 844, Spring House, Pennsylvania 19477
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 657-4000
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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
6-3/4% Convertible Class B Preferred Stock, Series 1995
Stock Appreciation Income Linked Securities (SAILS)(SM)
Class A Right
Class B Right
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(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 [ ].
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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.)
$ 525,168,654.75 as of March 1, 1997 which amount excludes the value
of all shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the Company (however, this
does not constitute a representation or acknowledgment that any of such
individuals is an affiliate of the Registrant).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 1, 1997 there were 18,168,896 shares of the Registrant's
Class A Common Stock, $.01 par value, outstanding and 25,988,917 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
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Definitive Proxy Statement relating to the Part III, Items 10-13
Registrant's 1997 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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PART I
ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. (the "Company") serves consumers and small businesses through
innovative products and services primarily via direct, cost effective delivery
systems. The Company primarily originates and services credit cards and
mortgages. Other products include small-ticket equipment leasing, auto finance,
credit insurance and deposit products. The Company utilizes customer
information attributes including credit assessments, usage patterns, and other
characteristics enhanced by proprietary information to match customer profiles
with appropriate products. At year end 1996 assets under management totaled $19
billion.
Approximately 72% of total revenues are derived from credit cards
marketed through targeted direct mail campaigns. For the past several years,
the Company's strategy has been to market this product in the form of a no
annual fee, low variable-rate gold card. The Company has successfully grown to
one of the ten largest issuers of gold cards and ranks among the top 15
bankcard issuers worldwide. Personal Finance Services which include mortgages
and auto loans contribute 13% of total revenues with a managed loan portfolio
of $2.8 billion. Mortgage loans are originated directly with consumers, as well
as through conduit relationships and wholesale purchases from brokers and other
financial institutions.
The Company was incorporated in Delaware in 1974 as Teachers Service
Organization, Inc., the successor to a business originally founded in 1951. In
January 1988, the Company's name was changed from TSO Financial Corp. to
Advanta Corp. The Company's principal executive office is located at Welsh &
McKean Roads, P. O. Box 844, Spring House, Pennsylvania 19477-0844. The
Company's telephone number at its principal executive office is (215) 657-4000.
References to the Company in this Report include its consolidated subsidiaries
unless the context otherwise requires.
ADVANTA PERSONAL PAYMENT SERVICES
During 1995, the Company's consumer credit card unit adopted the name Advanta
Personal Payment Services, which more appropriately captures the unit's mission
and its goal of expansion into new delivery systems. The credit card, a vehicle
enabling the consumer to transact purchases and facilitate borrowing, offers
utility to the consumer that may move beyond its traditional platform. For
example, "smart" credit cards (credit cards containing a microchip processor)
and on-line payment delivery systems associated with a credit card account are
nascent technologies which may in the future be a part of Advanta Personal
Payment Services.
The Company, which has been in the credit card business since 1983,
issues gold (i.e., premium) and standard MasterCard(R)* and VISA(R)* credit
cards nationwide. The Company has built a substantial cardholder base which, as
of December 31, 1996, totaled 5.7 million accounts and $12.7 billion in managed
receivables. The gold card strategy has produced a portfolio with approximately
80% of balances from customers holding a gold card. This contrasts with the
bankcard industry as a whole, which is composed of 43% gold (versus standard)
cards. The Company believes its concentration of gold card balances to be the
highest among the top twenty domestic bankcard issuers. The top twenty bankcard
issuers, as of December 31, 1996, accounted for more than 75% of all domestic
balances outstanding. Both gold and standard
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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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accounts undergo the same credit analysis, but gold accounts have higher
initial credit limits because of the cardholders' stronger credit record. 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 proprietary market segmentation and targeting models to target its
mailings to profitable segments of the market.
In 1982, the Company acquired Colonial National Bank USA, the name of
which was changed to Advanta National Bank USA ("AUS") in May 1996. As a
national bank, AUS has the ability to make loans to consumers without many of
the restrictions found in various state usury and licensing laws, to negotiate
variable rate loans, to generate funds economically in the form of deposits
insured by the Federal Deposit Insurance Corporation ("FDIC"), and to include
in its product mix a MasterCard and VISA credit card program. In 1995, the
Company chartered Advanta National Bank ("ANB") to complement the credit card
activities of AUS. ANB is a type of limited purpose national bank known as a
"credit card bank" whose lending activities are limited to consumer credit card
lending. See "Government Regulation -- Advanta National Bank USA and Advanta
National Bank." Prior to the establishment of ANB, substantially all of the
Company's credit card receivables and bank deposits were originated by AUS.
However, at December 31, 1996, ANB accounted for $5.6 billion of the Company's
total of $12.7 billion of managed credit card assets, as well as $716 million
of the total $1.9 billion of bank deposits and all of the $836 million of
medium term bank notes.
MasterCard and VISA license banks, such as AUS and ANB (together the
"Banks") and other financial institutions, to issue credit cards using their
trademarks and to utilize their interchange networks. Cardholders may use their
cards to make purchases at participating merchants or to obtain cash advances
at participating financial institutions. Cardholders may also use special
credit line drafts issued by the Banks to draw against their Visa or MasterCard
credit lines for cash, purchases or balance transfers. Each credit card
transaction is submitted to a merchant bank which remits to the merchant the
purchase amount less a merchant discount fee, and submits the purchase to the
card issuing bank for payment through the appropriate settlement system. The
card issuing bank receives an interchange fee as compensation for the funding
and credit and fraud risk that it takes when its customers use its credit card.
MasterCard or VISA sets the interchange fee as a percentage of each card
transaction (currently averaging approximately 1.4%).
The Company generates interest and other income from its credit card
business through finance charges assessed on outstanding loans, interchange
income, cash advance and other credit card fees, and securitization income as
described below. Credit card income also includes fees paid by credit card
customers for product enhancements they may select, and revenues paid to the
Banks by third parties for the right to market their products to the Company's
credit card customers.
Most of the Company's MasterCard and VISA credit cards carry no annual
fee, and those credit cards which do include an annual fee generally have lower
fees than those charged by many of the Company's competitors. The Company
believes that this characteristic of no or low annual fee credit cards has
appealed to consumers, and that the Company's credit cards have also appealed
to consumers because of their competitive interest rates, credit lines, quality
service, and payment terms. The interest rates on the majority of the Company's
credit card receivables are variable, tied either to the prime rate or the
London interbank offered rate ("LIBOR"). This variable rate structure helps the
Company maintain net interest margins in both rising and declining interest
rate environments.
While the Company believes that its credit card offers will continue
to appeal to consumers for the reasons stated, the Company also notes that for
several years competition has
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been increasing in the credit card industry. At the same time, the U.S.
consumer has become a generally more sophisticated and demanding user of
credit. These forces are likely to produce significant changes in the industry.
The Company is devoting substantial resources to meeting the challenges and
taking advantage of the opportunities which management sees emerging in the
industry. In 1994 through 1996, this included significant focus on balance
transfer initiatives, in which the Company encouraged new and existing
customers to transfer account balances they were maintaining with other credit
card issuers to an AUS or ANB account with a lower interest rate. Approximately
42% of the new credit card sales generated in 1996 resulted from balance
transfer business. Also in these years, most of the Company's new credit card
accounts carried low "introductory" interest rates, which repriced upwards
after an introductory period of up to one year.
In addition, as part of the strategy to broaden and deepen its
relationship with the consumer, the Company has launched some proprietary
branded credit card products. These products were crafted to meet identified
long-term consumer needs and are expected to establish relationships with
consumers that will be lasting. The Company intends to continue exploring new
approaches to the credit card market.
The 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, 1996:
PERCENT OF PERCENT OF
TOTAL TOTAL PERCENT OF
CREDIT TOTAL PORTFOLIO IMPAIRED IMPAIRED TO
CARD RECEIVABLES IMPAIRED BY STATE BY STATE TOTAL RECEIVABLES
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(Dollars in millions)
California $ 1,943.8 $ 59.4 15.3% 18.7% .5%
New York 1,008.9 28.5 8.0 9.0 .2
Texas 906.9 24.9 7.1 7.8 .2
Florida 763.3 24.3 6.0 7.6 .2
Illinois 520.3 11.4 4.1 3.6 .1
Other 7,548.2 169.3 59.5 53.3 1.3
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TOTAL $12,691.4 $317.8 100.0% 100.0% 2.5%
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Since 1988, AUS has been active in the credit card securitization
market, and since its inception in 1995, ANB has likewise been active, together
securitizing $3.4 billion of credit card receivables in 1996. The Company
continues to recognize income on a monthly basis from the securitized
receivables. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes 1 and 3 of the Notes to Consolidated
Financial Statements.
The Banks' securitization program provides a number of benefits:
diversifying the Banks' funding base, providing liquidity, reducing regulatory
capital requirements, lowering the cost of funds and providing a source of
variable-rate funding to complement the variable-rate credit card portfolio.
Additionally, until September 30, 1996, securitization was important in helping
to limit the on-balance sheet growth of AUS to less than 7% per annum. See
"Government Regulation -- the Company." Furthermore, the Banks continue to own
the credit card accounts and customer relationships, which the Company believes
continue to build significant long-term value. While the Company believes that
securitization will continue to be a reliable source of funding, there is
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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 the receivables from the Company's balance
sheet for financial and regulatory accounting purposes. For tax purposes, the
investor certificates are characterized as a collaterized 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 or quarterly 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, approximately 2.0% of the
securitized receivables. Excess spread (defined as finance charges plus
miscellaneous fees less interest paid to certificate holders, credit losses and
servicing fees) is 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 three to eight and one-half years of the trust. Thereafter, an
amortization period (generally between six and ten months) commences, during
which the certificate holders are entitled to payment of principal and
interest. Acceleration of the commencement of the amortization period (which
may occur in limited circumstances) on a securitization would accelerate the
Company's funding requirement. Upon full repayment of principal to the
certificate holders, whether as a result of normal or accelerated amortization,
the trust's lien on the accounts terminates and all related receivables and
funds held in the trust, including the reserve fund, are transferred to the
Company.
ADVANTA PERSONAL FINANCE SERVICES
Formerly designated Advanta Mortgage, the newer name Advanta Personal Finance
Services ("APFS") reflects the growing diversification and product array of
this business unit, which in 1995 expanded to include both Advanta Mortgage and
Advanta Finance, and in 1996 launched an automobile financing business, Advanta
Auto Finance.
Advanta Mortgage Corp. USA originates, purchases, securitizes, and
services non-conforming credit first and second mortgage loans directly,
through its subsidiaries, and for AUS's "Advanta Mortgage USA" Division
(collectively, "Advanta Mortgage"). Loan production is generated through
multiple distribution channels including two centralized, direct to consumer
origination centers (each one dedicated to a specific product), a broker
network serviced by selected sales locations, correspondent relationships and
purchases from other financial institutions. In 1995, Advanta Mortgage
developed and tested a Home Equity Line of Credit product, from which annual
loan production volume grew to $53 million in 1996.
During 1995 a new business channel, "Advanta Finance," was launched,
offering loans directly to the consumer through a branch office system. Through
December 31, 1996, fifty branches have been opened offering first and second
lien mortgage loans similar to those offered by Advanta Mortgage. Advanta
Finance production activity for 1996 grew to $137 million. In 1996, Advanta
Auto Finance began offering loans secured by automobiles to sub-prime
customers, largely through correspondent relationships, with originations
totaling $104 million. The combined origination volume for APFS for 1996 was
$1.5 billion.
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Advanta Mortgage originates and purchases loans, generally funding
these loans through sales or securitizations which have been structured to
qualify as real estate mortgage investment conduits ("REMICs") under the
Internal Revenue Code. In a securitization, Advanta Mortgage typically sells
receivables to a trust for cash while retaining an interest in the loans
securitized. The cash purchase price is generated through an offering of
pass-through certificates by the trust. The purchasers of the pass-through
certificates are generally entitled to the principal collected and a portion of
the interest collected on the underlying loans while Advanta Mortgage retains
the "excess spread." The excess spread represents the excess of the interest
and fees paid by borrowers on the underlying loans over the sum of the
pass-through rate of interest payable to the certificate holders, credit
losses, a servicing fee which is paid to the Company in its role as servicer,
and certain transaction related costs. During 1996, Advanta Mortgage
securitized $1.4 billion of loans.
The excess spread is received over the life of the loans. However, in
accordance with generally accepted accounting principles ("GAAP"), Advanta
Mortgage recognizes an amount which approximates the estimated present value of
the excess spread as a component of mortgage banking income in the fiscal
period in which the loans are sold. The gain recognized reflects estimates of
the impact of future credit losses and loan prepayments. Other basic sources of
income to Advanta Mortgage are net interest income on loans outstanding pending
their sale, and loan servicing income, including subservicing of loans which
were never owned by the Company. See Note 1 of Notes to Consolidated Financial
Statements.
Advanta Mortgage's subservicing portfolio at December 31, 1996 totals
$3.7 billion of third party loans serviced for a fee. During the year, the
Company assumed $3.1 billion of new servicing for third parties. The Company
has experienced significant growth in this portfolio over the past two years as
a result of its favorable reputation in the sub-prime market and anticipates
continued expansion of its market presence. The Company bears no credit risk on
this portfolio but it does bear operational risk with respect to its servicing
obligations. Subserviced loans are not included in the Company's managed
portfolio.
Advanta Mortgage's managed portfolio of receivables includes owned
loans (generally held for sale) and the loans it services in which it retains
an interest in the excess spread. At December 31, 1996, owned personal finance
loans receivable totaled $376 million while total managed receivables were $2.8
billion. In contrast to the subserviced loans, the performance of the managed
portfolio, including loans sold by the Company, can materially impact ongoing
income from Personal Finance activities. See Note 1 of Notes to Consolidated
Financial Statements. At December 31, 1996, the total serviced portfolio,
including the "subserviced" portfolio, was $6.4 billion.
Approximately 85% of the managed portfolio is secured by first lien
position loans and the balance is secured by second lien position loans.
Approximately 75% of the managed portfolio is comprised of fixed rate loans
while the remainder represents adjustable rate loans. At December 31, 1996,
total personal finance loans managed, and the nonperforming loans included in
these totals, are concentrated in the following five states:
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PERCENT OF
PERSONAL PERCENT OF PERCENT OF NONPERFORMING
FINANCE TOTAL PORTFOLIO BY NONPERFORMING BY TO TOTAL
LOANS NONPERFORMING STATE STATE LOANS
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(Dollars in Millions)
California $ 501.9 $24.9 18.2% 26.7% .9%
New York 208.3 7.7 7.6 8.3 .3
Maryland 194.2 7.4 7.1 7.9 .3
New Jersey 193.9 12.0 7.0 12.9 .4
Pennsylvania 184.8 7.6 6.7 8.2 .3
Other 1,470.6 33.5 53.4 36.0 1.2
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TOTAL $2,753.7 $93.1 100.0% 100.0% 3.4%
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Geographic concentration carries a risk of increased delinquency
and/or loss if a specific area suffers an economic downturn. Advanta Mortgage
monitors economic conditions in those regions through market and trend
analyses. A Credit Policy Committee meets throughout 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 the loan grade. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -- Provision for Credit Losses" and "-- Credit Risk Management -- Asset
Quality."
ADVANTA BUSINESS SERVICES
In late 1994, the Company's subsidiary, Advanta Leasing Corp., changed its name
to Advanta Business Services Corp. ("ABS"), reflecting the Company's intention
to expand its offerings to small business customers. The name change followed
the Company's introduction, in July 1994, of a business purpose MasterCard
credit card as a supplement to its commercial equipment leasing business. Both
lines of business continue to expand.
The commercial equipment leasing business is generated primarily
through third party referrals from manufacturers or distributors of equipment
as well as independent brokers. Most contact with these referral sources is
made from the Company's ABS headquarters in Voorhees, New Jersey, using
extensive direct marketing operations. These operations include a staff of
telephone sales representatives who are assigned to specific industries, and
backed by the Company's direct mail advertising program. Additional business is
also generated from direct contact with customers through these same channels.
Leasing originations volume, measured by the cost of the equipment
included in new lease contracts, continued to grow, from a total of $251
million in 1995 to $337 million in 1996. While much of this growth is due to
increased penetration of existing markets, such as office machinery, security
systems and computers, some has been the result of expansion into additional
market segments. The most significant of these are leasing programs for certain
industrial and agricultural equipment and programs for leasing equipment to
agencies of State and local governments. The Company's growth in its
traditional markets has been the result, in part, of an expanded National
Accounts program which seeks referral business from larger distributors and
manufacturers.
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The business-purpose credit card operation grew from 23,412 to 78,599
accounts with balances of $306 million as of December 31, 1996. Again, direct
marketing techniques, primarily direct mail to prospective customers, are the
source of new accounts. This marketing program is the result of extensive and
ongoing testing of various campaigns, with success of each campaign measured by
both the cost of acquisition of new business, and the credit performance of the
resulting business. The "Advanta Business Card" is marketed by ABS and issued
by its affiliate, Advanta Financial Corp. (see "Government Regulation --
Advanta Financial Corp.").
ADVANTA INSURANCE COMPANIES
The Company mainly offers specialty credit related insurance products and
services to its existing customer base. The focus of these products is on the
customers' ability to repay their debt in the event of certain circumstances.
Enrollment in these programs is achieved through the utilization of either
direct mail or telemarketing distribution channels.
Through unaffiliated insurance carriers, the Company generally makes
available a combined credit life, disability and unemployment product, an
accidental death product, or equipment insurance to Advanta's lending and
leasing customers. The Company's insurance subsidiaries reinsure 100% of these
risks from the insurance carriers on a coinsurance basis. In consideration for
assumption of these risks the insurance subsidiaries receive reinsurance
premiums equal to 100% of the net premiums collected by the insurance carriers,
less a ceding fee as defined by the reinsurance treaties, and all acquisition
expenses, premium taxes and loss payments made by the carriers on these risks.
Under the terms of certain reinsurance treaties the subsidiaries are either
obligated to maintain in trust for the benefit of an insurance carrier an
amount equal to 100% of the unearned premiums and all statutory reserves for
future incurred loss payments or have certain of these loss reserves, as
defined, withheld by an insurance carrier.
Credit life insurance for credit card customers insures the life of
the borrower (and any joint borrower) and provides for the payment to the
primary beneficiary (the lender) in the event of the borrower's death of a
benefit generally equal to the unpaid principal balance, subject to a maximum
amount equal to the lesser of the borrower's balance at the date of death or
$10,000. Credit disability and unemployment insurance for credit card
customers generally provide for the payment of the minimum monthly payment
required on the debt outstanding at the commencement of the primary borrower's
inability to work as a result of disability or involuntary unemployment, until
the customer is able to return to work or obtains other employment, subject to
a maximum equal to the lesser of the borrower's balance at the date of
unemployment or disability or $10,000.
Commencing in 1992 and 1995, AUS and ANB, respectively, began making
available to their credit card customers in certain states the option to
purchase a debt cancellation agreement called Credit Protection Plus(R).
Under the terms of the agreement, AUS or ANB will forgive the credit card
borrower's balance in the event of the death or permanent disability of either
the primary or joint (if purchased) credit card borrower up to the lesser of
$10,000, the customer's balance or the customer's credit limit at the date of
death or permanent disability. In addition, the agreement provides for the
suspension of the contractual principal payment obligation and the waiver of
all interest and service fees in the event that either the primary or joint (if
purchased) credit card borrower is unable to work due to involuntary
unemployment or short-term disability, from the date of initial unemployment or
disability to the sooner of twelve months thereafter or the date the customer
is able to return to work or obtains other employment. The Banks have purchased
from the Company's insurance subsidiaries insurance protection against excess
losses, as defined, incurred from providing these services.
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The Company also offers other specialty-based insurance products to
its customers. In consideration the lending institution receives an expense
reimbursement percentage of insurance revenues collected.
Approximately 90% of the Company's total insurance revenues are
derived from the offering of the combined insurance product and services to
credit card customers of AUS and ANB.
ADVANTA PARTNERS
Advanta Partners LP is a private venture capital equity investment firm formed
in 1994. The firm focuses primarily on growth capital financings,
restructurings and management buyouts in the financial services and information
services industries. The investment objective of Advanta Partners is to earn
attractive returns by building the long-term values of the businesses in which
it invests. Advanta Partners combines transaction expertise, management skills
and a broad contact base with strong industry-specific knowledge which is
further enhanced by its relationship with the Company.
DEVELOPMENTAL INITIATIVES
The Company has initiated a number of new programs focused on creating new
products, entering new markets and expanding the Company's channels of
delivery. As part of the Company's expansion into new markets, in 1995 the
Company formed a joint venture with The Royal Bank of Scotland to market, issue
and service bankcards in the United Kingdom. While initial mailings have
generated positive response, this effort was not material to the Company in
1996. The Company believes that the joint venture will not be material to
earnings in 1997. Additionally, the Company has developed and launched several
branded credit card products. The Company is continuing to explore new product
concepts and expects to introduce new products in 1997. (See "Advanta Personal
Payment Services"). Simultaneously, the Company is exploring new technologies
and delivery systems related to payment services. The Company continues to
engage in research and development activities with respect to products and
services outside the financial services sector.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured deposit products as well as uninsured
bank notes through AUS and ANB and offers uninsured investment products of
Advanta Corp. through both direct and underwritten sales of debt securities. In
December 1996, Advanta Capital Trust I, a statutory business trust established
by the Company, issued $100,000,000 of 8.99% Capital Securities, maturing in
December 2026. The securities represent a preferred beneficial interest in the
assets of the trust. The proceeds of that offering were lent to the Company for
general corporate purposes (See Note 7 of the Notes to Consolidated Financial
Statements). In October 1995, the Company ceased selling subordinated retail
investment notes, and instead began offering senior retail investment notes
which (like the previous subordinated notes) are marketed by print advertising
and direct mail solicitations to existing and prospective individual investors.
In addition to the senior retail investment note program, the Company has filed
a senior debt shelf registration with the Securities and Exchange Commission
covering $1.6 billion of securities. As of December 31, 1996 $500 million was
outstanding and $1.1 billion remained available for sale under this shelf. The
Company also filed a "universal shelf" registration statement in June 1995 for
$500 million of debt and/or equity securities. In July 1995, $92.5 million of 6
3/4% Convertible Class B Preferred Stock was issued under that shelf. Other
than through the retail investment Note Program described in this paragraph,
investments in the Company's senior debt securities
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are primarily marketed to institutional investors. In June of 1996, the Company
renegotiated its revolving bank line of credit to extend the term to
approximately four years and to increase the amount to an aggregate of $1
billion available to the Parent, AUS and ANB. Of the $1 billion revolving bank
line of credit, a maximum of $500 million is available to the Parent. This new
line provided by a consortium of domestic and foreign banks further strengthens
the funding capacity of the Company.
Bank deposit products include at AUS: demand deposits, money market
savings, statement savings accounts, and retail certificates of deposit; and at
both AUS and ANB: large denomination certificates of deposit (certificates of
$100,000 or more). Consumer deposit business at AUS is generated from repeat
sales to existing depositors and from new depositors attracted by newspaper
advertising and direct mail solicitations. ANB is limited to the issuance of
deposits having a minimum size of $100,000.
The deposits and senior debt securities of the Banks have investment
grade ratings from the nationally recognized rating agencies. These ratings,
which were first achieved in 1993 for AUS, and in 1995 for ANB, have allowed
the Banks to further diversify their funding sources. The Banks, in September
1995, filed an offering circular with the Office of the Comptroller of the
Currency for $2 billion in senior bank term debt and $250 million in
subordinated bank term debt. As of December 31, 1996, $1.1 billion of senior
bank debt was outstanding under that offering circular. At December 31, 1996,
ANB has $68 million in subordinated debt outstanding which it has issued to its
parent company.
In addition to the funding diversity provided by the debt issuance
capacity of the Company and the debt and deposit raising capabilities of the
Banks, Advanta Financial Corp. ("AFC") has been taking deposits in the form of
certificates of deposit since January 1992. AFC is an FDIC-insured industrial
loan corporation organized under the laws of the State of Utah. As of December
31, 1996, AFC's funding capacity was not material to the Company.
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
AUS, 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 AUS, 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 , prior to September 30, 1996, limiting its
growth rate to not more than 7% per annum. The 7% growth cap on AUS was
terminated as of September 30, 1996 by statutory amendment of the BHCA. The
elimination of this cap created substantial new flexibility with respect to
asset/liability management for AUS, leading the Company to evaluate the
corporate structure of AUS and ANB. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Asset/Liability Management
- -- Liquidity, Funding and Capital Resources." Continuing CEBA restrictions also
prohibit AUS 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 AUS cease
complying with the
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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 AUS
has improved the bank's competitiveness, should the Company be required to
apply to become a bank holding company the outcome of any such application
cannot be certain.
Registration as a bank holding company would subject the Company and
its subsidiaries to inspection and regulation by the Federal Reserve Board.
Although the Company has no plans to register as a bank holding company at this
time, the Company believes that registration would not restrict, curtail, or
eliminate any of its activities at current levels, except that some portions of
the current business operations of the Company's insurance subsidiaries would
have to be discontinued, the effects of which would not be material. However,
the Company is actively exploring additional lines of business, some of which
the Company would not be able to pursue as a registered bank holding company
under the BHCA.
Under CEBA, neither ANB nor AFC, is considered a "bank" for purposes
of the BHCA, and so the Company's ownership of these institutions does not
impact the Company's exempt status under the BHCA. ANB is a "credit card bank"
under CEBA, and as such is subject to certain restrictions, including that it
may only engage in credit card operations, it may not offer checking or
transaction accounts, and it may only accept time deposits in amounts of
$100,000 or more.
ADVANTA NATIONAL BANK USA AND ADVANTA NATIONAL BANK (THE "BANKS")
The Company acquired AUS in 1982 and organized ANB in 1995. Both of the Banks
are national banking associations organized under the laws of the United States
of America. The headquarters and respective sole branches of both AUS and ANB
are currently located in Wilmington, Delaware. ANB was chartered to complement
the credit card activities of AUS. ANB is a "credit card bank," a class of
FDIC-insured depository institution created under CEBA, which can only engage
in credit card operations, can only accept deposits in denominations of
$100,000 or more, may not offer transaction (e.g., checking) accounts, may only
maintain one office for the collection of deposits, and may not engage in
commercial lending activities. The Company conducts substantially all of its
consumer credit card lending business through the Banks, and conducts a large
portion of its mortgage lending business through AUS. The Banks are subject
primarily to regulation and periodic examination by the Office of the
Comptroller of the Currency (the "Comptroller"). Such regulation relates to the
maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices. As national banks, the Banks are subject to provisions
of federal law which restrict their ability to extend credit to their
affiliates or pay dividends to their parent company. See "Dividends and
Transfers of Funds."
The Banks are subject to capital adequacy guidelines approved by the
Comptroller. These guidelines make regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations and
consider off-balance sheet exposures in determining capital adequacy. As of
December 31, 1996, 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
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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, 1996, AUS's Tier 1 capital ratio was 10.15%, its combined Tier 1 and Tier 2
capital ratio was 15.84%, and its leverage ratio was 7.35%. At December 31,
1996, ANB's Tier 1 capital ratio was 11.13%, its combined Tier 1 and Tier 2
capital ratio was 17.20%, and its leverage ratio was 7.15%.
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, each of the
Banks' respective capital levels currently exceed the minimum standards. To
date, the Comptroller has not required either of the Banks to maintain capital
in excess of the minimum standards. However, there can be no assurance that
such a requirement will not be imposed in the future, or if it is, what higher
standard will be applicable.
In addition, pursuant to certain provisions of the FDIC Improvement
Act of 1991 ("FDICIA") and regulations promulgated thereunder with respect
to prompt corrective action, FDIC-insured institutions such as the Banks may
only accept brokered deposits without FDIC permission if they meet certain
capital standards, and are subject to restrictions with respect to the
interest they may pay on deposits unless they are "well-capitalized." To be
"well-capitalized," a bank must have a ratio of total capital to risk-weighted
assets of not less than 10%, Tier 1 capital to risk-weighted assets of not less
than 6%, and a Tier 1 leverage ratio of not less than 5%. As of December 31,
1996, the most recent notifications from the Comptroller categorized each of
AUS and ANB as well capitalized under the regulatory framework for prompt
corrective action. The Company intends to maintain AUS and ANB, at a minimum,
as "adequately capitalized" banks under this regulatory framework.
ADVANTA FINANCIAL CORP.
In January 1992, Advanta Financial Corp. ("AFC") opened for business and began
accepting deposits. AFC is an FDIC-insured industrial loan corporation
organized under the laws of the State of Utah and is subject to examination and
regulation by both the FDIC and the Utah Department of Financial Institutions.
At December 31, 1996, AFC had deposits of $51 million and total assets of
$102 million. Currently, AFC's principal activities consist of small ticket
equipment lease financing and issuance of the "Advanta Business Card" credit
card marketed by ABS. The Company anticipates that AFC's managed receivables
base of Advanta Business Card loans will continue to grow in 1997.
LENDING AND LEASING ACTIVITIES
The Company's activities as a lender are also subject to regulation under
various federal and state laws including the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Home Mortgage Disclosure Act, the Community
Reinvestment Act, the Electronic Funds Transfer Act, and the Fair Credit
Reporting Act. Provisions of those statutes, and related regulations, among
other matters, require disclosure to borrowers of finance charges in terms
of an annual percentage rate, prohibit certain discriminatory practices in
extending credit, require the Company's FDIC-insured depository institutions
to serve the banking needs of their local communities, and regulate the
dissemination and use of information relating to a borrower's creditworthiness.
Certain of these statutes and regulations also apply to the Company's leasing
activities. In addition, Advanta Mortgage, Advanta Finance and their respective
subsidiaries are
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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 AUS, ANB or AFC can
finance or otherwise supply funds through dividends, loans or otherwise to the
Company and its affiliates. The prior approval of the Comptroller is required
if the total of all dividends declared by either of the Banks in any calendar
year exceeds that institution's net profits (as defined) for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus accounts. In addition, neither AUS nor ANB may pay a
dividend in an amount greater than its undivided profits then on hand after
deducting its losses and bad debts. The Comptroller also has authority under
the Financial Institutions Supervisory Act to prohibit a national bank from
engaging in any unsafe or unsound practice in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the Comptroller could claim that a dividend payment might
under some circumstances be an unsafe or unsound practice.
AUS, ANB and AFC 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 AUS nor ANB may make any loans to the Company or any of its
subsidiaries.
REGULATION OF INSURANCE
The Company's insurance subsidiaries are subject to the laws and regulations
of, and supervision by, the states in which they are domiciled or have obtained
authority to transact insurance business. These states have adopted laws and
regulations which govern all marketing, administration and financial operations
of an insurance company, including dividend payments and financial solvency. In
addition, the insurance subsidiaries have registered as an Arizona Holding
Company which requires approval of transactions between all affiliated
entities.
The maximum dividend that any of the insurance subsidiaries can
distribute to its parent in any twelve month period without prior approval of
the State of Arizona Department of Insurance is the lesser of 10% of the
subsidiary's statutory surplus or for any given 12 month period, its net income
(if a life insurance company) or net investment income (if a property and
casualty insurance company).
The State of Arizona has adopted minimum risk-based capital standards
as developed by the National Association of Insurance Commissioners. Risk-based
capital is the quantification of an insurer's surplus requirements based on
financial balances and underwriting activity risks. The ratio of an insurer's
total adjusted capital and surplus, as defined, is compared to various levels
of risk-based capital to determine what intervention, if any, is required by
either the insurance company or an insurance department. All of the insurance
companies meet all risk-based capital standards and require no action by any
party.
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The Company's insurance subsidiaries reinsure risks whose underwriting
insurance practices and rates are regulated in part or fully by state insurance
departments. These rates are continually being reviewed and modified by the
state insurance departments based on prior historical experience. Any
modifications may impact the future profitability of the Company's insurance
subsidiaries.
GENERAL
Because the banking and finance businesses in general are the subject of such
extensive regulation at both the state and federal levels, and because numerous
legislative and regulatory proposals are advanced each year which, if adopted,
could affect the Company's profitability or the manner in which the Company
conducts its activities, the Company cannot now predict the extent of the
impact of any such new laws or regulations.
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, and permitting affiliations
between banks and commercial or securities firms. It is impossible to determine
whether any of these proposals will become law and, if so, what impact they
will have on the Company.
In 1994, Congress adopted the Interstate Banking and Branching
Efficiency Act, which statute permits nationwide interstate bank acquisitions
beginning in 1995, and interstate bank branching in 1997 (or earlier at a
state's option). The Company does not currently believe that the changes in the
country's banking system wrought by this statute will materially impact the
Company's business.
COMPETITION
As a marketer of credit products, the Company faces intense competition from
numerous providers of financial services. Many of these companies are
substantially larger and have more capital and other resources than the
Company. Competition among lenders can take many forms including convenience
in obtaining a loan, customer service, size of loans, interest rates and other
types of finance or service charges, duration of loans, the nature of the risk
which the lender is willing to assume and the type of security, if any,
required by the lender. Although the Company believes it is generally
competitive in most of the geographic areas in which it offers its services,
there can be no assurance that its ability to market its services successfully
or to obtain an adequate yield on its loans will not be impacted by the nature
of the competition that now exists or may develop.
In both domestic and international VISA and MasterCard markets, the
Company competes with national, regional, and local issuers. Additionally,
American Express and the Discover Card represent additional competition in the
general purpose credit card markets in the United States. The Company does not
believe that single purpose credit cards such as oil company, department store
or telephone credit cards represent a significant competitive threat. In recent
years, a large segment of customers have been attracted to credit card issuers
largely on the basis of product features, including price and credit limit; as
such, customer loyalty may be limited. As a result, account and balance
attrition can be significant factors in the credit card industry.
In seeking investment funds from the public, the Company faces
competition from banks, savings institutions, money market funds, credit unions
and a wide variety of private and public entities which sell debt securities,
some of which are publicly traded. Many of the competitors are larger and have
more capital and other resources than the Company. Competition relates to such
matters as rate of return, collateral, insurance or guarantees applicable to
the investment (if any),
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the amount required to be invested, convenience and the cost to and conditions
imposed upon the investor in investing and liquidating his investment
(including any commissions which must be paid or interest forfeited on funds
withdrawn), customer service, service charges, if any, and the taxability of
interest.
EMPLOYEES
As of December 31, 1996, the Company had 3,541 employees, up from 2,409
employees at the end of 1995. The Company believes that it has good
relationships with its employees. None of its employees are represented by a
collective bargaining unit.
CAUTIONARY STATEMENTS
Information or statements provided by the Company from time to time may contain
certain "forward-looking information" including information relating to
anticipated earnings per share, anticipated returns on equity, anticipated
growth in managed loans outstanding and credit card accounts, anticipated net
interest margins, anticipated operations costs and employment growth,
anticipated marketing expense or anticipated delinquencies and charge-offs. The
cautionary statements provided below are being made pursuant to the provisions
of the Private Securities Litigation Reform Act of 1995 (the "Act") and with
the intention of obtaining the benefits of the "safe harbor" provisions of the
Act for any such forward-looking information. Many of the following important
factors discussed below as well as other factors have also been discussed in
the Company's prior public filings.
The Company cautions readers that any forward-looking information
provided by the Company is not a guarantee of future performance and that
actual results may differ materially from those in the forward-looking
information as a result of various factors, including but not limited to:
-- The impact of repricing accounts and the overall product mix of
accounts on the Company's net interest margins; the actual amount
of accounts (and related loan balances) repriced and the level and
type of account originations at that time; and the ability of the
Company on a competitive basis to use account management
techniques to retain repriced accounts and the related loan
balances. In the fourth quarter of 1996 the Company contractually
repriced $100 million of credit card accounts. In the first
quarter of 1997, approximately $2.9 billion of credit card
accounts will be repriced upwards from their low introductory
rates and the Company anticipates that an additional $1.6 billion
will be similarly repriced upwards in the second quarter. If the
repriced accounts experience greater attrition than expected it
could have an adverse financial effect on the Company.
-- Increased credit losses (including increases due to a worsening of
general economic conditions), increased collection costs
associated with rising delinquency levels, costs associated with
an increase in the number of customers seeking protection under
the bankruptcy laws, resulting in accounts being charged off as
uncollectible, and costs and other effects of fraud by third
parties or customers.
-- Intense and increasing competition from numerous providers of
financial services who may employ various competitive strategies.
The Company faces competition from national, regional and local
issuers of bankcards in each of its markets, some of which have
substantially greater resources than the Company. Additionally,
the Company competes with other general purpose credit card
providers. More of the Company's competitors have begun pricing
credit card products at attractive interest rates, including rates
at or below those currently charged by the Company.
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-- The effects of interest rate fluctuations on the Company's net
interest margin and the value of its assets and liabilities; the
continued legal or commercial availability of techniques
(including interest rate swaps and similar financial instruments,
loan repricing, hedging and other techniques) used by the Company
to manage the risk of such fluctuations and the continuing
operational viability of those techniques and the accounting and
regulatory treatment of such instruments.
-- Difficulties or delays in the securitization of the Company's
receivables and the resulting impact on the cost and availability
of such funding. Such difficulties and delays may result from
changes in the availability of credit enhancement in
securitizations, the current legal, regulatory, accounting and tax
environment and adverse change in the performance of the
securitized assets.
-- Changes in the Company's aggregate accounts or loan balances and
the growth rate thereof, including changes resulting from factors
such as shifting product mix, amount of actual marketing
investment made by the Company, attrition of accounts and loan
balances (to competing card issuers in connection with repricing
of customers or otherwise) and general economic conditions and
other factors beyond the control of the Company. Customers have
been attracted to credit card issuers largely on the basis of
price, credit limit and other product features and, once an
account is originated, customer loyalty may be limited.
-- The impact of "seasoning" (the average age of a lender's
portfolio) on the Company's level of delinquencies and losses
which may require higher loan loss reserves for on-balance sheet
assets, and may adversely impact credit card, personal finance and
business loan and lease securitization income. The addition of
account originations or balances and the attrition of such
accounts or balances could significantly impact the seasoning of
the overall portfolio.
-- The amount, and rate of growth in, the Company's expenses
(including employee and marketing expenses) as the Company's
business develops or changes and the Company expands into new
market areas; the acquisition of assets (interest-earning, fixed
or other); the effects of changes within the Company's
organization or in its compensation and benefit plans; and the
impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, asset valuations and
organizational structures.
-- The amount, type and cost of financing available to the Company,
and any changes to that financing including any impact from
changes in the Company's debt ratings; and the activities of
parties with which the Company has agreements or understandings,
including any activities affecting any investment.
-- Difficulties or delays in the development, production, testing and
marketing of products or services, including, but not limited to,
a failure to implement new product or service programs when
anticipated, the failure of customers to accept these products or
services when planned, losses associated with the testing of new
products or services or financial, legal or other difficulties as
may arise in the course of such implementation.
- The effects of, and changes in, monetary and fiscal policies, laws
and regulations (financial, consumer regulatory or otherwise),
other activities of governments, agencies and similar
organizations, and social and economic conditions, such as
inflation, and changes in taxation of the Company's earnings.
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-- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims and changes in
those items, developments or assertions by or against the Company
or its subsidiaries; adoptions of new, or changes in existing,
accounting policies and practices and the application of such
policies and practices.
ITEM 2. PROPERTIES.
The Company owns four buildings totaling 308,278 square feet and leases an
additional 315,733 square feet in 10 buildings in the Pennsylvania suburbs of
Philadelphia. This includes the Company's principal executive offices located
in Spring House, Pennsylvania. In the adjoining states of New Jersey and
Delaware the Company owns 2 buildings totaling 178,000 square feet and leases
75,881 square feet in 3 buildings. The Company's five offices located in Utah,
California and Colorado total 315,486 square feet. In summary the Company
occupies 1,193,378 square feet of leased and owned space in 20 buildings
located in 6 states.
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.
NAME AGE OFFICE DATE ELECTED
---- --- ------ ------------
Dennis Alter 54 Chairman of the Board 1972
Alex W. Hart 56 Chief Executive Officer and Director 1995
William A. Rosoff 53 Vice Chairman and Director 1996
James J. Allhusen 48 Executive Vice President and Group 1997
Executive, Advanta Personal Payment
Services
William J. Razzouk 49 Chief Executive Officer of Advanta 1996
Information Services
Arthur D. Kranzley 46 Senior Vice President 1995
Albert E. Lindenberg 44 President and Director, Advanta Business 1988
Services
Charles H. Podowski 50 President and Director, Advanta 1995
Insurance Companies
Milton Riseman 60 President and Director, Advanta Mortgage 1994
Corp. USA and Subsidiaries
John W. Roblin 51 Senior Vice President and Chief 1995
Information Officer
David D. Wesselink 54 Senior Vice President and Chief 1993
Financial Officer
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Advanta Corp. and Subsidiaries
NAME AGE OFFICE DATE ELECTED
Renee Booth 38 Senior Vice President, Human Resources 1996
Christopher S. Derganc 44 Senior Vice President, Corporate 1996
Administration
Jeffrey D. Beck 48 Vice President and Treasurer 1992
John J. Calamari 42 Vice President, Finance 1988
Michael A. Girman 47 Vice President, Audit and Control 1991
Gene S. Schneyer 43 Vice President, Secretary and General 1989
Counsel
Mr. Alter became Executive Vice President and a director of the Company's
predecessor organization in 1967. He was elected President and Chief Executive
Officer in 1972, and Chairman of the Board of Directors in August 1985. In
February 1986, he relinquished the title of President, and in August 1995 he
relinquished the title of Chief Executive Officer. Mr. Alter remains Chairman of
the Board of Directors.
Mr. Hart joined the Company in March 1994 as a Director and Executive Vice
Chairman. He became Chief Executive Officer in August 1995. For the five years
prior to joining the Company he had been President and Chief Executive Officer
of MasterCard International, Inc., a worldwide association of over 29,000 member
financial institutions. Prior to joining MasterCard in November 1988, Mr. Hart
was Executive Vice President of First Interstate Bancorp, Los Angeles,
California.
Mr. Rosoff joined the Company in January 1996 as a Director and Vice Chairman.
Prior to joining the Company, Mr. Rosoff was a long time partner of the law firm
of Wolf, Block, Schorr and Solis-Cohen, the Company's outside counsel, where he
advised the Company for over 20 years. While at Wolf, Block, Schorr and
Solis-Cohen he served as both Chairman of its Executive Committee and Chairman
of its Tax Department. Mr. Rosoff is a Trustee of Atlantic Realty Trust, a
publicly held real estate investment trust, and Chairman of the Board of RMH
Teleservices, a publicly held company that is a leading provider of
telemarketing services, on an outsourced basis, to Fortune 500 companies.
Mr. Allhusen was elected Executive Vice President of the Company in October 1995
and Group Executive of Advanta Personal Payment Services, the Company's credit
card operations, in January 1997 Prior to joining the Company, from 1990 Mr.
Allhusen served Standard Chartered Bank in various capacities, most recently as
General Manager for the Middle East and South Asia region located in Dubai,
United Arab Emirates. Prior to joining Standard Chartered Bank, Mr. Allhusen
worked for Household Bank from 1986 to 1990 as its President, Midwest Division.
Mr. Razzouk joined the Company in September 1996 as Chief Executive Officer of
Advanta Information Services. Prior to joining the Company, Mr. Razzouk served
as President and Chief Operating Officer of America Online, a position from
which he resigned after a brief tenure. He is most widely known by his former
role as Executive Vice President and head of Worldwide Customer Operations for
Federal Express, a position he held from 1993 to early 1996. In his earlier
years at Federal Express, Mr. Razzouk rose from Vice President of Electronic
Sales in 1983 to Vice President of Sales in North America in 1986 to Senior Vice
President of Sales and Customer Service in 1990. Mr. Razzouk has served on the
board of LaQuinta Inns, Inc. since 1996.
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Advanta Corp. and Subsidiaries
Mr. Kranzley was elected Senior Vice President of the Company in October 1995.
For five years prior to joining the Company Mr. Kranzley was Senior Vice
President and General Manager of Debit Products for MasterCard International. In
this capacity Mr. Kranzley also served as President and Chief Executive Officer
of Maestro U.S.A., Inc., the membership corporation of the Maestro global,
on-line point-of-sale debit program in the United States.
Mr. Lindenberg had been the Chairman of the Board and President of an equipment
leasing business, LeaseComm Financial Corporation ("LeaseComm"), from that
company's inception in June 1985 until its purchase by the Company. Following
the acquisition, Mr. Lindenberg was elected President and Chief Executive
Officer of Advanta Business Services, the successor to LeaseComm. Prior to
starting LeaseComm, Mr. Lindenberg had been with First Pennsylvania Bank,
Philadelphia, Pennsylvania since 1982, where he had served in various
capacities, most recently as Vice President of the national division responsible
for that bank's commercial lending activities in leasing and electronics.
Mr. Podowski was elected President of the Advanta Insurance Companies in April
1995. Prior to joining the Company, Mr. Podowski served CIGNA Corporation in
various capacities for seventeen years, most recently as Senior Vice President
in their International Division, with responsibility for CIGNA's life insurance
subsidiaries in Asia and Australia. Prior to joining CIGNA Mr. Podowski worked
for The Chase Manhattan Bank, N.A.
Mr. Riseman came to the Company in June 1992 as Senior Vice President,
Administration. In February 1994, Mr. Riseman became President and Director of
Advanta Mortgage Corp. USA and its subsidiaries. Prior to joining the Company,
Mr. Riseman had 27 years of experience with Citicorp, most recently as Director
of Training and Development. Prior to that he held Citicorp positions as
Business Manager for the Long Island Region, Head of Policy and Administration
for New York's Retail Bank, and Chairman of Citicorp Acceptance Co. which was
involved in the financing and leasing of autos and financing of mobile homes.
Mr. Roblin became Senior Vice President and Chief Information Officer in
December 1994. Prior to joining Advanta, Mr. Roblin spent nineteen years with
the Chubb Group of Insurance Companies in Warren, New Jersey holding a variety
of positions. He was the Chief Information Officer and a Managing Director of
Chubb from 1986 through 1991. In 1991 he joined USF&G in Baltimore as Chief
Information Officer and Senior Vice President until 1993. After a year as an
independent consultant, he briefly joined the Personal Lines Division of the
Travelers Insurance Companies in Hartford, Connecticut as Chief Information
Officer from May 1994 to November 1994.
Mr. Wesselink joined the Company in November 1993 as Senior Vice President and
Chief Financial Officer after serving as Vice President and Treasurer of
Household International for the previous seven years. Prior to that, he served
in various capacities at Household from 1971, including Vice President and
Director of Research, Group Vice President and Chief Financial Officer, and
Senior Vice President and Chief Financial Officer of Household Finance
Corporation. Mr. Wesselink serves on the board of CFC International, a specialty
chemical company.
Mr. Derganc became the Company's Senior Vice President, Corporate Administration
in December 1996, prior to which he served the Company as Vice President of
Corporate Development from June 1993. Prior to joining the Company he was a
Partner in the Financial Advisory Services Group of Coopers & Lybrand for 12
years where he led a wide variety of consulting engagements involving mergers,
acquisitions and business reorganizations.
Ms. Booth joined the Company in October 1996 as Senior Vice President, Human
Resources. Prior to joining the Company, Ms. Booth served as Vice President and
General Manager of Hay Management Consultants in Philadelphia where she was
employed for 11 years. There she was responsible for directing consultant
activities across diverse industry and human resources practice areas.
Mr. Beck joined the Company in 1986 as Senior Vice President of Advanta National
Bank USA (formerly, Colonial National Bank USA) and was elected Vice President
and Treasurer of the Company in 1992. Prior to joining the Company, he was Vice
President at Fidelity Bank, N.A., responsible for asset/liability planning, as
well as for managing a portfolio of investment securities held at the bank. From
1970 through 1980, he served in various treasury and planning capacities for
Wilmington Trust Company.
Mr. Calamari joined the Company as Vice President, Finance 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.
22
Advanta Corp. and Subsidiaries
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 to joining the Company, Mr. Girman served as Vice
President, Management Accounting and Accounting Policies and Procedures for The
Chase Manhattan Bank (USA), N.A. from April 1985.
Mr. Schneyer joined the Company as Associate General Counsel in September 1986
and was elected to the offices of Vice President, Secretary and General Counsel
in March 1989. Prior to joining the Company, from October 1983 Mr. Schneyer was
an attorney in the Legal Department of Allied-Signal, Inc., Morristown, New
Jersey.
23
Advanta Corp. and Subsidiaries
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market tier of The Nasdaq
Stock Market(SM) under the symbols ADVNB (Class B non-voting common stock) and
ADVNA (Class A voting common stock).
Following are the high, low and closing sale prices and cash dividends declared
for the last two years as they apply to each class of stock:
Cash
Dividends
Quarter Ended: High Low Close Declared
Class B:
- -----------------------------------------------------------------------------------------------------------
March 1995 $32.25 $24.50 $31.25 $.08
June 1995 38.75 30.75 37.75 .08
September 1995 42.50 36.00 42.50 .08
December 1995 45.00 35.13 36.38 .108
March 1996 49.25 33.75 47.50 .108
June 1996 52.50 43.50 45.25 .108
September 1996 48.25 39.75 42.75 .108
December 1996 48.50 38.25 40.88 .132
Class A:
- -----------------------------------------------------------------------------------------------------------
March 1995 $34.75 $25.50 $33.50 $.067
June 1995 42.50 33.00 41.69 .067
September 1995 46.25 39.50 45.00 .067
December 1995 48.88 37.50 38.25 .09
March 1996 53.50 34.75 52.00 .09
June 1996 58.25 46.50 51.00 .09
September 1996 53.00 41.00 46.00 .09
December 1996 50.00 40.00 42.75 .11
At December 31, 1996, the Company had approximately 1,050 and 660 holders of
record of Class B and Class A common stock, respectively.
RECENT SALES OF UNREGISTERED SECURITIES
On December 17, 1996, Advanta Capital Trust I, a newly formed statutory
business trust established by the Company (the "Trust"), issued to two
institutional investors, in a private offering exempt from registration
pursuant to section 4(2) of the Securities Act of 1933, as amended, $100
million of 8.99% Capital Securities, representing preferred beneficial
interests in the assets of the Trust (the "Capital Securities"). The aggregate
offering price for the Capital Securities was $100 million and the aggregate
commission paid by the Company was $1 million. The sole assets of the Trust
consist of $100 million of 8.99% junior subordinated debentures issued by the
Company due December 17, 2026. See Note 7 to Consolidated Financial Statements.
24
Advanta Corp. and Subsidiaries
ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts) Year Ended December 31, 5 Year
1996 1995 1994 1993 1992 1991 CAGR(2)
----------- ----------- ---------- ---------- ---------- ---------- ------
SUMMARY OF OPERATIONS
Net operating revenues(1) $ 850,977 $ 615,914 $ 447,837 $ 334,224 $ 266,320 $ 207,347 33%
Net interest income 78,265 72,900 70,381 78,644 73,176 73,990 1
Noninterest revenues 806,532 543,014 395,808 255,580 193,144 133,357 43
Provision for credit losses 96,862 53,326 34,198 29,802 47,138 55,461 12
Operating expenses 523,174 350,685 266,784 181,167 142,082 112,567 36
Income before income taxes
and extraordinary items 264,761 211,903 165,207 123,255 77,100 39,319 46
Income before extraordinary
items 175,657 136,677 106,063 77,920 48,037 25,165 47
Net income 175,657 136,677 106,063 76,647 48,037 25,165 47
----------- ----------- ---------- ---------- ---------- ---------- --
PER COMMON SHARE DATA
Income before extraordinary items $ 3.89 $ 3.20 $ 2.58 $ 1.95 $ 1.38 $ .81 37%
Net income 3.89 3.20 2.58 1.92 1.38 .81 37
Cash dividends declared (3)
Class A .380 .290 .217 .167 .107 .063 43
Class B .456 .348 .260 .200 .104 N/A *
Book value 18.06 14.35 11.12 8.82 5.22 3.70 37
Average shares used to compute
EPS(4) 45,073 42,670 41,046 39,777 34,590 31,044 8
Closing stock price
Class A 42.75 38.25 26.25 33.25 21.58 11.50 30
Class B 40.88 36.38 25.25 29.00 19.33 N/A *
----------- ----------- ---------- ---------- ---------- ---------- --
FINANCIAL CONDITION -- YEAR END
Investments and money market
instruments $ 1,671,309 $ 1,090,047 $ 671,661 $ 542,222 $ 521,567 $ 270,267 44%
Gross receivables
Owned 2,656,641 2,762,927 1,964,444 1,277,305 998,244 1,273,420 16
Securitized 13,632,552 9,452,428 6,190,793 3,968,856 2,721,726 1,573,164 54
Managed 16,289,193 12,215,355 8,155,237 5,246,161 3,719,970 2,846,584 42
Total assets
Owned 5,583,959 4,524,259 3,113,048 2,140,195 1,775,067 1,716,350 27
Managed 19,216,511 13,976,687 9,303,841 6,109,051 4,496,793 3,289,514 42
Deposits 1,860,058 1,906,601 1,159,358 1,254,881 1,204,486 1,205,035 9
Long-term debt 1,393,095 587,877 666,033 368,372 173,668 112,609 65
Stockholders' equity 852,036 672,964 441,690 342,741 174,870 118,859 48
Capital securities(5) 100,000 0 0 0 0 0 *
Stockholders' equity, long-term
debt and capital securities 2,345,131 1,260,841 1,107,723 711,113 348,538 231,468 59
----------- ----------- ---------- ---------- ---------- ---------- --
SELECTED FINANCIAL RATIOS
Return on average assets 3.16% 4.06% 4.47% 3.91% 2.82% 1.63% *
Return on average common equity 25.31 26.15 26.97 27.50 33.32 27.09 *
Return on average total
equity(6) 22.07 24.75 26.97 27.50 33.32 27.09 *
Equity/managed assets(6) 4.95 4.81 4.75 5.61 3.89 3.61 *
Equity/owned assets(6) 17.05 14.87 14.19 16.01 9.85 6.93 *
Dividend payout 10.75 9.97 9.24 9.56 7.69 7.85 *
Managed net interest margin(7) 6.32 5.87 6.72 7.77 8.05 7.54 *
As a percentage of managed
receivables
Total loans 30 days or more
delinquent(8) 5.4 3.3 2.7 3.6 5.0 5.6 *
Net charge-offs (8) 3.2 2.2 2.3 2.9 3.4 3.2 *
Other operating expenses 2.9 2.9 3.7 4.1 4.4 4.6 *
----------- ----------- ---------- ---------- ---------- ---------- --
(1) Excludes gains on sales of credit card relationships in 1996 and 1994.
(2) Compound annual growth rate from December 31, 1991.
(3) 1992 cash dividends include dividends for three quarters on the Class B
common stock and the full year on the Class A common stock, adjusted to reflect
the effective stock split.
(4) Includes common stock equivalents. 1996 and 1995 amounts include equivalent
shares related to convertible Class B Preferred stock.
(5) Represents Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures of the Company.
(6) In 1996, return on average total equity, equity/managed assets and
equity/owned assets include capital securities as equity. The ratios without
capital securities were 22.31%, 4.43% and 15.26%, respectively.
(7) Combination of owned interest-earning assets/interest-bearing liabilities
and securitized credit card assets/liabilities.
(8) The 1996 figures reflect the adoption of a new charge-off methodology in
August 1996 relating to credit card bankruptcies (see Asset Quality).
* Not meaningful.
25
Advanta Corp. and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Net income for 1996 of $175.7 million increased $39.0 million or 29% from the
$136.7 million reported for 1995. Earnings per share of $3.89 increased 22% from
the $3.20 reported for 1995.
Earnings in 1996 reflected a $5.4 billion or 56% increase in average
managed receivables, and a $263.5 million or 49% rise in noninterest revenues
derived principally from securitized receivables and a $33.8 million gain on the
sale of credit card customer relationships. The securitization of $1.4 billion
of mortgage and home equity loans in 1996, 158% greater than in 1995, also
contributed to the increase in noninterest revenues, as income from personal
finance loans (mortgage, home equity and auto loans) was up $58.6 million or
116% from 1995. Credit card securitization activities were affected by the
adoption in the third quarter of 1996 of a new charge-off methodology relating
to bankruptcies (see Asset Quality), the upward repricing of interest rates and
fees, increases in charge-offs and the related impact on reserves, all of which
had an approximate $50 million impact (earnings increase) in 1996, as well as a
57% increase in average securitized receivables. Total other operating expenses
(excluding the amortization of credit card deferred origination costs, net)
increased 56%, consistent with the increase in average managed receivables.
Thus, the operating expense ratio was 2.9% for both 1996 and 1995. Asset quality
indicators tracked unfavorably, as the total managed charge-off rate increased
to 3.2% in 1996 from 2.2% in 1995. The 30-day and over delinquency rate on
managed receivables increased to 5.4% at December 31, 1996 from 3.3% at year end
1995. The 1996 indicators reflect the new charge-off methodology relating to
credit card bankruptcies. Without this change, the managed charge-off rate and
the 30-day and over delinquency rate on managed receivables would have been 3.5%
and 5.2%, respectively. The changes in the delinquency and charge-off rates from
year to year reflect the trend in unsecured consumer credit quality which is
being experienced throughout the industry. This trend is continuing in the
first quarter of 1997.
Over the last three years, average managed receivables have grown at a
compound annual rate of 53%. This receivable growth has greatly contributed to
higher net income and earnings per share. A significant component of this
receivable growth strategy is the Company's continuing efforts to market
"risk-adjusted" credit card products, whereby credit cards are issued with lower
rates to customers whose credit quality is expected to result in a lower rate of
credit losses (the "risk-adjusted pricing strategy"). The Company's pricing
structure on its credit card products also reflects low "introductory" credit
card rates, which reprice upwards after an introductory period of up to one
year. It is estimated that approximately $3 billion of receivables will reprice
upwards in the first quarter of 1997. At repricing, most of the receivables on
these credit cards will have been securitized, and consequently, the enhanced
revenues on those receivables will be recorded primarily as increased
noninterest revenues (securitization income). Although this will not affect the
owned net interest margin, it is expected that it will positively impact the
managed net interest margin.
Net income for 1995 of $136.7 million increased $30.6 million or 29%
from the $106.1 million reported for 1994. Earnings per share of $3.20 increased
24% from the $2.58 reported for 1994. Earnings grew in 1995 primarily as a
result of a 56% increase in average managed receivables, from $6.1 billion in
1994 to $9.5 billion in 1995, partially offset by an approximate 13% contraction
in the managed net interest margin. Noninterest revenues of $543.0 million in
1995 increased $147.2 million or 37% from $395.8 million in 1994. This increase
was primarily due to a 62% increase in average securitized receivables. The
operating expense ratio decreased to 2.9% in 1995 from 3.7% in 1994. The total
managed charge-off rate for 1995 fell to 2.2% from 2.3% in 1994.
On March 17, 1997, the Company announced that it expects to report
1997 results well below previous expectations. The Company stated it expects to
report a loss in the area of $20 million, or approximately $0.44 cents per
share, for the first quarter, and to report net profit for full-year 1997 of
approximately $1.50 per share. This interruption in the Company's historical
pattern of strong financial results reflects a number of factors, including
continuing increases in consumer bankruptcies and charge-offs and lower
receivable balances than originally anticipated in its credit card business. The
Company's mortgage financing, leasing and insurance businesses continue to
perform well. In addition to considering other strategic alternatives with its
financial and other advisors, the Company is pursuing a number of steps to
return the Company to its historical levels of financial performance by
increasing revenues and stemming credit card losses.
This Annual Report on Form 10-K contains forward-looking statements,
including but not limited to projections of future earnings, that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The most significant among these risks and
uncertainties are: (1) the Company's managed net interest margin, which in turn
is affected by the Company's success in originating new credit card accounts,
the receivables volume and initial pricing of new accounts, the impact of
repricing existing accounts and account attrition, the mix of account types and
interest rate fluctuations; (2) the level of delinquencies and charge-offs; and
(3) the level of expenses. Earnings also may be affected by factors that affect
consumer debt, competitive pressures and the ratings on debt of the Company and
its subsidiaries. Additional risks that may affect the Company's future
performance are detailed elsewhere in this Annual Report on Form 10-K and in the
Company's other filings with the Securities and Exchange Commission.
NET INTEREST INCOME
Net interest income represents the excess of income generated from
interest-earning assets, including on-balance sheet receivables, investments and
money market instruments over the interest paid on interest-bearing liabilities,
primarily deposits and debt.
26
Advanta Corp. and Subsidiaries
Net interest income of $78.3 million for 1996 increased $5.4 million or
7% from 1995 as a result of a $1.7 billion or 63% increase in average
interest-earning assets, largely offset by a lower owned net interest margin,
which fell to 1.84% in 1996 from 2.80% in 1995. The lower owned net interest
margin resulted from a 99 basis point decrease in the yield on average
interest-earning assets as a significant amount of credit cards on the balance
sheet are at introductory rates, partially offset by a 34 basis point decrease
in the cost of funds.
Net interest income of $72.9 million for 1995 increased $2.5 million or
4% from 1994 as a result of a $737 million or 37% increase in average
interest-earning assets, largely offset by a lower owned net interest margin,
which fell to 2.80% in 1995 from 3.67% in 1994. The lower owned net interest
margin primarily resulted from a 124 basis point increase in the cost of funds.
Credit card, personal finance, and business loan and lease receivable
securitization activity shifts revenues from interest income to noninterest
revenues. This ongoing securitization activity reduces the level of
higher-yielding receivables on the balance sheet while proportionately
increasing the balance sheet levels of new lower-yielding receivables and money
market assets. Net interest income on securitized credit card balances is
reflected in credit card securitization income. Net interest income on
securitized mortgage and other personal finance loans is reflected in income
from personal finance activities, and net interest income on securitized
business loans and leases is reflected in business loan and lease other
revenues. All securitization income is included in noninterest revenues. See
Note 1 to Consolidated Financial Statements.
Average managed credit card receivables of $12.2 billion for 1996
increased $4.5 billion or 58% from 1995. This increase resulted from the
successful marketing of low introductory rate credit cards which generated
approximately 1.7 million new accounts. In 1996, average owned credit card
receivables were $2.6 billion compared to $1.6 billion in 1995.
Average managed personal finance loans increased to $2.1 billion in
1996, a 38% increase from $1.5 billion in 1995. The average balance of owned
personal finance loans increased to $243 million in 1996 from $185 million in
1995. Personal finance loan originations of $1.5 billion in 1996 were up $728
million or 94% from 1995. Yields on owned personal finance loans increased to
10.62% from 9.38% in 1995 reflecting a lower proportion of nonperforming loans
on the balance sheet in 1996 versus the prior year.
Average managed business loans and leases of $604 million increased
$289 million or 92% from 1995. Average owned balances of business loans and
leases increased $116 million or 138% during 1996 primarily due to the success
of the business credit card, as originations increased 552% from $80 million in
1995 to $519 million in 1996. Additionally, during 1996, the Company completed
its first business card securitizations totaling $229 million of receivables.
Yields on owned business loans and leases decreased to 11.97% in 1996 from
12.59% in 1995.
The owned average cost of funds dropped to 6.12% from 6.46% in 1995.
The Company has utilized derivatives to manage interest rate risk (see
discussion under "Derivatives Activities").
The following table provides an analysis of both owned and managed
interest income and expense data, average balance sheet data, net interest
spread (the difference between the yield on interest-earning assets and the
average rate paid on interest-bearing liabilities), and net interest margin (the
difference between the yield on interest-earning assets and the average rate
paid to fund interest-earning assets) for 1994 through 1996. Average owned loan
and lease receivables and the related interest revenues include certain loan
fees.
27
Advanta Corp. and Subsidiaries
INTEREST RATE ANALYSIS
($ in thousands) Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- ------------------------------
AVERAGE AVERAGE Average Average Average Average
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
ON-BALANCE SHEET
Interest-earning assets:
Receivables:
Credit cards $ 2,594,997 $ 220,547 8.50% $1,580,352 $ 163,637 10.35% $1,171,266 $117,661 10.05%
Personal finance loans(1) 242,946 25,812 10.62 184,855 17,334 9.38 119,919 9,809 8.18
Business loans and
leases(2) 200,052 23,951 11.97 84,216 10,603 12.59 60,437 8,681 14.36
Other loans 12,270 1,045 8.52 5,979 446 7.46 3,893 280 7.19
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
Total receivables 3,050,265 271,355 8.90 1,855,402 192,020 10.35 1,355,515 136,431 10.06
Federal funds sold 166,454 8,853 5.32 141,031 8,210 5.82 103,674 4,437 4.28
Interest-bearing deposits 524,505 34,154 6.51 371,826 22,243 5.98 196,468 10,216 5.20
Tax-free securities(3) 8,052 502 6.23 60,412 3,654 6.05 81,761 4,858 5.94
Taxable investments 704,641 36,808 5.22 296,700 16,121 5.43 250,535 11,899 4.75
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
Total interest earning
assets(4) $ 4,453,917 $ 351,672 7.90% $2,725,371 $ 242,248 8.89% $1,987,953 $167,841 8.44%
=========== ========== ===== ========== ========== ===== ========== ======== =====
Interest-bearing liabilities:
Deposits
Savings $ 302,125 $ 15,728 5.21% $ 270,550 $ 17,728 6.55% $ 269,583 $ 11,411 4.23%
Time deposits
under $100,000 582,887 34,430 5.91 547,710 31,618 5.77 560,015 27,543 4.92
Time deposits of
$100,000 or more 999,613 60,721 6.07 380,918 23,466 6.16 217,683 9,314 4.28
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
Total deposits 1,884,625 110,879 5.88 1,199,178 72,812 6.07 1,047,281 48,268 4.61
Debt 1,856,034 118,612 6.39 981,816 67,908 6.92 583,317 36,347 6.23
Other borrowings 664,529 40,209 6.05 388,340 25,312 6.52 185,298 10,143 5.47
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
Total interest-bearing
liabilities 4,405,188 269,700 6.12 2,569,334 166,032 6.46 1,815,896 94,758 5.22
Net noninterest-bearing
liabilities 48,729 -- -- 156,037 -- -- 172,057 -- --
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
Sources to fund interest-
earning assets $ 4,453,917 $ 269,700 6.06% $2,725,371 $ 166,032 6.09% $1,987,953 $ 94,758 4.77%
=========== ========== ===== ========== ========== ===== ========== ======== =====
Net interest spread -- -- 1.78% -- -- 2.43% -- -- 3.22%
=========== ========== ===== ========== ========== ===== ========== ======== =====
Net interest margin -- -- 1.84% -- -- 2.80% -- -- 3.67%
=========== ========== ===== ========== ========== ===== ========== ======== =====
OFF-BALANCE SHEET
Average balance on
securitized:
Credit cards $ 9,574,549 -- -- $6,105,575 -- -- $3,507,801 -- --
Personal finance loans(1) 1,890,101 -- -- 1,355,383 -- -- 1,105,610 -- --
Business loans and
leases(2) 403,745 -- -- 230,696 -- -- 141,421 -- --
----------- ---------- ----- ---------- ---------- ----- ---------- -------- -----
Total average securitized
receivables 11,868,395 -- -- 7,691,654 -- -- 4,754,832 -- --
Total average managed
receivables $14,918,660 -- -- $9,547,056 -- -- $6,110,347 -- --
=========== ========== ===== ========== ========== ===== ========== ======== =====
MANAGED NET INTEREST
ANALYSIS(5)
Interest-earning assets $14,028,466 $1,712,557 12.21% $8,830,946 $1,081,779 12.25% $5,495,754 $665,009 12.10%
Interest-bearing liabilities $13,979,737 $ 826,379 5.91% $8,674,909 $ 563,385 6.49% $5,323,697 $295,880 5.56%
Net interest spread -- -- 6.30% -- -- 5.76% -- -- 6.54%
Net interest margin -- -- 6.32% -- -- 5.87% -- -- 6.72%
=========== ========== ===== ========== ========== ===== ========== ======== =====
(1) Includes mortgage, home equity and auto loans beginning in 1996.
(2) Includes leases and business cards beginning in 1996.
(3) Interest and average rate computed on a tax equivalent basis using a
statutory rate of 35%.
(4) Includes assets held and available for sale, and nonaccrual loans and
leases.
(5) Combination of owned interest-earning assets/owned interest-bearing
liabilities and securitized credit card assets/liabilities.
28
Advanta Corp. and Subsidiaries
INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
($ in thousands)
1996 VS. 1995 1995 vs. 1994
---------------------------------- --------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO Due to
---------------------------------- --------------------------------
VOLUME RATE TOTAL Volume Rate Total
--------- -------- --------- -------- -------- --------
Interest income from:
Loan and lease receivables:
Credit cards $ 78,867 $(21,957) $ 56,910 $42,852 $ 3,124 $45,976
Personal finance loans(1) 5,968 2,510 8,478 5,921 1,604 7,525
Business loans and leases(2) 13,843 (495) 13,348 2,799 (877) 1,922
Other loans 528 71 599 155 11 166
Federal funds sold 1,227 (584) 643 1,888 1,885 3,773
Interest-bearing deposits 9,796 2,115 11,911 10,296 1,730 12,026
Tax-free securities (3,264) 112 (3,152) (1,295) 92 (1,203)
Taxable investments 21,286 (599) 20,687 2,376 1,846 4,222
-------- -------- -------- ------- -------- -------
Total interest income(3) 128,251 (18,827) 109,424 64,992 9,415 74,407
-------- -------- -------- ------- -------- -------
Interest expense on:
Deposits:
Savings 2,656 (4,656) (2,000) 41 6,276 6,317
Time deposits under $100,000 2,041 771 2,812 (593) 4,668 4,075
Time deposits of $100,000 or more 37,593 (338) 37,255 8,925 5,227 14,152
Debt 55,476 (4,772) 50,704 27,158 4,403 31,561
Other borrowings 16,577 (1,680) 14,897 12,907 2,262 15,169
-------- -------- -------- ------- -------- -------
Total interest expense 114,343 (10,675) 103,668 48,438 22,836 71,274
-------- -------- -------- ------- -------- -------
Net interest income $ 13,908 $ (8,152) $ 5,756 $16,554 $(13,421) $ 3,133
-------- -------- -------- ------- -------- -------
(1) Includes mortgage, home equity and auto loans beginning in 1996.
(2) Includes leases and business cards beginning in 1996.
(3) Includes income from assets held and available for sale.
29
Advanta Corp. and Subsidiaries
MANAGED PORTFOLIO DATA
The Company analyzes its financial results on a managed basis as well as
analyzing data as reported under generally accepted accounting principles. The
following table provides selected information on a managed basis, as well as a
managed income statement including the effects of credit card securitizations on
selected line items of the Company's Consolidated Income Statements for the past
three years.
($ in thousands) Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
----------- ----------- ----------
Balance Sheet Data:
Average managed receivables $14,918,660 $ 9,547,056 $6,110,347
Managed receivables 16,289,193 12,215,355 8,155,237
Total managed assets 19,216,511 13,976,687 9,303,841
Managed net interest margin (on a fully tax equivalent 6.32% 5.87% 6.72%
basis)
As a percentage of gross managed receivables:
Total loans 30 days or more delinquent:
New methodology (see Asset Quality) 5.4% -- --
Prior methodology (pro forma) 5.2% 3.3% 2.7%
Net charge-offs:
New methodology (see Asset Quality) 3.2% -- --
Prior methodology (pro forma) 3.5% 2.2% 2.3%
Managed Income Statement:
Net interest income $ 882,471 $ 515,078 $ 366,427
Provision for credit losses 483,581 211,061 126,728
Noninterest revenues 389,045 258,571 192,292
Operating expenses 523,174 350,685 266,784
----------- ----------- ----------
Income before income taxes $ 264,761 $ 211,903 $ 165,207
=========== =========== ==========
With respect to the Managed Income Statement, net interest income
includes owned net interest income and securitized net interest income. In the
Consolidated Income Statements, securitized net interest income is reported as
noninterest revenues. In addition, the provision for credit losses includes the
amount by which the provision for credit losses would have been higher had the
securitized receivables remained as owned and the provision for credit losses
been equal to actual reported charge-offs (see Asset Quality). Noninterest
revenues exclude the net interest income and credit losses associated with the
securitized credit card receivables.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $96.9 million in 1996 increased $43.5 million
or 82% from $53.3 million in 1995. The increase was primarily due to higher
charge-offs on owned receivables, which increased 66% from $42.5 million in 1995
to $70.6 million in 1996 and to the higher levels of impaired assets which
continued to increase throughout the year.
The provision for credit losses of $53.3 million in 1995 increased
$19.1 million or 56% from $34.2 million in 1994. The increase was primarily due
to an increase in the desired level of reserves given the increase in impaired
assets and delinquency levels during 1995.
A description of the credit performance of the loan portfolio is set
forth under the section entitled "Credit Risk Management."
30
Advanta Corp. and Subsidiaries
NONINTEREST REVENUES
($ in thousands)
- --------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
Gain on sale of credit cards $ 33,820 $ 0 $ 18,352
Other noninterest revenues:
Credit card securitization
income 258,066 183,360 149,043
Credit card servicing
income 176,567 117,369 68,960
Income from personal
finance activities 109,167 50,541 37,586
Credit card interchange
income 102,804 92,439 71,740
Business loan and lease
other revenues 61,622 41,050 21,551
Insurance revenues, net 38,175 30,146 12,734
Equity securities gains 6,522 15,386 0
Other 19,789 12,723 15,842
-------- -------- --------
Total other noninterest
revenues $772,712 $543,014 $377,456
-------- -------- --------
Total noninterest
revenues $806,532 $543,014 $395,808
======== ======== ========
Noninterest revenues of $806.5 million in 1996 increased $263.5 million
or 49% from $543.0 million in 1995. The increase includes a $33.8 million gain
on the sale of credit card customer relationships in June 1996. Excluding this
gain, noninterest revenues increased $229.7 million or 42% from 1995. This rise
resulted primarily from income derived from increased securitization activity in
all areas, as described below.
Due to the securitization of credit card receivables, activity from
securitized account balances, which otherwise would be 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 activities were affected by the adoption in the third quarter of
1996 of a new charge-off methodology relating to bankruptcies (see Asset
Quality), the upward repricing of interest rates and fees, increases in
charge-offs and the related impact on reserves, all of which had an approximate
$50 million impact (earnings increase) in 1996, as well as a 57% increase in
average securitized receivables. See Note 1 to Consolidated Financial Statements
for further description of securitization income.
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
This statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and will be
applied prospectively. The adoption of SFAS 125 is not expected to have a
material effect on the Company's financial statements.
Credit card servicing income, which represents fees paid to the Company
for continuing to service accounts which have been securitized, increased to
$176.6 million in 1996 from $117.4 million in 1995, in line with the increase in
securitized credit cards. Such fees generally approximate 2% of securitized
receivables.
Interchange income represents fees that are payable by merchants to the
credit card issuer for sale transactions. Total interchange income, which
represents approximately 1.4% of credit card purchases, increased 11% to $102.8
million in 1996 from $92.4 million in 1995.
31
Advanta Corp. and Subsidiaries
During 1996, the Company securitized $1.4 billion of mortgage and home
equity loans compared to $542 million in 1995. As a result, income from personal
finance activities of $109.2 million for 1996 increased 116% from $50.5 million
in 1995. See Note 1 to Consolidated Financial Statements for a description of
income from personal finance activities.
Business loan and lease other revenues increased $20.6 million to $61.6
million in 1996 primarily due to a 75% growth in average securitized business
loans and leases from 1995. Insurance revenues, net, were $38.2 million in 1996,
an increase of $8.0 million over 1995. This growth is attributed to the
successful marketing of insurance products in the credit card, personal finance,
and business loan and lease areas.
Noninterest revenues of $543.0 million in 1995 increased $147.2 million
or 37% from $395.8 million in 1994, primarily due to increases in credit card
securitization, servicing and interchange income, as well as higher business
loan and lease and insurance revenues. Noninterest revenues for 1994 included an
$18.4 million gain on the sale of credit card customer relationships.
OPERATING EXPENSES
($ in thousands)
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
-------- -------- --------
Amortization of credit cards deferred origination costs, net $ 88,517 $ 72,258 $ 39,381
Other operating expenses:
Salaries and employee benefits 182,666 116,681 88,681
External processing 42,814 28,407 22,618
Professional fees 40,247 14,937 10,985
Marketing 31,975 25,374 32,339
Postage 25,700 18,518 12,732
Credit card fraud losses 23,611 20,029 16,654
Equipment expense 22,752 12,751 9,293
Telephone expense 16,116 11,959 8,615
Occupancy expense 14,827 9,254 8,425
Credit and collection expense 13,784 9,039 7,604
Other 20,165 11,478 9,457
======== ======== ========
Total other operating expenses $434,657 $278,427 $227,403
-------- -------- --------
Total operating expenses $523,174 $350,685 $266,784
======== ======== ========
At year end:
Number of accounts managed (000's) 5,984 5,031 3,968
Number of employees 3,541 2,409 1,753
For the year:
Other operating expenses
as a percentage of average managed receivables 2.9% 2.9% 3.7%
-------- -------- --------
The amortization of credit card deferred origination costs, net,
increased from $72.3 million in 1995 to $88.5 million in 1996. This increase
resulted primarily from amortization related to the increased spending on credit
card origination costs that were incurred over the last eighteen months (see
Note 1 of Notes to Consolidated Financial Statements).
Total other operating expenses of $434.7 million for 1996 were up
$156.3 million or 56% from $278.4 million in 1995. The increase in total other
operating expenses is attributable, in part, to a $66.0 million or 57% increase
in salaries and employee benefits as a result of an increase in the number of
employees from 2,409 at year-end 1995 to 3,541 at year-end 1996, including the
addition of senior management to assist in the strategic growth of the various
business units. Other factors affecting the increase in other operating expenses
were a $25.3 million or 169% increase in professional fees primarily as a result
of corporate strategic initiatives as well as an overall increase in credit card
related costs comparable to the 58% increase in average managed credit card
receivables.
32
Advanta Corp. and Subsidiaries
The amortization of credit card deferred origination costs, net,
increased from $39.4 million in 1994 to $72.3 million in 1995. This increase
resulted primarily from amortization related to the $80.6 million of credit card
origination costs that were incurred since the fourth quarter of 1994 (see Note
1 of Notes to Consolidated Financial Statements).
Total other operating expenses of $278.4 million for 1995 were up $51.0
million or 22% from $227.4 million in 1994. Part of the increase in total other
operating expenses resulted from a $28.0 million or 32% increase in salaries and
employee benefits. Other factors affecting the increase in other operating
expenses were a $5.8 million or 26% increase in external processing resulting
primarily from a 27% increase in the number of accounts managed year-to-year,
and an overall increase in credit card related costs.
INCOME TAXES
The Company's consolidated income tax expense was $89.1 million for 1996, or an
effective tax rate of 34%, compared to tax expense of $75.2 million, or a 36%
effective rate, in 1995 and tax expense of $59.1 million, or a 36% effective
rate, in 1994. The decrease in the effective tax rate from 1995 to 1996 resulted
from a higher level of insurance-related activities, tax credits from
investments and lower levels of state income taxes.
ASSET/LIABILITY MANAGEMENT
The financial condition of Advanta Corp. is managed with a focus on maintaining
high credit quality standards, disciplined interest rate risk management and
prudent levels of leverage and liquidity.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to net interest income variability resulting
from mismatches between asset and liability indices (basis risk) and the effects
which changes in market interest rates have on asset and liability repricing
mismatches (gap risk).
The Company attempts to minimize the impact of market interest rate
fluctuations on net interest income and net income by regularly evaluating the
risk inherent in its asset and liability structure, including securitized
assets. This risk arises from continuous changes in the Company's
asset/liability mix, market interest rates, the yield curve, prepayment trends
and the timing of cash flows. Computer simulations are used to evaluate net
interest income volatility under varying rate, spread and volume projections
over monthly time periods of up to two years.
In managing its interest rate sensitivity position, the Company
periodically securitizes receivables, sells and purchases assets, alters the mix
and term structure of its funding base, changes its investment portfolio and
short-term investment position, and uses derivative financial instruments.
Derivative financial instruments are used to manage exposures to changes in
interest rates and foreign exchange rates and create match funding of assets and
liabilities. Derivative financial instruments, by policy, are not used for any
speculative purposes (see discussion under "Derivatives Activities"). The
Company has primarily utilized variable rate funding in pricing its credit card
securitization transactions in an attempt to match the variable rate pricing
dynamics of the underlying receivables sold to the trusts. Variable rate funding
is used on the balance sheet as well, in support of unsecuritized receivables
which carry variable rates. Although credit card receivable rates are generally
set at a spread over a floating rate index, they often contain interest rate
floors. These floors have the impact of converting the credit card receivables
to fixed rate receivables in a low interest rate environment. In addition, the
Company at times offers fixed rate pricing to consumers for the introductory
rate period of its credit cards. In instances when a significant portion of
credit card receivables carry fixed rate introductory pricing or are at their
floors, the Company may convert part of the underlying funding to a fixed rate
by using interest rate hedges, swaps and fixed rate securitizations. In pricing
mortgage and business loan and lease securitizations, both fixed rate and
variable rate funding are used depending upon the characteristics of the
underlying receivables and the overall interest rate risk exposure to the
Company. Additionally, basis risk exists in on-balance sheet
33
Advanta Corp. and Subsidiaries
funding as well as in securitizing credit card receivables at a spread over the
London interbank offered rate ("LIBOR") when the rate on the underlying assets
is indexed to the prime rate. The Company measures the basis risk resulting from
potential variability in the spread between prime and LIBOR and incorporates
such risk into the asset and liability management process. During 1996,
substantially all new credit cards were issued using LIBOR as the repricing
index. The effect of this change is the reduction of prime/LIBOR basis risk over
time. The Company continues to seek cost-effective alternatives for minimizing
this risk.
Interest rate fluctuations affect net interest income at virtually all
financial institutions. While interest rate volatility does have an effect on
net interest income, other factors also contribute significantly to changes in
net interest income. Specifically, within the credit card portfolio, pricing
decisions and customer behavior regarding convenience usage affect the yield on
the portfolio. These factors may counteract or exacerbate income changes due to
fluctuating interest rates. The Company closely monitors interest rate
movements, competitor pricing and consumer behavioral changes in its ongoing
analysis of net interest income sensitivity.
LIQUIDITY, FUNDING AND CAPITAL RESOURCES
The Company's goal is to maintain an adequate level of liquidity, both long and
short-term, through active management of both assets and liabilities. During
1996, the Company, through its subsidiaries, securitized $3.4 billion of credit
card receivables, $1.4 billion of mortgage and home equity loans and $363
million of business loans and leases. 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 receivable
growth. See the Consolidated Statements of Cash Flows for more information
regarding liquidity, funding and capital resources. In addition, see Note 5 to
the Consolidated Financial Statements and the Supplemental Schedules thereto for
additional information regarding the Company's investment portfolio.
Over the last nine years, the Company has successfully accessed the
securitization market to efficiently support its growth strategy. While
securitization should continue to be a reliable source of funding for the
Company, other funding sources are available and include deposits, medium-term
notes, senior and subordinated debt, repurchase agreements, committed and
uncommitted bank lines, bank notes, federal funds purchased and the ability to
sell assets and raise additional equity.
In February 1995, the Company's wholly owned subsidiary, Advanta
National Bank ("Advanta National" or "ANB"), a Delaware based credit card bank,
commenced operations. The Company's initial capitalization of Advanta National
was $50 million, consisting of $25 million in common stock and $25 million of
additional paid in capital. Additional capital totaling $114 million and $39
million was contributed during 1996 and 1995, respectively, in order to maintain
Advanta National as a "well capitalized" bank under applicable regulations. As a
credit card bank, Advanta National is limited to one office, can engage only in
consumer credit card operations and cannot accept deposits other than savings
and time deposits of $100,000 or more. Advanta National had total assets of $2.2
billion at December 31, 1996.
Funding diversification is an essential component of the Company's
liquidity management. The debt securities of Advanta Corp., Advanta National
Bank USA ("AUS"), and ANB investment-grade ratings from the nationally
recognized rating agencies throughout 1996. These ratings allowed the Company to
further diversify its funding sources. In March 1997, the various rating
agencies lowered their ratings on the debt securities of each of Advanta Corp.,
AUS and ANB by one or two grades. As of March 17, 1997, debt of the two banks,
AUS and ANB, was still rated at or above the lowest level of investment grade
by each agency; debt of the parent company, Advanta Corp., maintained
investment grade ratings (at or above the lowest investment grade level) from
three of the rating agencies, but was rated one level below investment grade by
Standard & Poors and two levels below investment grade by Moody's Investors
Service. Efforts continue to develop new sources of funding, both through
previously untapped customer segments and through developing new financing
structures.
In August 1995, in a public offering, the Company sold 2,500,000
depositary shares each representing a one-hundredth interest in a share of
Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a
series of the Company's Class B Preferred Stock, designated as 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (SAILS). On September 15,
1999, unless either previously redeemed by the Company or converted at the
option of the holder, each share of the SAILS will automatically convert into
100 shares of Class B Common Stock. Proceeds from the offering, net of
underwriting discount, were approximately $90 million. The Company used the
proceeds of the offering for general corporate purposes, including financing
the growth of its subsidiaries.
34
Advanta Corp. and Subsidiaries
In September 1995, AUS and Advanta National (the "Banks") established a
$2.25 billion bank note program. Under this program, the Banks may issue an
aggregate of $2.0 billion of senior bank notes and $250 million of subordinated
bank notes. These notes may have maturities ranging from seven days to fifteen
years from date of issuance.
In July 1996, the Company's $510 million revolving credit facility was
replaced with a new $1 billion revolving credit facility. A portion of this
facility is available to the Banks as well. Also, in July, the Company filed a
shelf registration statement with the Securities and Exchange Commission for
$1.6 billion of debt securities.
On December 17, 1996, Advanta Capital Trust I, a newly formed statutory
business trust established by the Company (the "Trust"), issued in a private
offering to two institutional investors $100 million of capital securities,
representing preferred beneficial interests in the assets of the Trust (the
"Capital Securities"). The sole assets of the Trust consist of $100 million of
8.99% junior subordinated debentures issued by the Company due December 17, 2026
(the "Junior Subordinated Debentures"). The Capital Securities will be subject
to mandatory redemption under certain circumstances, including at any time on or
after December 17, 2006 upon the optional prepayment by the Company of the
Junior Subordinated Debentures. The Company has guaranteed the obligations of
the Trust. The Company used the proceeds from the sale for general corporate
purposes.
At the Advanta parent company level, steady building of liquidity and
capital in 1996 and 1995 was achieved as a result of $135 million of net
dividends from subsidiaries in 1996 and $66.1 million in 1995. The Board of
Directors currently intends to have the Company pay regular quarterly dividends
to its shareholders, maintaining an approximate 20% premium on the dividend paid
on the Class B common shares; however, the Company plans to reinvest the
majority of its earnings to support future growth. In the fourth quarter of
1996, the quarterly dividends on the Class A Common and Class B Common shares
were raised to $.11 and $.132 respectively, from the previous levels of $.09 and
$.108.
At December 31, 1996, the Company was carrying $1.5 billion of loans
available for sale. The fair value of such loans was in excess of their carrying
value at year end. In connection with liquidity and asset/liability management,
the Company had $1.7 billion of investments available for sale at December 31,
1996. See Note 19 to the Consolidated Financial Statements for fair value
disclosures.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the past five
years.
COMPOSITION OF DEPOSIT BASE
($ in millions)
- --------------------------------------------------------------------------------------------------------------------------------
As of December 31,
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
---------- --- ---------- --- ---------- --- ---------- --- ---------- ---
Demand deposits $ 28.3 1% $ 91.7 5% $ 64.5 5% $ 33.4 3% $ 24.8 2%
Money market
savings 329.7 18 277.5 14 301.7 26 220.7 17 210.7 17
Time deposits of
$100,000 or less $ 978.6 53 965.5 51 691.0 60 961.4 77 926.8 77
Time deposits of
more than 523.5 28 571.9 30 102.2 9 39.4 3 42.2 4
$100,000
---------- --- ---------- --- ---------- --- ---------- --- ---------- ---
Total deposits $ 1,860.1 100% $ 1,906.6 100% $ 1,159.4 100% $ 1,254.9 100% $ 1,204.5 100%
========== === ========== === ========== === ========== === ========== ===
35
Advanta Corp. and Subsidiaries
COMPOSITION OF DEBT AND OTHER BORROWINGS
($ in millions)
As of December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- --------------- ---------------
AMOUNT % Amount % Amount % Amount % Amount %
-------- --- -------- --- -------- --- ------- --- ------- ---
Subordinated notes and
certificates $ 71.1 3% $ 76.2 4% $ 282.1 20% $ 301.3 63% $ 271.1 83%
Senior notes and
certificates 208.3 8 200.6 11 0 0 0 0 0 0
Subordinated debentures 0 0 0 0 0 0 0 0 33.2 10
Short-term bank notes 309.3 13 25.0 1 85.0 6 0 0 0 0
Medium-term bank notes 835.6 34 322.7 18 0 0 0 0 0 0
5 1/8% notes, due 1996 0 0 150.0 8 149.9 11 149.9 32 0 0
Medium-term notes 880.8 36 504.7 28 359.7 25 15.0 3 0 0
Term fed funds 10.0 0 443.0 25 309.0 22 0 0 0 0
Securities sold under
agreements to repurchase 0 0 0 0 86.5 6 0 0 0 0
Lines of credit and term
funding arrangements 0 0 0 0 50.0 4 7.5 2 16.5 5
Other borrowings 147.0 6 81.8 5 80.9 6 0 0 7.1 2
-------- --- -------- --- -------- --- ------- --- ------- ---
Total debt and other
borrowings $2,462.1 100% $1,804.0 100% $1,403.1 100% $ 473.7 100% $ 327.9 100%
======== === ======== === ======== === ======= === ======= ===
Previously, as a grandfathered institution under the Competitive
Equality Banking Act of 1987 ("CEBA"), the Company had to limit AUS's average
on-balance sheet asset growth to 7% per annum. For the fiscal CEBA year ended
September 30, 1996, AUS's average assets did not exceed the allowable amount
and, accordingly, AUS was in full compliance with CEBA growth limits. However,
on September 30, 1996 this growth rate provision of CEBA was repealed which has
created substantial new flexibility with respect to asset/liability management
for AUS and ultimately the Company. The timing and size of securitizations,
on-balance sheet liability structure and rapid changes in balance sheet
structure have frequently been due to the management of AUS's balance sheet
within this growth constraint. As a result of the elimination of this growth
restriction, the Company is currently evaluating the corporate structure
of its two banking subsidiaries.
In addition to AUS's total deposits of $1.2 billion, deposits at
December 31, 1996 included $705.1 million of time deposits at Advanta National
and $50.4 million of deposits at Advanta Financial Corp. ("AFC"), a Utah
state-chartered, FDIC-insured industrial loan corporation. AFC's assets and
operations are not currently material to the Company, and the Company does not
expect them to become material in the near term.
While there are no specific capital requirements for Advanta Corp., the
Office of the Comptroller of the Currency requires that AUS and Advanta National
maintain a risk-based capital ratio of at least 8%. Both banks were in excess of
the required level and exceeded the minimum capital level of 10% required for
designation as a "well-capitalized" depository institution. At December 31, 1996
and 1995, AUS's risk-based capital ratio was 15.84% and 11.56%, respectively.
Advanta National's risk-based capital ratio at December 31, 1996 and 1995 was
17.20% and 12.28%, respectively. The Company intends to take the necessary
actions to maintain AUS and Advanta National, at a minimum, as "adequately
capitalized" banks. In addition, the Company's insurance subsidiaries are
subject to certain capital, deposit and dividend rules and regulations as
prescribed by state jurisdictions in which they are authorized to operate. At
December 31, 1996 and 1995 the insurance subsidiaries were in compliance with
all requisite rules and regulations.
36
Advanta Corp. and Subsidiaries
CAPITAL EXPENDITURES
The Company spent $78.4 million for capital expenditures in 1996, primarily for
the purchase of land and a building in Pennsylvania, leasehold improvements to
both the Company's new headquarters and a Colorado office building, additional
space in existing buildings, office and voice communication equipment and
furniture and fixtures. This compared to $20.6 million for capital expenditures
in 1995 and $24.1 million in 1994.
In 1997, the Company anticipates capital expenditures to be comparable
to those of 1996 to accommodate growth in its operating units.
DERIVATIVES ACTIVITIES
The Company utilizes derivative financial instruments for the purpose of
managing its exposure to interest rate and foreign currency risks. The Company
has a number of mechanisms in place that enable it to monitor and control both
market and credit risk from these derivatives activities. At the broader level,
all derivatives strategies are managed under a hedging policy approved by the
Board of Directors that details the use of such derivatives and the individuals
authorized to execute derivatives transactions. All derivatives strategies must
be approved by the Company's senior management (President, Chief Executive
Officer, Chief Financial Officer and Treasurer).
As part of this approval process, a market risk analysis is completed
to determine the potential impact on the Company from severe negative (stressed)
movements in the market. By policy, derivatives transactions may only be used to
manage the Company's exposure to interest rate and foreign currency risks or for
cost reduction and may not be used for speculative purposes. As such, the impact
of any derivatives transaction is calculated using the Company's asset/liability
model to determine its suitability.
The Company's Investment Committee (a management committee) has a
counterparty credit policy. This policy details the maximum credit exposure,
transaction limit and transaction term for counterparties based on an internally
assigned Investment Committee credit rating. Internal counterparty credit
ratings reflect the credit ratings from nationally recognized rating agencies,
as well as other significant credit factors where appropriate. Each
counterparty's credit quality is reviewed as new information becomes available,
and, in any case, at least quarterly. Activities with counterparties will be
suspended if there is reason to believe that their credit quality is below the
Company's set standards.
For each counterparty, credit exposure amounts are calculated in a
stress environment and represent the maximum aggregate credit exposure from
derivatives and other capital market transactions the Company is willing to
accept from an individually approved counterparty. To manage counterparty
exposure, the Company also uses negotiated agreements that establish threshold
exposure amounts for each counterparty above which the Company has the right to
call for and receive collateral for the amount of such excess, thereby limiting
its exposure to the threshold amount. The threshold levels can be fixed or may
change as the credit rating of the counterparty changes, and in all cases, the
threshold levels are well below the maximum allowable exposure amounts described
above.
Counterparty master agreements and any collateral agreements, by
policy, must be signed prior to the execution of any derivatives transactions
with a counterparty. To date, substantially all master agreements with
counterparties have included bilateral collateral agreements. As such, the
potential exposure from a particular counterparty is limited to the maximum
threshold level for that counterparty.
The Company has a treasury middle office independent of the trading
function, which measures, monitors and reports on credit, market and liquidity
risk exposures from capital markets, hedging and derivative product activities.
It is the responsibility of this department to ensure compliance with respect to
the hedging policy, including the counterparty transaction limits, transaction
terms and trader authorizations. In addition, this department marks each
derivatives position to market on a weekly basis using both internal and
external models. These models have been benchmarked against a sample of
37
Advanta Corp. and Subsidiaries
derivatives dealers' valuation models for accuracy. Position and counterparty
exposure reports are generated and used to manage collateral requirements of the
counterparty and the Company.
All of these procedures and processes are designed to provide
reasonable assurance that prior to and after the execution of any derivatives
strategy, market, credit and liquidity risks are fully analyzed and incorporated
into the Company's asset/liability and risk measurement models and the proper
accounting treatment for the transaction is identified and executed.
During 1996, the FASB issued its exposure draft for accounting for
hedging and derivatives. This draft, an attempt to standardize accounting
treatment for derivatives and hedging, would materially alter the accounting
treatment for the use of such instruments in the reduction of interest rate
risk. The FASB is currently reviewing comments received on the exposure draft.
The Company is unable to predict the outcome of these deliberations at this
time.
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 additions to and/or transfers between these accounts.
The reserve for credit losses on a consolidated basis was $89.2
million, or 3.4% of owned receivables, at December 31, 1996, compared to $53.5
million, or 1.9% of owned receivables, at December 31, 1995. The reserve for
credit losses on a consolidated basis was $41.6 million, or 2.1% of owned
receivables, in 1994.
ASSET QUALITY
Impaired assets include both nonperforming assets (personal finance loans and
business loans and leases past due 90 days or more, real estate owned, bankrupt,
decedent and fraudulent credit card accounts, and off-lease equipment) and
accruing loans past due 90 days or more on credit cards. The carrying value for
real estate owned is based on net realizable value after taking into account
holding costs and costs of disposition and is reflected in other assets.
Gross interest income that would have been recorded in 1996 and 1995
for owned nonperforming assets, had interest been accrued throughout the year in
accordance with the assets' original terms, was approximately $3.7 million and
$4.0 million, respectively. The amount of interest on nonperforming assets
included in income for 1996 and 1995 was $.7 million and $1.3 million,
respectively.
In the third quarter of 1996, the Company adopted a new charge-off
methodology related to bankrupt credit card accounts, providing for up to a
90-day (rather than up to a 30-day) investigative period following notification
of the bankruptcy petition, prior to charge-off. This new methodology is
consistent with others in the credit card industry. The 1996 credit statistics
set forth in the following table reflect this change in methodology.
On the total managed portfolio, impaired assets were $420.5 million, or
2.6% of receivables, at year end 1996 compared to $167.1 million, or 1.4% of
receivables, in 1995. Nonperforming assets on the total managed portfolio were
$191.7 million, or 1.2% of receivables, compared to $82.2 million, or .7%, in
1995. The total managed charge-off rate for 1996 was 3.2%, compared to 2.2% for
1995. The charge-off rate on managed credit cards was 3.7% for 1996 compared to
2.5% for 1995. As of March 17, 1997, the Company was projecting estimated 1997
charge-off rates on the total managed portfolio of 5.2%-5.6% for the first
quarter and 5.0%-6.0% for the full year, and rates on managed credit cards of
6.6%-7.0% for the first quarter and 6.5%-7.5% for the full year.
38
Advanta Corp. and Subsidiaries
The 30 day and over delinquency rate on the managed portfolio rose to
5.4% at December 31, 1996 compared to 3.3% at December 31, 1995. The 30 day and
over delinquency rate on managed credit cards was 5.0% at year end 1996 compared
to 2.6% at year end 1995. As of March 17, 1997, the Company was projecting
estimated 30 day and over delinquency rates as of March 31, 1997 of 5.7%-6.1%
of the total managed portfolio, and of 5.2%-5.6% of managed credit cards.
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 personal finance loans and business loans and leases are put on
nonaccrual status when they become 90 days past due.
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.
39
Advanta Corp. and Subsidiaries
The following tables provide a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
(in thousands) December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
CONSOLIDATED-MANAGED
Nonperforming assets $191,668 $ 82,171 $ 61,587 $ 63,589 $ 57,797
Accruing loans past due 90 days or more 228,845 84,892 40,837 31,514 34,890
Impaired assets 420,513 167,063 102,424 95,103 92,687
Total loans 30 days or more delinquent 886,717 404,072 220,390 186,297 184,670
As a percentage of gross receivables:
Nonperforming assets 1.2% .7% .8% 1.2% 1.6%
Accruing loans past due 90 days or more 1.4% .7% .5% .6% .9%
Impaired assets 2.6% 1.4% 1.3% 1.8% 2.5%
Total loans 30 days or more delinquent:
New methodology(1) 5.4%
Prior methodology(2) 5.2% 3.3% 2.7% 3.6% 5.0%
Net charge-offs:
Amount $479,992 $212,865 $139,676 $122,715 $108,606
As a percentage of gross receivables:
New methodology(1) 3.2%
Prior methodology(2) 3.5% 2.2% 2.3% 2.9% 3.4%
-------- -------- -------- -------- --------
CREDIT CARDS-MANAGED
Nonperforming assets $ 89,064 $ 20,516 $ 14,227 $ 10,881 $ 7,592
Accruing loans past due 90 days or more 228,822 84,878 40,721 31,489 34,890
Impaired assets 317,886 105,394 54,948 42,370 42,482
Total loans 30 days or more delinquent 632,083 262,299 133,121 94,035 99,308
As a percentage of gross receivables:
Nonperforming assets .7% .2% .2% .3% .3%
Accruing loans past due 90 days or more 1.8% .8% .6% .8% 1.3%
Impaired assets 2.5% 1.1% .8% 1.1% 1.6%
Total loans 30 days or more delinquent:
New methodology(1) 5.0%
Prior methodology(2) 4.6% 2.6% 2.0% 2.4% 3.7%
Net charge-offs:
Amount $451,239 $193,160 $115,218 $105,966 $100,465
As a percentage of gross receivables:
New methodology(1) 3.7%
Prior methodology(2) 4.1% 2.5% 2.5% 3.5% 4.5%
-------- -------- -------- -------- --------
PERSONAL FINANCE LOANS-MANAGED(3)(4)
Nonperforming assets $ 93,101 $ 56,743 $ 44,678 $ 50,418 $ 46,755
Total loans 30 days or more delinquent 194,412 106,223 65,966 75,747 69,962
As a percentage of gross receivables:
Nonperforming assets 3.4% 3.2% 3.3% 4.4% 5.1%
Total loans 30 days or more delinquent 7.1% 5.9% 4.9% 6.6% 7.7%
Net charge-offs:
Amount $ 14,981 $ 13,836 $ 20,709 $ 13,991 $ 5,924
As a percentage of gross receivables .7% .9% 1.7% 1.3% .8%
-------- -------- -------- -------- ----------
BUSINESS LOANS AND LEASES-MANAGED(5)
Nonperforming assets $ 9,503 $ 4,912 $ 2,682 $ 2,290 $ 3,432
Total loans 30 days or more delinquent 59,880 35,274 20,972 16,476 15,320
As a percentage of receivables:
Nonperforming assets 1.2% 1.3% 1.0% 1.3% 2.5%
Total loans 30 days or more delinquent 7.3% 9.3% 7.9% 9.7% 11.1%
Net charge-offs:
Amount $ 13,777 $ 5,846 $ 3,747 $ 2,759 $ 2,352
As a percentage of receivables 2.3% 1.9% 1.9% 1.9% 2.2%
-------- -------- -------- -------- --------
(1) The 1996 figures reflect the adoption of a new charge-off methodology in
August 1996 relating to credit card bankruptcies (see Asset Quality).
(2) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
(3) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
(4) Includes mortgage, home equity and auto loans beginning in 1996.
(5) Includes leases and business cards beginning in 1996.
40
Advanta Corp. and Subsidiaries
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
(in thousands) December 31,
---------------------------
1996 1995
----------- ----------
ASSETS
Cash $ 165,875 $ 45,714
Federal funds sold 338,926 146,375
Interest-bearing deposits 546,783 410,709
Investments available for sale 785,600 532,963
Loan and lease receivables, net:
Available for sale 1,476,146 1,079,478
Other loan and lease receivables, net 1,136,857 1,699,771
---------- ----------
Total loan and lease receivables, net 2,613,003 2,779,249
Premises and equipment (at cost, less accumulated
depreciation of $53,979 in 1996 and $37,621 in 1995) 108,130 43,453
Amounts due from credit card securitizations 399,359 190,819
Other assets 626,283 374,977
---------- ----------
TOTAL ASSETS $5,583,959 $4,524,259
========== ==========
LIABILITIES
Deposits:
Noninterest-bearing $ 28,302 $ 91,721
Interest-bearing 1,831,756 1,814,880
---------- ----------
Total deposits 1,860,058 1,906,601
Long-term debt 1,393,095 587,877
Other borrowings 1,068,989 1,216,127
Other liabilities 309,781 140,690
---------- ----------
TOTAL LIABILITIES 4,631,923 3,851,295
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely
subordinated debentures of the Company 100,000 0
STOCKHOLDERS' EQUITY (SEE NOTE 9)
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding - 1,010 shares
in 1996 and 1995 1,010 1,010
Class B preferred stock, $.01 par value:
Authorized - 1,000,000 shares;
Issued - 25,000 shares in 1996 and 1995 0 0
Class A common stock, $.01 par value;
Authorized - 200,000,000 shares;
Issued - 17,945,471 shares in 1996
and 17,481,022 shares in 1995 179 175
Class B common stock, $.01 par value
Authorized - 200,000,000 shares;
Issued - 25,592,764 shares in 1996
and 24,007,352 shares in 1995 256 240
Additional paid-in capital, net 309,250 280,294
Retained earnings, net 541,383 391,245
Less: Treasury stock at cost,
1,231 Class B common shares in 1996 (42) 0
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 852,036 672,964
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,583,959 $4,524,259
========== ==========
See Notes to Consolidated Financial Statements
41
Advanta Corp. and Subsidiaries
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
Year Ended December 31,
1996 1995 1994
--------- -------- --------
Interest income:
Loans and leases $267,823 $189,983 $135,429
Investments:
Taxable 79,640 46,574 26,552
Exempt from federal income tax 502 2,375 3,158
-------- -------- --------
Total investments 80,142 48,949 29,710
-------- -------- --------
Total interest income 347,965 238,932 165,139
-------- -------- --------
Interest expense:
Deposits 110,879 72,812 48,268
Debt 118,612 67,908 36,347
Other borrowings 40,209 25,312 10,143
-------- -------- --------
Total interest expense 269,700 166,032 94,758
-------- -------- --------
Net interest income 78,265 72,900 70,381
-------- -------- --------
Provision for credit losses 96,862 53,326 34,198
-------- -------- --------
Net interest income after provision for credit
losses (18,597) 19,574 36,183
Noninterest revenues:
Gain on sale of credit cards 33,820 0 18,352
Other noninterest revenues 772,712 543,014 377,456
-------- -------- --------
Total noninterest revenues 806,532 543,014 395,808
-------- -------- --------
Operating expenses:
Amortization of credit card deferred
origination costs, net 88,517 72,258 39,381
Other operating expenses 434,657 278,427 227,403
-------- -------- --------
Total operating expenses 523,174 350,685 266,784
-------- -------- --------
Income before income taxes 264,761 211,903 165,207
Provision for income taxes 89,104 75,226 59,144
-------- -------- --------
Net income $175,657 $136,677 $106,063
======== ======== ========
Earnings per common share (See Note 1) $ 3.89 $ 3.20 $ 2.58
======== ======== ========
Weighted average common shares outstanding 45,073 42,670 41,046
======== ======== ========
See Notes to Consolidated Financial Statements
42
Advanta Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Investment Total
Class A Class B Class A Class B Additional Deferred Holding Stock-
Preferred Preferred Common Common Paid-In Compen- Gains Retained Treasury holder's
Stock Stock Stock Stock Capital sation (Losses) Earnings Stock Equity
--------- --------- -------- ------ -------- -------- ------- -------- ----- --------
Balance at Dec. 31, 1993 $ 1,010 $ 0 $ 172 $ 226 $177,654 $(11,008) $ 524 $174,163 $ 0 $342,741
Change in unrealized
appreciation of
investments (7,062) (7,062)
Preferred and common
cash dividends declared (9,877) (9,877)
Exercise of stock options 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 0 173 231 190,678 (14,213) (6,538) 270,349 0 441,690
Change in unrealized
appreciation of
investments 6,258 6,258
Preferred and common
cash dividends declared (15,501) (15,501)
Exercise of stock options 2 3 2,049 59 2,113
Issuance of stock:
Public offering 0 88,927 88,927
Benefit plans 6 18,360 (16,523) 1,296 3,139
Amortization of deferred
compensation 7,661 7,661
Termination/tax benefit-
benefit plans 1,917 1,438 (1,355) 2,000
Net Income 136,677 136,677
--------- --------- -------- ------ -------- -------- ------- -------- ------- --------
Balance at Dec. 31, 1995 1,010 0 175 240 301,931 (21,637) (280) 391,525 0 672,964
Change in unrealized
appreciation of
investments (338) (338)
Preferred and common
cash dividends declared (24,588) (24,588)
Exercise of stock options 4 7 7,503 7,514
Issuance of stock:
Benefit plans 9 36,000 (33,815) 2,228 4,422
Amortization of deferred
compensation 11,960 11,960
Termination/tax benefit-
benefit plans 5,045 2,263 (2,270) 5,038
Foreign currency
translation adjustment (593) (593)
Net Income 175,657 175,657
--------- --------- -------- ------ -------- -------- ------- -------- ------- --------
Balance at Dec. 31, 1996 $ 1,010 $ 0 $ 179 $ 256 $350,479 $(41,229) $ (618) $542,001 $ (42) $852,036
========= ========= ======== ====== ======== ======== ======= ======== ======= ========
See Notes To Consolidated Financial Statements
43
Advanta Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands) Year Ended December 31,
---------------------------------------------------
1996 1995 1994
------------ ----------- -----------
OPERATING ACTIVITIES
Net income $ 175,657 $ 136,677 $ 106,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity securities gains (4,074) (6,776) 0
Depreciation and amortization of intangibles 19,335 10,802 7,907
Provision for credit losses 96,862 53,326 34,198
Change in other assets and amounts due from securitizations (287,798) (127,931) (43,599)
Change in other liabilities 147,276 51,757 27,616
Gain on securitization of receivables (89,843) (35,652) (27,189)
------------ ----------- -----------
Net cash provided by operating activities 57,415 82,203 104,996
INVESTING ACTIVITIES
Purchase of investments available for sale (30,770,841) (3,313,555) (1,804,963)
Proceeds from sale of investments available for sale 1,119,231 1,683,934 623,663
Proceeds from maturing investments available for sale 29,388,538 1,430,276 1,159,702
Change in fed funds sold and interest-bearing deposits (303,435) (202,262) (34,973)
Change in credit card receivables, excluding sales (3,329,603) (4,179,735) (2,787,652)
Proceeds from sales/securitizations of receivables 5,385,055 4,331,739 2,738,740
Purchase of personal finance loan/lease portfolios (288,753) (214,094) (143,804)
Principal collected on personal finance loans 60,544 30,945 25,753
Personal finance loans made to customers (1,267,073) (608,064) (451,892)
Purchase of premises and equipment (84,167) (20,652) (24,088)
Proceeds from sale of premises and equipment 574 20 647
Excess of cash collections over income
recognized on direct financing leases 78,282 38,910 21,691
Equipment purchased for direct financing lease contracts (325,729) (235,773) (160,080)
Change in business card receivables, excluding sales (262,064) (43,684) (2,769)
Net change in other loans (11,553) (4,062) (75)
------------ ----------- -----------
Net cash used by investing activities (610,994) (1,306,057) (840,100)
FINANCING ACTIVITIES
Change in demand and savings deposits (11,277) 3,023 112,048
Proceeds from deposits sold 0 30,018 0
Proceeds from sales of time deposits 1,481,557 1,322,388 448,624
Payments for maturing time deposits (1,516,823) (608,186) (656,195)
Change in repurchase agreements and term fed funds (433,000) 47,545 395,455
Proceeds from issuance of subordinated/senior debt 41,076 59,256 39,437
Payments on redemption of subordinated/senior debt (38,541) (64,642) (58,618)
Proceeds from issuance of medium-term notes 720,545 165,052 344,787
Payments on maturity of medium-term notes (494,400) (20,000) 0
Change in notes payable 837,210 212,730 127,489
Proceeds from issuance of capital securities 100,000 0 0
Proceeds from issuance of stock 11,974 94,179 4,498
Cash dividends paid (24,581) (15,501) (9,877)
------------ ----------- -----------
Net cash provided by financing activities 673,740 1,225,862 747,648
------------ ----------- -----------
Net increase in cash 120,161 2,008 12,544
Cash at beginning of year 45,714 43,706 31,162
Cash at end of year $ 165,875 $ 45,714 $ 43,706
============ =========== ===========
See Notes to Consolidated Financial Statements
44
Advanta Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Advanta Corp. (the "Company"), a Delaware corporation, is a financial services
company which provides a variety of products to consumers and small businesses.
The Company services approximately 6 million customers and manages receivables
in excess of $16 billion. The Company issues credit cards primarily through its
two wholly owned subsidiaries Advanta National Bank USA ("AUS") and Advanta
National Bank ("Advanta National" or "ANB", and together with AUS, "the Banks").
Substantially all of the Company's credit card processing is performed by a
single outside third party processor. Total managed credit card receivables at
December 31, 1996 totaled $12.7 billion. The Company also operates through other
wholly owned subsidiaries including: Advanta Mortgage Corp. USA ("AMC") which
originates mortgage loans, Advanta Business Services Corp. ("ABS") which
provides small ticket equipment leases and markets business credit cards to
businesses, and Advanta Life Insurance Company which reinsures or writes various
credit insurance products available to the Company's customers. Managed
receivables for AMC and ABS totaled approximately $2.8 billion and $.8 billion,
respectively, at December 31, 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
BASIS OF PRESENTATION
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
Certain prior-period amounts have been reclassified to conform with current-year
classifications.
CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES
Credit Card Origination Costs
The Company accounts for credit card origination costs under Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" ("SFAS 91"). This accounting standard requires certain loan and lease
origination fees and costs to be deferred and amortized over the life of a loan
or lease. 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 $54.6 million in 1996, $71.9 million in 1995 and $55.2 million in
1994.
The Company amortizes deferred credit card origination costs following
the consensus reached at the May 20, 1993 meeting of the Emerging Issues Task
Force ("EITF") of the Financial Accounting Standards Board ("FASB") regarding
the acquisition of individual credit card accounts from independent third
parties (EITF Issue 93-1). Under this consensus amounts paid to third parties
are deferred and amortized on a straight-line basis over one year. Costs
incurred for originations which were initiated prior to May 20, 1993 continue to
be amortized over a 60 month period as was the practice prior to the EITF Issue
93-1 consensus.
Credit Card Securitization Income
45
Advanta Corp. and Subsidiaries
Since 1988, the Company, through its subsidiaries AUS and Advanta National, has
completed credit card securitizations totaling $12.2 billion in receivables. See
Note 3 and Note 16. In each transaction, credit card receivables were
transferred to a trust and interests in the trust were sold to investors for
cash. The Company records excess servicing income on credit card securitizations
representing additional cash flow from the receivables initially sold based on
estimates of the repayment term, including prepayments. As the estimates used to
record excess servicing income are influenced by factors outside the Company's
control, there is uncertainty inherent in these estimates, making it reasonably
possible that they could change in the near term. Excess servicing income
recorded at the time of each transaction is substantially offset by the
establishment of recourse reserves for anticipated charge-offs. 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 securitization activities were affected
by the adoption in the third quarter of 1996 of a new charge-off methodology
relating to bankruptcies (see Credit Losses below), the upward repricing of
interest rates and fees, increases in charge-offs and the related impact on
reserves, all of which had an approximate $50 million impact (earnings increase)
in 1996, as well as a 57% increase in average securitized receivables.
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 AVAILABLE FOR SALE
Investments available for sale include securities that the Company sells from
time to time to provide liquidity and in response to changes in the market. Debt
and equity securities classified as Available for Sale are reported at market
value under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115,
unrealized gains and losses on these securities (except those held by the
Company's venture capital unit, Advanta Partners LP) are reported as a separate
component of stockholders' equity and included in retained earnings. Changes in
the fair value of Advanta Partners LP investments are reported in noninterest
revenues as equity securities gains or losses. The fair value of publicly traded
investments takes into account their quoted market prices with adjustments made
for liquidity or sale restrictions. For investments that are not publicly
traded, estimates of fair value have been made by management that considered
several factors including the investees' financial results, conditions and
prospects, and the values of comparable public companies. Because of the nature
of these investments, the equity method of accounting is not used in situations
where the Company has a greater than 20 percent ownership interest.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses various derivative financial instruments ("derivatives") such
as interest rate swaps and caps, forward contracts, options on securities, and
financial futures as part of its risk management strategy to reduce interest
rate and foreign currency exposures, and where appropriate, to synthetically
lower its cost of funds. 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 or foreign
currency risks, 2) the derivative used serves to reduce the Company's
sensitivity to interest rate or foreign currency risks, and 3) the derivative
used is designated and deemed effective in hedging the Company's exposure to
interest rate or foreign currency risks. In addition to meeting these
conditions, anticipatory hedges must demonstrate that the anticipated
transaction being hedged is probable to occur and the expected terms of the
transaction are identifiable.
46
Advanta Corp. and Subsidiaries
For derivatives designated as hedges of interest rate exposure, gains
or losses are deferred and included in the carrying amounts of the related item
exposing the Company to interest rate risk and ultimately recognized in income
as part of those carrying amounts. For derivatives designated as hedges of
foreign currency exposure, gains or losses are reported in stockholders' equity.
Accrual accounting is applied for derivatives designated as synthetic
alterations with income and expense recorded in the same category as the related
underlying on-balance sheet or off-balance sheet item synthetically altered.
Gains or losses resulting from early terminations of derivatives are deferred
and amortized over the remaining term of the underlying balance sheet item or
the remaining term of the derivative, as appropriate.
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in noninterest revenues. At December 31, 1996, 1995 and 1994, all the
Company's derivatives qualified as hedges or synthetic alterations.
INCOME FROM PERSONAL FINANCE ACTIVITIES
The Company, through its subsidiaries, sells mortgage and home equity 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. As these
estimates are influenced by factors outside the Company's control, there is
uncertainty inherent in these estimates, making it reasonably possible that they
could change in the near term. 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 income from personal finance activities. Also
included in income is any difference between the net sales proceeds and the
carrying value of the mortgage loans sold at the time of the transaction. See
Note 3 and Note 16. The carrying value includes deferred loan origination fees
and costs which include certain fees and costs related to acquiring and
processing a loan held for resale. These deferred origination fees and costs are
netted against income from personal finance activities when the loans are sold.
Income from personal finance activities includes loan servicing fees equal to
.5% of the outstanding balance of securitized loans less amortization of
previously recorded mortgage servicing assets and loan servicing fees on
mortgage loan portfolios which were never owned by the Company ("contract
servicing").
INCOME FROM BUSINESS LOAN AND LEASE SECURITIZATIONS
The Company, through its subsidiaries, sells business loans and leases through
secondary market securitizations. The Company records excess servicing income on
lease securitizations 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 transactions. 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. The
Company records excess servicing income on business card securitizations
representing additional cash flow from the receivables initially sold based on
estimates of the repayment term, including prepayments. Excess servicing income
recorded at the time of each transaction is substantially offset by the
establishment of recourse reserves for anticipated charge-offs. As the estimates
to record excess servicing income are influenced by factors outside the
Company's control, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change in the near term. 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. See Note 3 and Note 16.
INSURANCE
Reinsurance premiums, net of commissions on credit life, disability and
unemployment policies on credit cards, are earned monthly based upon the
outstanding balance of the underlying receivables. Insurance premiums are earned
ratably over the period of insurance coverage provided. The cost of acquiring
new reinsurance is deferred and amortized over the respective periods in order
to match the expense with the anticipated revenue. Insurance loss reserves are
based on estimated settlement amounts for both reported losses and incurred but
not reported losses.
47
Advanta Corp. and Subsidiaries
CREDIT LOSSES
The Company's charge-off policy, as it relates to consumer credit card accounts,
is to charge-off a receivable, if not paid, at 186 days contractual delinquency.
Accounts suspected of being fraudulent are written off after a 90 day
investigation period, unless the investigation shows no evidence of fraud.
In the third quarter of 1996, the Company adopted a new charge-off
methodology related to bankrupt credit card accounts, providing for up to a
90-day (rather than up to a 30-day) investigative period following notification
of the bankruptcy petition, prior to charge-off. This new methodology is
consistent with others in the credit card industry.
During 1994, the Company implemented a new policy for the charge-off of
nonperforming mortgage loans. Under this policy, the Company charges off
potential losses on all nonperforming mortgages that have become twelve months
delinquent, regardless of anticipated collectibility. During the 1994 transition
period, losses with respect to both mortgages that became twelve months
delinquent in 1994, as well as those mortgages that had been twelve months or
more delinquent, were charged off.
PREMISES AND EQUIPMENT
Premises, equipment, computers and software are stated at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Repairs and
maintenance are charged to expense as incurred.
GOODWILL
Goodwill, representing the cost of investments in subsidiaries and affiliated
companies in excess of net assets acquired at acquisition, is amortized on a
straight-line basis for a period of up to 25 years.
STOCK-BASED COMPENSATION
The FASB has issued SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). This statement requires that an employer's financial statements
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. The Company chose to apply
certain allowable accounting provisions, and as such continues to account for
these plans under APB Opinion No. 25. No adjustments to reported net income or
earnings per share are required, however certain disclosures required under SFAS
123 are reported in Note 11.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 utilizes the liability method and deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of the
enacted tax laws.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net earnings after Class A
preferred stock dividends by the average number of shares of common stock and
common stock equivalents outstanding during each year. The outstanding Class A
preferred stock is not a common stock equivalent. The outstanding Class B
preferred stock is mandatorily convertible into common stock and thus is
considered a common stock equivalent.
CASH FLOW REPORTING
For purposes of reporting cash flows, cash includes cash on hand and amounts due
from banks. Cash paid during 1996, 1995 and 1994 for interest was $241.1
million, $147.2 million and $91.5 million, respectively. Cash paid for taxes
during these periods were $45.1 million, $43.9 million and $60.9 million,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
48
Advanta Corp. and Subsidiaries
The FASB has issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and will be
applied prospectively. Under SFAS 125, a transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. SFAS 125 requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practicable. It also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative fair
values at the date of the transfer. The adoption of SFAS 125 is not expected to
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,
------------------------------
1996 1995
----------- -----------
Credit cards(A) $ 2,045,219 $ 2,338,280
Personal finance loans(B)(C) 376,260 321,711
Business loans and leases(D) 214,327 93,660
Other loans 20,835 9,276
----------- -----------
Gross loan and lease receivables 2,656,641 2,762,927
----------- -----------
Add: Deferred origination
costs, net of deferred fees(E) 45,546 69,816
Less: Reserve for credit losses:
Credit cards (76,084) (36,889)
Personal finance loans (8,785) (3,360)
Business loans and leases (4,241) (977)
Other (74) (12,268)
----------- -----------
Total (89,184) (53,494)
----------- -----------
Net loan and lease receivables $ 2,613,003 $ 2,779,249
=========== ===========
(A) Includes credit card receivables available for sale of $1.1 billion and
$776.7 million in 1996 and 1995, respectively.
(B) Includes mortgage, home equity and auto loans beginning in 1996.
(C) Includes personal finance loan receivables available for sale of $337.3
million and $279.4 million in 1996 and 1995, respectively and is net of
unearned income of $2.5 million in 1996.
(D) Includes business loans and leases available for sale of $71.9 million and
$18.0 million in 1996 and 1995, respectively, and is net of unearned income
of $20.9 million and $15.9 million in 1996 and 1995, respectively. Also
includes residual interest for both years.
(E) Includes approximately $4.0 million and $5.3 million in 1996 and 1995,
respectively, related to loan and lease receivables available for sale.
49
Advanta Corp. and Subsidiaries
Receivables serviced for others consisted of the following items:
December 31,
----------------------------
1996 1995
----------- ----------
Credit cards $10,646,177 $7,692,463
Personal finance loans(A) 2,377,430 1,475,871
Business loans and leases 608,945 284,094
----------- ----------
Total $13,632,552 $9,452,428
=========== ==========
(A) Excludes mortgage loans which were not originated by the Company, but which
the Company services for a fee ("contract servicing"). Contract servicing
receivables were $3.7 billion and $.6 billion at December 31, 1996 and
1995, respectively.
The geographic concentration of managed receivables was as follows:
December 31,
------------------------------------------------------
1996 1995
----------------------- -----------------------
RECEIVABLES % Receivables %
----------- ----- ----------- -----
California $ 2,559,128 15.7% $ 2,043,281 16.7%
New York 1,283,895 7.9 983,832 8.1
Texas 1,003,641 6.2 692,665 5.7
Florida 902,692 5.5 640,859 5.3
New Jersey 731,055 4.5 599,867 4.9
All other 9,808,782 60.2 7,254,851 59.3
Total managed receivables $16,289,193 100.0% $12,215,355 100.0%
=========== ===== =========== =====
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, 1996 and 1995, the Company
had $41.2 billion and $33.3 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, 1996 and 1995, outstanding managed
consumer and business credit card receivables represented 32% and 30%,
respectively, of outstanding commitments.
NOTE 3. CREDIT CARD, PERSONAL FINANCE AND BUSINESS LOAN AND LEASE
SECURITIZATIONS
AUS and Advanta National together had securitized credit card receivables
outstanding of $10.6 billion at December 31, 1996. In each securitization
transaction, credit card receivables were transferred to a trust which issued
certificates representing ownership interests in the trust primarily to
institutional investors. The Banks retained a participation interest in each
trust, reflecting the excess of the total amount of receivables transferred to
the trust over the portion represented by certificates sold to investors. The
retained participation interests in the credit card trusts were $.9 billion and
$1.5 billion at December 31, 1996 and 1995, respectively. Although the Banks
continue to service the underlying credit card accounts and maintain the
customer relationships, these transactions are treated as sales for financial
reporting purposes to the extent of the investors' interests in the trusts.
Accordingly, the associated receivables are not reflected on the balance sheet.
The Banks are subject to certain recourse provisions in connection with
these securitizations. At December 31, 1996 and 1995, the Banks had reserves of
$334.6 million and $167.4 million, respectively, related to these recourse
provisions. These reserves are netted against the amounts due from credit card
securitizations. At December 31, 1996, the Company had amounts receivable from
credit card securitizations, including related interest-bearing deposits, of
$733.3 million, $333.9 million of which constitutes amounts which are subject to
liens by the providers of the credit enhancement facilities for the individual
securitizations and is net of amounts awaiting distribution to investors. At
December 31, 1995, the amounts receivable were $453.2 million and amounts
subject to lien (net of amounts due to investors) were $262.4 million.
50
Advanta Corp. and Subsidiaries
At December 31, 1996, the Company had $2.4 billion of securitized
personal finance loans outstanding which are subject to certain recourse
provisions. The Company had reserves of $64.4 million and $27.2 million at year
end 1996 and 1995, respectively, related to these recourse provisions which are
netted against the excess mortgage servicing rights. See Note 16. At December
31, 1996, the Company had amounts receivable from personal finance loan sales
and securitizations of $260.2 million, $96.5 million of which was subject to
liens. At December 31, 1995, the amounts receivable and amounts subject to lien
were $162.4 million and $58.1 million, respectively.
At December 31, 1996, the Company had $609 million of securitized
business loans and leases outstanding which are subject to certain recourse
provisions. There were reserves of $22.2 million and $15.3 million at year end
1996 and 1995, respectively, related to these recourse provisions which are
netted against the excess servicing on business loan and lease securitizations.
See Note 16. The Company had accounts receivable from business loan and lease
securitizations of $27.6 million at year end 1996 and $22.2 million at year end
1995, of which $8.1 million and $7.5 million, respectively, were subject to
liens by providers of the credit enhancement facilities. Total interest in
residuals for business loan and lease assets sold at December 31, 1996 and 1995,
was $32.1 million and $22.4 million respectively, and is also subject to
recourse provisions.
As indicated in Note 1, recourse reserves are established at the time
of the securitization transactions based on anticipated future cash flows,
prepayment rates and charge-offs. As these estimates are influenced by factors
outside of the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term.
NOTE 4. RESERVE FOR CREDIT LOSSES
The reserve for credit losses for lending and leasing transactions is
established to reflect losses anticipated from delinquencies that have already
occurred. In estimating the reserve, management relies on historical experience
by loan type adjusted for any known trends in the portfolio. As these estimates
are influenced by factors outside of the Company's control, there is uncertainty
inherent in these estimates, making it reasonably possible that they could
change in the near term.
Any adjustments to the reserves (net of transfers between on-and
off-balance sheet reserves) are reported in the Consolidated Income Statements
in the periods they become known.
51
Advanta Corp. and Subsidiaries
The following table displays five years of reserve history:
RESERVE FOR CREDIT LOSSES
Year Ended December 31,
.................................. .............. ............... .............. ............. ............
1996 1995 1994 1993 1992
- ------------------------------------------------- --------------- ------------- -------------- ------------
Balance at January 1 $ 53,494 $ 41,617 $ 31,227 $ 40,228 $ 36,355
Provision for credit losses 96,862 53,326 34,198 29,802 47,138
Transfer of reserves from/(to)
recourse reserves 3,000 1,100 11,485 (12,027) (3,300)
Reserves on receivables purchased 6,404 0 0 0 0
Gross credit losses:
Credit cards (73,466) (41,779) (28,646) (33,805) (46,477)
Personal finance loans (3,473) (6,038) (11,731) (2,247) (1,488)
Business loans and leases (3,444) (1,413) (1,053) (1,376) (1,930)
Other loans (13) (38) (44) (93) (73)
.................................. .............. ............... .............. ............. ............
Total credit losses (80,396) (49,268) (41,474) (37,521) (49,968)
.................................. .............. ............... .............. ............. ............
Recoveries:
Credit cards 8,945 6,354 5,958 10,182 9,095
Personal finance loans 414 76 42 40 37
Business loans and leases 442 274 139 429 663
Other loans 19 15 42 94 208
- ---------------------------------- -------------- --------------- -------------- ------------- ------------
Total recoveries 9,820 6,719 6,181 10,745 10,003
- ---------------------------------- -------------- --------------- -------------- ------------- ------------
Net credit losses (70,576) (42,549) (35,293) (26,776) (39,965)
- ---------------------------------- -------------- --------------- -------------- ------------- ------------
Balance at December 31 $ 89,184 $ 53,494 $ 41,617 $ 31,227 $ 40,228
- ---------------------------------- -------------- --------------- -------------- ------------- ------------
NOTE 5. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consisted of the following:
December 31,
- ------------------------------ ---------------------------- ----------------------------------------------- ---------
1996 1995
- ------------------------------ --------- ---------- ---------- --------- ---------- ---------- ---------- --------
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 $645,113 $ 21 $ (677) $644,457 $405,614 $ 70 $ (286) $405,398
State and municipal securities 3,640 38 0 3,678 24,239 52 0 24,291
Collateralized mortgage
obligations 7,624 9 (108) 7,525 8,066 0 (101) 7,965
Mortgage- backed securities 41,493 45 (464) 41,074 36,599 0 (103) 36,496
Equity securities 55,115 21,155 (6,250) 70,020 37,860 4,307 (250) 41,917
Other 18,850 0 (4) 18,846 16,897 0 (1) 16,896
- ------------ --------- --------- --------- -------- -------- --------- -------- --------
Total $771,835 $21,268 $(7,503) $785,600 $529,275 $ 4,429 $ (741) $532,963
- ------------ --------- --------- --------- -------- -------- --------- -------- --------
- ------------ ----------------------------------------
1994
- ------------ --------- --------- --------- --------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------ --------- --------- --------- --------
U. S. Treasury & other U.S.
Government Securities $192,994 $ 0 $ (4,509) $188,485
State and municipal securities 78,884 0 (1,676) 77,208
Collateralized mortgage
obligations 8,584 0 (672) 7,912
Mortgage- backed securities 34,555 0 (2,829) 31,726
Equity securities 13,056 0 (372) 12,684
Other 745 0 (1) 744
- ------------ -------- ----- -------- --------
Total $328,818 $ 0 $(10,059) $318,759
- ------------ -------- ----- -------- --------
52
Advanta Corp. and Subsidiaries
At December 31, 1996, investment securities with a book value of $2,916
were pledged at the Federal Reserve Bank. At December 31, 1995, investment
securities with a book value of $4,139 were pledged at the Federal Reserve Bank
and as collateral for derivatives transactions. At December 31, 1996, 1995 and
1994, investment securities with a book value of $6,395, $6,281, and $7,133,
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, 1996, $13,765 of net unrealized gains on securities
was included in investments available for sale. During 1996, the net change in
unrealized gains/losses on available for sale securities included as a separate
component of stockholders' equity was a decrease of $338.
Maturity of investments available for sale at December 31, 1996 was as
follows:
Amortized Market
Cost Value
.....................
Due in 1 year $592,720 $592,639
Due after 1 but within 5 years 54,293 53,734
Due after 5 but within 10 years 1,740 1,762
Due after 10 years 0 0
- -----------------------------------------------------------
Subtotal 648,753 648,135
Mortgage-backed CMO and MBS 49,117 48,599
Equity and other securities 73,965 88,866
- -----------------------------------------------------------
Total investments $771,835 $785,600
- -----------------------------------------------------------
During 1996, proceeds from sales of available for sale securities were
$1,114,000. Gross gains of $2,492 and losses of $110 were realized on these
sales. Of the gross gains, $2,448 relate to investments held by the Company's
venture capital unit. Proceeds during 1995 were $1,689,000. Gross gains of
$8,666 and losses of $320 were realized on these sales. Of the gross gains,
$8,610 related to an investment held by the Company's venture capital unit.
Proceeds during 1994 were $624,000. Gross gains of $118 and losses of $596 were
realized on these sales. The specific identification method was the basis used
to determine the amortized cost in computing realized gains and losses.
53
Advanta Corp. and Subsidiaries
NOTE 6. DEBT
Debt consisted of the following:
December 31,
............................
1996 1995
........... ...........
SENIOR DEBT
RediReserve certificates $ 4,952 $ 4,203
6 month senior notes 4,857 4,629
12 month senior notes 66,955 46,372
18 month senior notes (5.83%-6.35%) 7,855 6,534
24 month senior notes (5.87%-7.58%) 41,911 37,600
30 month senior notes (5 45%-7.14%) 13,599 16,730
48 month senior notes (5.60%-8.16%) 10,440 19,939
60 month senior notes (5.83%-10.08%) 48,108 55,604
5 1/8% notes due 1996 0 149,955
Medium-term notes,
fixed (6.00%-8.36%) 627,835 289,735
Medium-term notes, floating 253,000 215,000
Short-term bank notes (5.43%-6.07%) 309,349 24,999
Medium-term bank notes,
fixed (5.59%-7.18%) 530,086 297,737
Medium-term bank notes, floating 305,481 24,970
Other senior notes 9,639 8,961
- ------------------------------------------------------------ -----------
Total senior debt $ 2,234,067 $ 1,202,968
SUBORDINATED DEBT
Subordinated notes (5.45%-10.08%) $ 21,275 $ 26,523
7% subordinated bank notes due 2003 49,739 49,699
............................................................ ...........
Total subordinated debt $ 71,014 $ 76,222
............................................................ ...........
Total debt $ 2,305,081 $ 1,279,190
Less short-term debt & certificates $ (911,986) $ (691,313)
- ------------------------------------------------------------ -----------
Long-term debt $ 1,393,095 $ 587,877
============================================================ ===========
The Company's senior floating rate notes were priced based on a factor
of LIBOR. At December 31, 1996 the rates on these notes varied from 5.63% to
6.01%.
The annual maturities of long-term debt at December 31, 1996 for the
years ending December 31 are as follows: $469.4 million in 1998; $237.5 million
in 1999; $155.0 million in 2000; $446.4 million in 2001; and $84.8 million
thereafter. The average interest cost of the Company's debt during 1996, 1995
and 1994 was 6.39%, 6.92%, and 6.23%, respectively.
NOTE 7. MANDATORILY REDEEMABLE PREFERRED SECURITIES
On December 17, 1996, Advanta Capital Trust I, a newly formed statutory business
trust established by the Company (the "Trust"), issued in a private offering to
two institutional investors $100 million of Company-obligated mandatorily
redeemable preferred securities, representing preferred beneficial interests in
the assets of the Trust (the "Capital Securities"). The sole assets of the Trust
consist of $100 million of 8.99% junior subordinated debentures issued by the
Company due December 17, 2026 (the "Junior Subordinated Debentures"). The
Capital Securities will be subject to mandatory redemption under certain
circumstances, including at any time on or after December 17, 2006 (upon the
optional prepayment by the Company of the junior subordinated debentures) at an
amount per Capital Security equal to 104.495% of the principal amount declining
ratably on each December 17 thereafter to 100% on December 17, 2016, plus
accrued and unpaid distributions thereon. The Company has guaranteed the
obligations of the Trust. The Company used the proceeds from the sale for
general corporate purposes.
54
Advanta Corp. and Subsidiaries
NOTE 8. CAPITAL STOCK
The number of shares of capital stock was as follows:
Issued and Outstanding
December 31,
--------------------------
1996 1995
--------------------------
(In thousands)
Class A preferred-
$1,000 par value;
Authorized, 1,010 1 1
...............................................................
Class B preferred---
$.01 par value;
Authorized, 1,000,000 25 25
...............................................................
Class A voting common
stock-$.01 par value;
Authorized, 200,000,000 17,945 17,481
Class B non-voting
common stock
$.01 par value;
Authorized, 200,000,000 25,593 24,007
Less treasury stock:
Class B 1 0
- ---------------------------------------------------------------
Total common stock 43,537 41,488
===============================================================
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 1996 as
the Company paid dividends on its common stock. The redemption price of the
Class A Preferred Stock is equivalent to the par value. The Class B Preferred
Stock pays a 6 3/4% dividend per share per year (equal to $249.75 per share) and
must be paid prior to any dividend on the common stock.
NOTE 9. ISSUANCE OF PREFERRED STOCK
On August 21, 1995, in a public offering, the Company sold 2,500,000 depositary
shares each representing a one-hundredth interest in a share of Stock
Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series
of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class
B Preferred Stock, Series 1995 (SAILS). The SAILS (and thereby the related
depositary shares) are not redeemable by the Company before September 15, 1998.
The call price of each of the depositary shares will be $37.6244 declining
periodically to $37.00 at September 15, 1999 (the mandatory conversion date). On
September 15, 1999, unless either previously redeemed by the Company or
converted at the option of the holder, each share of the SAILS will
automatically convert into 100 shares of Class B Common Stock. Proceeds from the
offering, net of underwriting discount, were approximately $90 million. The
Company used the proceeds of the offering for general corporate purposes,
including financing the growth of its subsidiaries.
NOTE 10. INCOME TAXES
Income tax expense consisted of the following components:
Year Ended December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
Current:
Federal $78,037 $55,184 $54,246
State 5,346 4,943 4,948
- -------------------------------------------------------------
83,383 60,127 59,194
- -------------------------------------------------------------
Deferred:
Federal 5,800 14,316 (613)
State (79) 783 563
- -------------------------------------------------------------
5,721 15,099 (50)
- -------------------------------------------------------------
Total tax expense $89,104 $75,226 $59,144
- -------------------------------------------------------------
55
Advanta Corp. and Subsidiaries
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,
------------------------------------
1996 1995 1994
------------------------------------
Statutory federal income tax $92,740 $74,166 $57,822
State income taxes, net of
federal income tax benefit 3,423 3,722 3,582
Nontaxable investment
income (443) (984) (1,149)
Insurance income (4,492) 0 0
Tax credits (1,231) 0 0
Other (893) (1,678) (1,111)
- -------------------------------------------------------------------
Consolidated tax expense $89,104 $75,226 $59,144
===================================================================
56
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,
...............................
1996 1995
...............................
Deferred taxes:
Gross assets $112,861 $ 75,851
Gross liabilities (83,226) (59,445)
- --------------------------------------------------------------
Total deferred taxes $ 29,635 $ 16,406
- --------------------------------------------------------------
The Company concluded that a valuation allowance against the deferred
tax asset at December 31, 1996 and 1995 is not necessary. Realization of the
deferred tax asset is dependent on generating sufficient future taxable income.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
December 31,
- --------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------
SFAS 91 $(17,870) $(23,899)
Loan losses 26,851 20,197
Mortgage banking income 6,623 9,767
Securitization income (35,415) (35,546)
Leasing income 56,447 41,901
Other (7,001) 3,986
- --------------------------------------------------------------------
Net deferred tax assets $ 29,635 $ 16,406
- --------------------------------------------------------------------
NOTE 11. BENEFIT PLANS
The Company has adopted several management incentive plans designed to provide
incentives to participating employees to remain in the employ of the Company and
devote themselves to its success. Under these plans, eligible employees were
given the opportunity to elect to take portions of their anticipated or "target"
bonus payments for future years in the form of restricted shares of common stock
(with each plan covering three performance years). 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.
The following table summarizes the Company's incentive plans:
Plan
Performance Original Stock Shares Shares
Years Covered Price Issued Vested
- --------------------------------------------------------------------------------
AMIPWISE III 1996-1998 $17.00 796,042 0
AMIPWISE IV 1999-2001 $25.00 732,252 0
- --------------------------------------------------------------------------------
The weighted average fair value of shares issued on or after January 1,
1995 are: $35 for 77,517 AMIPWISE III shares and $26 for 450,321 AMIPWISE IV
shares issued in 1995, and $42 for both 277,219 AMIPWISE III shares and 281,931
AMIPWISE IV shares issued in 1996.
57
Advanta Corp. and Subsidiaries
At December 31, 1996, a total of 1,565,904 shares issued under these
and the predecessor plans to AMIPWISE III were subject to restrictions and were
included in the number of shares outstanding. At December 31, 1996 the Company
had two stock option plans and accounts for these plans under APB Opinion No.
25, under which no compensation expense has been recognized.
Had compensation cost for these plans been determined consistent with
SFAS 123, the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
1996 1995
......................................................................
Net Income As reported $175,657 $136,677
Pro forma 168,193 119,718
Earnings per share As reported $ 3.89 $ 3.20
Pro forma 3.73 2.81
- ----------------------------------------------------------------------
Because SFAS 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The Company's two stock option plans together authorize the grant to
employees and directors of options to purchase an aggregate of 10.2 million
shares of common stock. The Company presently intends only to issue options to
purchase Class B common stock. Options generally vest over a four-year period
and expire 10 years after the date of grant.
Shares available for future grant were approximately 3.4 million at
December 31, 1996, and 97 thousand at December 31, 1995. Transactions under the
plans for the three years ended December 31, 1996, were as follows:
1994 1995 1996
-----------------------------------------------------------------------------------------
(shares in thousands) Weighted Weighted Weighted
Number of average Number of average Number of average
Shares exercise price Shares exercise price Shares exercise price
..........................................................................................................................
Outstanding at beginning of year 3,039 $10 3,415 $14 4,381 $21
Granted 762 29 1,363 34 578 39
Exercised (313) 5 (300) 6 (699) 9
Terminated (73) 17 (97) 27 (151) 30
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,415 14 4,381 21 4,109 25
- --------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 2,145 2,015 2,138
Weighted average fair value of
options granted during the year N/A $19.34 $19.87
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
(shares in thousands) Weighted average Number
Number Outstanding remaining Weighted average exercisable Weighted average
Range of Exercise Prices at 12/31/96 contractual life exercise price at 12/31/96 exercise price
..........................................................................................................................
$ 1 to 10 555 3.0 years $ 3 555 $ 3
11 to 20 694 5.1 12 694 12
21 to 30 1,084 6.9 26 607 25
31 to 40 1,458 8.7 35 259 34
40 to 52 318 9.2 44 23 42
- --------------------------------------------------------------------------------------------------------------------------
$ 1 to 52 4,109 6.6 25 2,138 16
- --------------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants for 1995 and 1996: risk-free interest rates of 6.7
percent and 6.0 percent, respectively; expected dividend yields of 1 percent;
expected lives of 10 years; expected volatility of 41 percent.
The Company also has outstanding options to purchase 87 thousand 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. All of these shares were
issued prior to January 1, 1995 and were vested at December 31, 1996.
58
Advanta Corp. and Subsidiaries
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 1996, 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 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, 1996, 1995 and 1994, the Company contributions equaled 100% of the
first 5% of participating employees' compensation contributed to the plan. The
expense for this plan totaled $2,546, $2,027 and $1,565 in 1996, 1995, and 1994,
respectively. All shares purchased by the plan for the three years ended
December 31, 1996, 1995 and 1994 were acquired from the Company at the market
price on each purchase date or were purchased on the open market.
The Company offers an elective, nonqualified deferred compensation plan
to qualified executives and nonemployee directors, which allows them to defer a
portion of their cash compensation on a pretax basis. The plan contains
provisions related to minimum contribution levels and deferral periods with
respect to any individual's participation. The plan participant makes
irrevocable elections at the date of deferral as to deferral period and date of
distribution. Interest is credited to the participant's account at the rate of
125% of the 10 Year Rolling Average Interest Rate on 10-Year U.S. Treasury
Notes. Distribution from the plan may be either at retirement or at an earlier
date, and can be either in a lump sum or in installment payments. The Company
has purchased life insurance contracts with a face value of $53.4 million to
fund this plan.
NOTE 12. CREDIT CARD SALES
In June 1996, the Company, through its subsidiary AUS, sold certain credit card
customer relationships and the related receivables balance to a domestic bank.
The receivables associated with these relationships represented less than 2% of
the Company's managed credit card portfolio as of June 30, 1996. The Company
recorded a $33.8 million net gain related to this transaction.
In April 1994, the Company, through its subsidiary AUS, 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. In the second quarter of 1994, the
Company recorded an $18.4 million pretax gain on the sale related to the value
associated with the customer relationships. In addition, the Company deferred a
portion of the proceeds related to the excess spread of the receivables to be
generated over the remaining life of the securitization trust, which terminated
in the second quarter of 1995. These proceeds were recognized as securitization
income over the related period.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company leases office space in several states under leases accounted for as
operating leases. Total rent expense for all of the Company's locations for the
years ended December 31, 1996, 1995 and 1994 was $8.5 million, $4.9 million and
$5.4 million, respectively. The future minimum lease payments of all
non-cancelable operating leases are as follows:
Year Ended December 31,
- ----------------------------------------------------------------
1997 $ 8,598
................................................................
1998 7,299
................................................................
1999 5,296
................................................................
2000 4,666
................................................................
2001 3,572
- ----------------------------------------------------------------
Thereafter 13,044
- ----------------------------------------------------------------
59
Advanta Corp. and Subsidiaries
NOTE 14. OTHER BORROWINGS
The Company had a revolving credit facility of $1.0 billion and money market bid
lines of $265 million at December 31, 1996. There is a quarterly facility fee of
up to 35 basis points on the total amount of the revolving credit facility.
There is no facility fee on the money market bid lines as they are uncommitted
facilities. At December 31, 1996, the Company had borrowed $40 million on the
money market bid lines. Under the revolving credit facility, the Company is
subject to various loan covenants, including the maintenance of certain fixed
financial ratios and conditions, limitations on mergers and acquisitions, and
limitations on liens on property and other assets.
The composition of other borrowings was as follows:
December 31,
- ------------------------------------------------------------------------
1996 1995
........................................................................
Term fed funds $ 10,000 $ 443,000
Short-term debt 911,986 691,313
Other borrowings 147,003 81,814
- ------------------------------------------------------------------------
Total $1,068,989 $1,216,127
========================================================================
The following table displays information related to selected types of
short-term borrowings:
1996 1995
- ---------------------------------------------------------------------------------------
AMOUNT RATE Amount Rate
- ---------------------------------------------------------------------------------------
At year end:
Securities sold under repurchase
agreements $ 0 0.00% $ 0 0.00%
Term fed funds 10,000 5.42 443,000 5.83
- ---------------------------------------------------------------------------------------
Total $ 10,000 5.42% $443,000 5.83%
- ---------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase
agreements $ 149,791 5.31% $ 25,008 5.97%
Term fed funds and fed funds
purchased 100,793 5.71 199,166 6.10
- ---------------------------------------------------------------------------------------
Total $ 250,584 5.47% $224,174 6.09%
- ---------------------------------------------------------------------------------------
Maximum month-end balance
Securities sold under repurchase
agreements $ 1,027,695 $ 29,813
Term fed funds and fed funds
purchased 263,000 455,250
=======================================================================================
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.
60
Advanta Corp. and Subsidiaries
NOTE 15. SELECTED INCOME STATEMENT INFORMATION
NONINTEREST REVENUES
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Gain on sale of credit cards $ 33,820 $ 0 $ 18,352
Other noninterest revenues:
Credit card securitization
income 258,066 183,360 149,043
Credit card servicing income 176,567 117,369 68,960
Income from personal finance
activities 109,167 50,541 37,586
Credit card interchange
income 102,804 92,439 71,740
Business loan and lease
other revenues 61,622 41,050 21,551
Insurance revenues, net 38,175 30,146 12,734
Equity securities gains 6,522 15,386 0
Other 19,789 12,723 15,842
- --------------------------------------------------------------------------------
Total other noninterest
revenues $772,712 $543,014 $377,456
================================================================================
Total noninterest revenues $806,532 $543,014 $395,808
================================================================================
OPERATING EXPENSES
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Amortization of credit card
deferred origination costs, net $ 88,517 $ 72,258 $ 39,381
Other operating expenses:
Salaries and employee
benefits 182,666 116,681 88,681
External processing 42,814 28,407 22,618
Professional fees 40,247 14,937 10,985
Marketing 31,975 25,374 32,339
Postage 25,700 18,518 12,732
Credit card fraud losses 23,611 20,029 16,654
Equipment expense 22,752 12,751 9,293
Telephone expense 16,116 11,959 8,615
Occupancy expense 14,827 9,254 8,425
Credit and collection expense 13,784 9,039 7,604
Other 20,165 11,478 9,457
Total other operating expenses $434,657 $278,427 $227,403
================================================================================
Total operating expenses $523,174 $350,685 $266,784
================================================================================
61
Advanta Corp. and Subsidiaries
NOTE 16. SELECTED BALANCE SHEET INFORMATION
INTEREST-BEARING DEPOSITS
- ---------------------------------------------------------------
December 31,
- ---------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------
Amounts due from credit card trusts(A) $333,923 $262,392
Amounts due from mortgage trusts(A) 96,460 58,105
Amounts due from business loan and
leasing trusts(A) 8,099 7,479
Other interest-bearing deposits 108,301 82,733
===============================================================
Total interest-bearing deposits $546,783 $410,709
===============================================================
(A) Represents initial deposits and subsequent excess collections up to the
required amount on each of the credit card, mortgage and business loan and lease
securitizations. Also includes amounts to be distributed to investors.
OTHER ASSETS
- ------------------------------------------------------------------------
December 31,
........................................................................
1996 1995
........................................................................
Excess mortgage servicing rights $149,418 $ 96,194
Prepaid assets 117,934 69,170
Accrued interest receivable 101,021 67,681
Deferred costs 42,252 20,670
Current and deferred federal income
taxes 28,169 15,823
Investments in operating leases 17,276 11,928
Due from trustees mortgage 14,298 8,095
Excess servicing - leasing 14,205 11,813
Goodwill 5,795 4,983
Due from trustees - business loans
and leasing 5,326 2,941
Other real estate(A) 2,513 3,333
Other 128,076 62,346
========================================================================
Total other assets $626,283 $374,977
========================================================================
(A) Carried at the lower of cost or fair market value.
At December 31, 1996 and 1995, the Company had $399.4 million and
$190.8 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,
.........................................................................
1996 1995
.........................................................................
Deferred fees and other reserves $ 86,877 $ 46,058
Accounts payable and accrued expenses 59,432 32,831
Accrued interest payable 55,320 29,012
Current and deferred state income taxes 10,300 9,026
Other 97,852 23,763
=========================================================================
Total other liabilities $309,781 $140,690
=========================================================================
62
Advanta Corp. and Subsidiaries
NOTE 17. CASH, DIVIDEND AND LOAN RESTRICTIONS
In the normal course of business, the Company and its subsidiaries enter into
agreements, or are subject to regulatory requirements, that result in cash, debt
and dividend restrictions.
The Federal Reserve Act imposes various legal limitations on the extent
to which banks that are members of the Federal Reserve System can finance or
otherwise supply funds to certain of their affiliates. In particular, AUS and
Advanta National are subject to certain restrictions on any extensions of credit
to, or other covered transactions, such as certain purchases of assets, with the
Company or its affiliates. Such restrictions prevent both banks from lending to
the Company and its affiliates unless such extensions of credit are secured by
U.S. Government obligations or other specified collateral. Further, such secured
extensions of credit by AUS and Advanta National are limited in amount: (a) as
to the Company or any such affiliate, to 10 percent of each bank's capital and
surplus, and (b) as to the Company and all such affiliates in the aggregate, to
20 percent of each bank's capital and surplus.
Under certain grandfathering provisions of the Competitive Equality
Banking Act of 1987, the Company is not required to register as a bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so
long as the Company and AUS continue to comply with certain restrictions on
their activities. With respect to AUS, these restrictions include limiting the
scope of its activities to those in which it was engaged prior to March 5, 1987.
Since AUS 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. Advanta National, as a credit
card bank, must also refrain from making commercial loans, which would include
any loans to the Company or any of its subsidiaries. AUS and Advanta National
are also subject to various legal limitations on the amount of dividends that
can be paid to their parent, Advanta Corp. Each bank is eligible to declare a
dividend provided that it is not greater than the current year's net profits
plus net profits of the preceding two years, as defined. During 1996, AUS paid
$107 million of dividends to Advanta Corp. while $63 million of dividends were
paid during 1995. At December 31, 1996, total stockholders' equity of the
Company's banking and insurance affiliates approximated $434.2 million, of which
$35.0 million was available for payment of dividends without prior approval by
the applicable regulatory authority.
NOTE 18. CAPITAL RATIOS
AUS and Advanta National are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the institutions' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
each institution must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The institutions' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require each institution to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that as of December
31, 1996, each institution meets all capital adequacy requirements to which it
is subject.
As of December 31, 1996, the most recent notifications from the Office
of the Comptroller of the Currency (the "OCC") categorized each institution as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized each institution must maintain minimum total
risk-based and Tier I risk-based capital and Tier I leverage ratios as set forth
in the following table. There are no conditions or events since those
notifications that management believes have changed either institution's
category.
63
Advanta Corp. and Subsidiaries
Actual
- -----------------------------------------------------------------
Amount Ratio
- -----------------------------------------------------------------
As of December 31, 1995
Total Capital (to Risk Weighted
Assets)
AUS $193,718 11.56%
ANB 113,066 12.28
Tier I Capital (to Risk Weighted
Assets)
AUS 122,354 7.30
ANB 74,066 8.04
Tier I Capital (to Average Assets)
AUS 122,354 6.79
ANB 74,066 7.87
As of December 31, 1996
Total Capital (to Risk Weighted
Assets)
AUS $179,649 15.84%
ANB 241,534 17.20
Tier I Capital (to Risk Weighted
Assets)
AUS 115,237 10.15
ANB 156,287 11.13
Tier I Capital (to Average Assets)
AUS 115,237 7.35
ANB 156,287 7.15
- -----------------------------------------------------------------
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
Total Capital (to Risk Weighted
Assets)
AUS $134,086 Greater Than or Equal To 8.0 % $167,067 Greater Than or Equal To 10.0 %
ANB 73,665 Greater Than or Equal To 8.0 92,082 Greater Than or Equal To 10.0
Tier I Capital (to Risk Weighted
Assets)
AUS 67,043 Greater Than or Equal To 4.0 100,564 Greater Than or Equal To 6.0
ANB 73,665 Greater Than or Equal To 8.0(1) 73,665 Greater Than or Equal To 8.0(1)
Tier I Capital (to Average Assets)
AUS 50,282 Greater Than or Equal To 3.0 83,804 Greater Than or Equal To 5.0
ANB 27,625 Greater Than or Equal To 3.0 46,041 Greater Than or Equal To 5.0
As of December 31, 1996
Total Capital (to Risk Weighted
Assets)
AUS $ 90,820 Greater Than or Equal To 8.0 % $113,525 Greater Than or Equal To 10.0 %
ANB 112,359 Greater Than or Equal To 8.0 140,449 Greater Than or Equal To 10.0
Tier I Capital (to Risk Weighted
Assets)
AUS 45,410 Greater Than or Equal To 4.0 68,115 Greater Than or Equal To 6.0
ANB 112,359 Greater Than 8.0(1) 112,359 Greater Than of Equal To 8.0(1)
Tier I Capital (to Average Assets)
AUS 34,058 Greater Than or Equal To 3.0 56,763 Greater Than or Equal To 5.0
ANB 42,135 Greater Than or Equal To 3.0 70,225 Greater Than or Equal To 5.0
- ---------------------------------------------------------------------------------------------------------------------------
(1) Supplementary agreement with the OCC requires ANB to maintain a Tier I
capital ratio of at least 8% during the first three years of operation
(until February 1998) as well as a minimum Tier I capital level of $50
million.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
1996 1995
-----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------
Financial assets:
Cash $ 165,875 $ 165,875 $ 45,714 $ 45,714
Federal funds sold 338,926 338,926 146,375 146,375
Interest-bearing deposits 546,783 546,783 410,709 410,709
Investments available for sale 785,600 785,600 532,963 532,963
Loans, net of reserve for credit losses 2,613,003 2,629,797 2,779,249 2,846,166
Amounts due from credit card securitizations 399,359 399,359 190,819 236,483
Excess mortgage servicing rights 149,418 155,266 96,194 105,024
Financial liabilities:
Demand and savings deposits $ 358,429 $ 358,469 $ 369,224 $ 369,224
Time deposits and debt 3,806,710 3,813,634 2,816,567 2,830,590
Other borrowings 157,003 156,984 524,814 525,246
Off-balance sheet financial instruments Asset/(Liability):
Interest rate swaps and swaptions $ 0 $ 9,788 $ 0 $ 3,198
Interest rate options:
Caps purchased 273 1,766 1,228 1,211
Caps written (272) (1,845) (4,330) (1,703)
Corridors/collars 831 (748) 66 (1,033)
Forward contracts 0 573 0 (1,294)
Intangibles:
Credit card customer relationships
on- and off-balance sheet $ 0 $ 2,460,700 $ 0 $ 1,841,900
-----------------------------------------------------------
64
Advanta Corp. and Subsidiaries
The above values do not necessarily reflect the premium or discount
that could result from offering for sale at one time the Company's entire
holdings of a particular instrument. In addition, these values, derived from the
methods and assumptions described below, do not consider the potential income
taxes or other expenses that would be incurred on an actual sale of an asset or
settlement of a liability. With respect to the fair value of liabilities, the
above table is prepared on the basis that the amounts necessary to discharge
such liabilities represent fair value. The Company's off-balance sheet financial
instruments relate to managing the interest rate sensitivity 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.
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 consumer credit card receivables, business card receivables and personal
finance 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 these 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 any benefit that may result 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.
65
Advanta Corp. and Subsidiaries
OTHER BORROWINGS
The other borrowings are all at variable interest rates and therefore the
carrying value approximates a reasonable estimate of the fair value.
INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS
The fair value of interest rate swaps, options and forward contracts (used for
managing interest rate and foreign currency risks) is the estimated amount that
the Company would pay or receive to terminate the agreement at the reporting
date, taking into account current interest and foreign exchange rates and the
current creditworthiness of the counterparty.
CREDIT CARD CUSTOMER RELATIONSHIPS (BOTH ON- AND OFF-BALANCE SHEET)
The fair value of the credit card relationships, which are not financial
instruments, is estimated using a credit card valuation model which considers
the value of the existing receivables together with the value of new receivables
and the associated fees generated from existing cardholders over the remaining
life of the portfolio.
COMMITMENTS TO EXTEND CREDIT
Although the Company had $28.2 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, 1996, 1995 and 1994:
1996 1995 1994
--------- --------- ---------
Net income $ 175,657 $ 136,677 $ 106,063
less: Preferred 'A' dividends (141) (141) (141)
--------- --------- ---------
Net income available to
common shares $ 175,516 $ 136,536 $ 105,922
Average common stock
outstanding 40,795 39,723 38,877
Common stock equivalents:
Restricted stock and options 2,210 2,206 2,169
Mandatorily convertible
Preferred 'B' stock
(see Note 9) 2,068 741 0
--------- --------- ---------
Weighted average shares
outstanding 45,073 42,670 41,046
========= ========= =========
Earnings per common share $ 3.89 $ 3.20 $ 2.58
========= ========= =========
NOTE 21. DERIVATIVE FINANCIAL INSTRUMENTS
In managing its interest rate sensitivity and foreign currency positions, the
Company may use derivative financial instruments. These instruments are used for
the express purpose of managing its interest rate and foreign currency exposures
and are not used for any trading or speculative activities. As of December 31,
1996 and 1995, all of the Company's derivatives were designated as hedges or
synthetic alterations and were accounted for as such.
66
Advanta Corp. and Subsidiaries
The following table summarizes by notional amounts the Company's
derivatives instruments as of December 31, 1996 and 1995:
1996 1995
---------- ----------
Interest rate swaps $1,560,444 $ 867,835
Swaptions 153,000 0
Interest rate options:
Caps written 1,413,222 1,360,000
Caps purchased 365,000 270,000
Corridors/collars 500,000 575,000
Forward contracts 386,680 190,652
========== ==========
Total $4,378,346 $3,263,487
========== ==========
The notional amounts of derivatives do not represent amounts exchanged
by the counterparties and, thus, are not a measure of the Company's exposure
through its use of derivatives. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the derivatives
contracts.
Credit risk associated with derivatives arises from the potential for a
counterparty to default on its obligations. The Company attempts to limit credit
risk by only transacting with highly creditworthy counterparties and requiring
master netting and collateral agreements for all interest rate swap and interest
rate option contracts. All derivative counterparties are associated with
organizations having securities rated as investment grade by independent rating
agencies. The list of eligible counterparties, setting of counterparty limits,
and monitoring of credit exposure is controlled by the Investment Committee, a
management committee. The Company's credit exposure to derivatives, with the
exception of caps written, is represented by contracts with a positive fair
value without giving consideration to the value of any collateral exchanged --
see Note 19. For caps written, credit exposure does not exist since the
counterparty has performed its obligation to pay the Company a premium payment.
Interest rate swap agreements generally involve the exchange of fixed
and floating rate interest payments without the exchange of the underlying
notional amount on which the interest payments are calculated. Based on its
interest rate sensitivity analyses, the Company enters into interest rate swaps
to more effectively manage the impact of fluctuating interest rates on its net
interest income and noninterest revenues. The Company has used interest rate
swaps to synthetically alter the cash flows on certain deposit, debt, and
off-balance sheet credit card and leasing securitizations.
As of December 31, 1996, the Company used interest rate swaps,
including swaptions, for the following purposes: $976.3 million to effectively
convert fixed rate debt to a LIBOR based variable rate, and $737.1 million to
effectively convert certain off-balance sheet variable pass-through rate home
equity and leasing securitizations to a fixed rate. As of December 31, 1995, the
Company used $250.0 million to effectively convert certain variable rate
deposits to a fixed rate, $203.8 million to effectively convert fixed rate debt
to a LIBOR based variable rate, and $414.0 million to effectively convert
certain off-balance sheet variable pass-through rate credit card and leasing
securitizations to a fixed rate. In 1995, as part of its asset/liability risk
management process, the Company elected to terminate $285.9 million of interest
rate swaps which were effectively converting certain fixed rate debt to a
variable rate based on LIBOR. Gains or losses resulting from these interest rate
swap terminations are deferred and amortized to interest expense over the
remaining life of the underlying fixed rate debt.
67
Advanta Corp. and Subsidiaries
The following table summarizes by notional amounts the Company's
interest rate swap and swaption activity by major category for the periods
presented:
Receive Pay
Fixed Rate Fixed Rate Total
- ---------------------------------------------------------------------
Balance at 1/1/94 $ 150,000 $ 500,000 $ 650,000
Additions 309,735 0 309,735
Maturities 0 (500,000) (500,000)
- ---------------------------------------------------------------------
Balance at 12/31/94 459,735 0 459,735
Additions 30,000 625,962 655,962
Net accretion 0 38,038 38,038
Terminations (285,900) 0 (285,900)
- ---------------------------------------------------------------------
Balance at 12/31/95 203,835 664,000 867,835
Additions 635,000 594,804 1,229,804
Net accretion 0 41,805 41,805
Maturities (26,000) (400,000) (426,000)
---------------------------------------
Balance at 12/31/96 $ 812,835 $ 900,609 $ 1,713,444
=====================================================================
Interest rate options are contracts that grant the purchaser, for a
premium payment, the right to either purchase or sell a financial instrument at
a future date for a specified price from the writer of the option. Interest rate
caps and floors are option-like contracts that require the seller (writer) to
pay the purchaser at specified future dates the amount by which a specified
market interest rate exceeds the cap rate or falls below the floor rate,
multiplied against a notional amount. A corridor is also an option-like contract
which is the simultaneous purchase and sale of separate interest rate caps where
each cap is referenced to a different interest rate index. A collar is an
option-like contract which is the simultaneous purchase of an interest rate cap
and the sale of an interest rate floor using the same reference interest rate
index.
As part of managing its balance sheet and liquidity position, the
Company periodically securitizes and sells credit cards, business loans and
leases. For credit enhancement purposes, certain variable pass-through rate
credit card and business loan and lease securitizations were issued with
embedded or purchased interest rate caps. These rate caps, however, were not
needed to satisfy asset/liability management strategies. In order to achieve its
desired interest rate sensitivity structure and further reduce the effective
pass-through rate of the securitization, the Company has synthetically altered
the interest rate structure on certain off-balance sheet credit card, business
loan 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 with third parties 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, 1996, unamortized premiums for caps written and
purchased amounted to $272 thousand and $273 thousand, respectively. The
weighted average maturities for caps written and purchased were 2.7 years and
4.3 years, respectively. As of December 31, 1995, unamortized premiums for caps
written and purchased amounted to $4.3 million and $1.2 million, respectively.
The weighted average maturities for caps written and purchased were 2.9 years
and 2.8 years, respectively.
When the Company periodically securitizes and sells credit card
receivables, the receivables sold to the securitization trust may carry rates
which are indexed to the prime rate, whereas the securitization certificates
issued from the trust may be priced at a spread over LIBOR. The Company is
exposed to interest rate risk to the extent that these two rate indices react
differently to changes in market interest rates. The Company may choose to hedge
its excess servicing revenues from the risk of spread compression between the
prime rate and LIBOR by entering into corridor transactions which effectively
fix a prime/LIBOR spread. In addition, variable rate receivables sold to a
variable pass-through rate securitization trust may contain introductory fixed
rates which expose the Company to interest rate risk during the receivables'
introductory period. The Company may choose to hedge the risk of interest rate
spread compression by entering into collar transactions which effectively lock
in a minimum interest rate spread in a changing interest rate environment.
68
Advanta Corp. and Subsidiaries
Premiums paid or received for entering into corridor and collar
transactions are included in other assets or other liabilities and are amortized
to noninterest revenues over the life of the contract. Any obligations which may
arise under these contracts are recorded to noninterest revenues on an accrual
basis. As of December 31, 1996 and 1995, unamortized premiums received for
corridor and collar transactions amounted to $831 thousand and $66 thousand,
respectively. As of December 31, 1996 and 1995, the weighted average maturities
of corridor and collar transactions were 2.2 years and 8 months, respectively.
Forward contracts are commitments to either purchase or sell a
financial instrument at a future date for a specified price and may be settled
in cash or through delivery of the underlying financial instrument. The Company
regularly securitizes and sells fixed rate mortgage, business loan and lease
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
gains of $3.4 million and realized losses of $1.8 million were deferred as of
December 31, 1996 and 1995, respectively.
In addition, the Company periodically issues fixed pass-through rate
credit card securitizations, fixed rate bank notes and capital securities. The
Company is exposed to interest rate risk to the extent that rates rise before
the issuance of the anticipated fixed rate obligations. The Company may choose
to hedge the interest costs associated with anticipated obligations by selling
securities for forward settlement. Gains or losses resulting from these hedges
are deferred and amortized to interest expense over the life of the underlying
obligation. The maximum and average terms of these types of anticipatory hedges
are two months. As of December 31, 1996 and 1995, unamortized losses on hedges
of anticipated fixed interest rate obligations amounted to $1.7 million and $2.2
million, respectively and the remaining weighted average amortization period was
3.3 years and 4.3 years, respectively.
The Company also has foreign currency risk to the extent that its net
investment in the joint venture with the Royal Bank of Scotland is not funded
with local currency. The Company may choose to hedge its foreign exchange risk
by selling foreign currency for forward settlement. The maximum and average
terms of hedges of foreign currency exposure is thirty days. Losses from foreign
currency forward contracts are included in stockholders' equity and amounted to
$2.3 million and $4 thousand as of December 31, 1996 and December 31, 1995,
respectively.
69
Advanta Corp. and Subsidiaries
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 ---------------------------------------------------------------------------------------------------
12/31/96 1997 1998 1999 2000 2001 2002 2003 2005 2006
---------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive
Variable:
Notional Value $ 900,609 $ 10,500 $ 80,000 $ 73,000 $ 46,553 $305,410 $22,000 $ 83,084 $280,062 $ 0
Weighted Average
Pay Rate 5.97% 5.88% 5.44% 5.35% 5.72% 6.03% 5.97% 6.46% 6.12% 0.00%
Weighted Average
Receive Rate 5.58% 5.50% 5.55% 5.55% 5.83% 5.67% 5.48% 5.43% 5.38% 0.00%
Receive Fixed/Pay
Variable:
Notional Value $ 812,835 $136,835 $114,000 $ 91,000 $ 0 $406,000 $ 0 $ 50,000 $ 0 $15,000
Weighted Average 6.63% 6.74% 6.44% 6.57% 0.00% 6.62% 0.00% 6.90% 0.00% 6.71%
Receive Rate
Weighted Average
Pay Rate 5.28% 5.49% 5.52% 5.54% 0.00% 5.00% 0.00% 5.50% 0.00% 5.56%
Total Notional
Value $1,713,444 $147,335 $194,000 $164,000 $ 46,553 $711,410 $22,000 $133,084 $280,062 $15,000
Total Weighted
Average
Rates on Swaps:
Pay Rate 5.64% 5.52% 5.49% 5.45% 5.72% 5.45% 5.97% 6.10% 6.12% 5.56%
Receive Rate 6.08% 6.65% 6.07% 6.12% 5.83% 6.21% 5.48% 5.98% 5.38% 6.71%
---------- -------- -------- -------- -------- -------- ------- -------- -------- -------
70
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Philadelphia, PA
January 21, 1997
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: (l) 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/ ALEX W. HART /s/ DAVID D. WESSELINK /s/ JOHN J. CALAMARI
- ------------------- ---------------------- --------------------
Alex W. Hart David D. Wesselink John J. Calamari
Chief Executive Senior Vice President Vice President,
Officer and Chief Financial Officer Finance
71
Advanta Corp. and Subsidiaries
SUPPLEMENTAL SCHEDULES
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(in thousands) December 31,
- ---------------------------------------------------------------------
1996
- ---------------------------------------------------------------------
Maturity:
3 months or less $260,027
Over 3 months through 6 months 178,174
Over 6 months through 12 months 259,359
Over 12 months 150,102
- ---------------------------------------------------------------------
Total $847,662
- ---------------------------------------------------------------------
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market tier of the Nasdaq
Stock Market under the symbols ADVNB (Class B non-voting common stock and ADVNA
(Class A voting common stock).
Following are the high, low and closing sale prices and cash dividends declared
for the last two years as they apply to each class of stock:
Cash
Dividends
Quarter Ended: High Low Close Declared
- ---------------------------------------------------------------------------------
Class B:
- ---------------------------------------------------------------------------------
March 1995 $ 32.25 $ 24.50 $ 31.25 $ .08
June 1995 38.75 30.75 37.75 .08
September 1995 42.50 36.00 42.50 .08
December 1995 45.00 35.13 36.38 .108
March 1996 49.25 33.75 47.50 .108
June 1996 52.50 43.50 45.25 .108
September 1996 48.25 39.75 42.75 .108
December 1996 48.50 38.25 40.88 .132
- ---------------------------------------------------------------------------------
Class A:
- ---------------------------------------------------------------------------------
March 1995 $ 34.75 $ 25.50 $ 33.50 $ .067
June 1995 42.50 33.00 41.69 .067
September 1995 46.25 39.50 45.00 .067
December 1995 48.88 37.50 38.25 .09
March 1996 53.50 34.75 52.00 .09
June 1996 58.25 46.50 51.00 .09
September 1996 53.00 41.00 46.00 .09
December 1996 50.00 40.00 42.75 .11
- ---------------------------------------------------------------------------------
At December 31, 1996, the Company had approximately 1,050 and 660
holders of record Class B and Class A common stock, respectively.
72
Advanta Corp. and Subsidiaries
QUARTERLY DATA
(Unaudited)
(In thousands, except per share data) 1996
------------------------------------------------------
December 31, September 30, June 30, March 31,
------------------------------------------------------
Interest income $ 90,754 $ 101,118 $ 83,447 $ 72,646
Interest expense 68,736 77,697 67,332 55,935
------------------------------------------------------
Net interest income 22,018 23,421 16,115 16,711
Provision for credit losses 29,899 24,230 27,651 15,082
Net interest income after provision for credit losses (7,881) (809) (11,536) 1,629
------------------------------------------------------
Noninterest revenues:
Gain on sale of credit cards 0 0 33,820 0
Other noninterest revenues 218,832 209,338 173,513 171,029
------------------------------------------------------
Total noninterest revenues 218,832 209,338 207,333 171,029
Operating expenses 143,925 141,309 127,445 110,495
------------------------------------------------------
Income before income taxes 67,026 67,220 68,352 62,163
------------------------------------------------------
Net income $ 45,151 $ 44,356 $ 45,120 $ 41,030
------------------------------------------------------
Earnings per common share $ 1.00 $ 0.98 $ 1.00 $ 0.91
------------------------------------------------------
Weighted average common shares outstanding 45,245 45,181 45,239 44,875
------------------------------------------------------
1995
------------------------------------------------------
December 31, September 30, June 30, March 31,
------------------------------------------------------
Interest income $ 74,487 $ 56,482 $ 48,557 $ 59,406
Interest expense 50,829 41,522 35,571 38,110
------------------------------------------------------
Net interest income 23,658 14,960 12,986 21,296
Provision for credit losses 25,215 10,603 8,583 8,925
------------------------------------------------------
Net interest income after provision for credit losses (1,557) 4,357 4,403 12,371
Noninterest revenues 161,721 136,221 130,849 114,223
Operating expenses 102,377 86,296 83,871 78,141
------------------------------------------------------
Income before income taxes 57,787 54,282 51,381 48,453
------------------------------------------------------
Net income $ 37,580 $ 34,914 $ 33,400 $ 30,783
------------------------------------------------------
Earnings per common share $ 0.85 $ 0.81 $ 0.80 $ 0.74
------------------------------------------------------
Weighted average common shares outstanding 44,349 43,133 41,772 41,438
------------------------------------------------------
73
Advanta Corp. and Subsidiaries
SUPPLEMENTAL SCHEDULES
ALLOCATION OF RESERVE FOR CREDIT LOSSES
December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
----------------------------------------------------------------------------------
Credit cards $76,084 85% $36,889 69% $27,486 66% $25,859 83% $35,743 89%
Personal finance
loans(1) 8,785 10 3,360 6 5,164 12 2,706 9 2,926 7
Business loans
and leases(2) 4,241 5 977 2 1,076 3 1,826 6 1,442 4
Other 74 -- 12,268 23 7,891 19 836 2 117 --
------- --- ------- --- ------- --- ------- --- ------- ---
Total $89,184 100% $53,494 100% $41,617 100% $31,227 100% $40,228 100%
==================================================================================
COMPOSITION OF GROSS RECEIVABLES
($ in thousands) December 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
-----------------------------------------------------------------------------------------------
Credit cards $2,045,219 77% $2,338,280 85% $1,730,176 88% $1,131,367 89% $737,485 74%
Personal
finance 376,260 14 321,711 12 142,874 7 91,340 7 212,273 21
loans(1)
Business loans
and leases(2) 214,327 8 93,660 3 86,157 5 51,008 4 46,712 5
Other loans 20,835 1 9,276 -- 5,237 -- 3,590 -- 1,774 --
-----------------------------------------------------------------------------------------------
Total $2,656,641 100% $2,762,927 100% $1,964,444 100% $1,277,305 100% $998,244 100%
===============================================================================================
(1) Includes mortgage, home equity and auto loans beginning in 1996.
(2) Includes leases and business cards beginning in 1996.
YIELD AND MATURITY OF INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1996
($ in thousands) Maturing
-------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
-------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------------
U.S. Treasury and other
U.S. Government securities $592,153 5.60% $52,304 6.06% $ 0 0.00% $ 0 0.00%
State and municipal
securities(1) 486 6.06 1,431 7.11 1,761 7.80 0 0.00
Other(2) 1,030 2.96 2,871 6.84 7,738 7.04 38,312 7.00
-------------------------------------------------------------------------------------
Total $593,669 5.60% $56,606 6.13% $9,499 7.18% $38,312 7.00%
=====================================================================================
(1) Yield computed on a taxable equivalent basis using a statutory rate of 35%.
(2) Equity investments and other securities without a stated maturity are
excluded from this table.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
74
Advanta Corp. and Subsidiaries
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" are hereby
incorporated by reference, as is the text in Part I of this Report under the
caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive Compensation,"
"Compensation Committee Report on Executive Compensation" and "Election of
Directors--Committees, Meetings and Compensation of the Board of
Directors", "--Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "--Other Matters" are hereby incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The text of the Proxy Statement under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" are hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the Proxy Statement under the captions "Election of
Directors--Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" and "--Other Matters" are hereby incorporated herein by
reference.
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, 1996 and 1995.
2. Consolidated Income Statements for each of the three years in the
period ended December 31, 1996.
3. Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended December 31, 1996.
4. Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996.
5. Notes to Consolidated Financial Statements.
(a)(2) Schedules
1. Schedule I--Condensed Financial Information of Registrant.
2. Schedule II--Valuation and Qualifying Accounts.
3. Report of Independent Public Accountants on Supplemental Schedules.
Other statements and schedules are not being presented either because
they are not required or the information required by such statements
and schedules is presented elsewhere in the financial statements.
(a)(3) Exhibits
3-a Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File No. 33-53475),
filed June 10, 1994) , as amended by the Certificate of Designations,
Preferences, Rights and Limitations of the Registrant's 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation
Income Linked Securities (SAILS)) (incorporated by reference to Exhibit
4.3 to the Registrant's Current Report on Form 8-K dated August 15,
1995, filed the same date).
3-b By-laws of the Registrant, as amended (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K for the year
dated March 17, 1997).
75
Advanta Corp. and Subsidiaries
4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon
Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including
Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of Class B
Common Stock Certificate (incorporated by reference to Exhibit 1 of the
Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's
Form 8-A, respectively, both dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the Registrant
and The Chase Manhattan Bank (National Association), as Trustee
(incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-3 (No. 33-50883), filed November 2,
1993).
4-d Specimen of 6 3/4% Convertible Class B Preferred Stock, Series 1995
(Stock Appreciation Income Linked Securities (SAILS)) Certificate
(incorporated by reference to Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated August 15, 1995, filed the same date).
4-e Deposit Agreement, dated as of August 15, 1995, among Advanta Corp. and
Mellon Securities Trust Company and the Holders from Time to Time of
the Depositary Receipts Described Therein in Respect of the 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation
Income Linked Securities (SAILS)) (with form of Depositary Receipt as
an exhibit thereto) (incorporated by reference to Exhibit 4.10 to the
Company's Current Report on Form 8-K dated August 15, 1995, filed the
same date).
4-f Senior Trust Indenture, dated as of October 23, 1995, between the
Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference
to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3
(File No. 33-62601), filed September 13, 1995).
4-g Indenture dated as of December 17, 1996 between Advanta Corp. and The
Chase Manhattan Bank, as trustee relating to the Junior Subordinated
Debentures (filed herewith).
4-h Declaration of Trust dated as of December 5, 1996 of Advanta Capital
Trust I (filed herewith).
4-i Amended and Restated Declaration of Trust dated as of December 17, 1996
for Advanta Capital Trust I (filed herewith).
4-j Registration Rights Agreement dated as of December 11, 1996 between
Advanta Corp. and the Initial Purchasers of the Advanta Capital Trust
I Capital Securities (filed herewith).
4-k Series A Capital Securities Guarantee Agreement dated as of December
17, 1996 (filed herewith).
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by reference
to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1989).+
10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan (incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).+
10-c Advanta Management Incentive Plan, as amended (filed herewith).+
10-d* Application for membership in VISA(R) U.S.A. Inc. and Membership
Agreement executed by Colonial National Bank USA on March 25, 1983.
10-e* Application for membership in MasterCard(R) International, Inc. and
Card Member License Agreement executed by Colonial National Bank USA on
March 25, 1983.
10-f 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-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).
76
Advanta Corp. and Subsidiaries
10-h 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-i Advanta Corp. Executive Deferral Plan (incorporated by reference to the
Exhibit 10-j to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995), as amended by Amendment No. 2 thereto
(filed herewith).+
10-j Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by
reference to Exhibit 10-K to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995), as amended (Amendment
filed herewith).+
10-k 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-l Amended and Restated Master Pooling and Servicing Agreement between
Advanta National Bank USA and The Chase Manhattan Bank, formerly
Chemical Bank, as Trustee, dated as of April 1, 1992 (incorporated by
reference to Exhibit 4.1 to Advanta National's Registration Statement
on Form S-1 (No. 33-49602), filed with Amendment No. 1 thereto on
August 19, 1992).
10-m Advanta Management Incentive Plan With Stock Election III, as amended
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.+
10-n Life Insurance Benefit for Certain Key Executives and Directors (filed
herewith).+
10-o Revolving Credit and Competitive Loan Agreement, dated as of July 26,
1996, by and among Advanta Corp., Advanta National Bank and Advanta
National Bank USA (the "Borrowers"), The Chase Manhattan Bank, as Agent
for the Banks (as defined in the Agreement), Nationsbanc Capital
Markets, Inc., as syndication agent and PNC Bank, National Association,
as documentation agent (incorporated by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
10-p Advanta Management Incentive Plan With Stock Election IV, as amended
(incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
10-q Amended and Restated Agreement of Limited Partnership of Advanta
Partners LP, dated as of October 1, 1996 (filed herewith).
10-r Pooling and Servicing Agreement between Advanta 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 Advanta
National's Registration Statement on Form S-3 (No. 33-79986), filed
June 8, 1994)
10-s Agreement dated as of January 15, 1996 between the Registrant and
William A. Rosoff (incorporated by reference to Exhibit 10-u to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995).+
10-t Agreement dated September 5, 1996 between the Registrant and William J.
Razzouk (file herewith).+
11 Inapplicable.
12 Inapplicable.
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21 Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
77
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.
78
Advanta Corp. and Subsidiaries
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the Company on October 17,
1996 regarding consolidated earnings of the Company and its
subsidiaries for the fiscal quarter ended September 30, 1996.
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 Company on January 22,
1997 regarding consolidated earnings for the Company and its
subsidiaries for the fiscal quarter and fiscal year ended
December 31, 1996. Summary earnings and balance sheet
information as of that date were filed with such report.
3. A Report on Form 8-K was filed by the Registrant on March 17,
1997 reporting on certain announcements made by the Company
that day, the adoption of a shareholder rights plan and
amendments to the Company's By-laws. Summary estimated
earnings and financial information for the fiscal quarter
ending March 31, 1997 and the fiscal year ending December 31,
1997 were filed with such report.
79
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 26, 1997
By: /s/ Alex W. Hart
----------------------------------
Alex W. Hart,
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does
hereby constitute and appoint Dennis Alter, Alex W. Hart, William A. Rosoff,
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, 1996 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 26th day of March, 1997.
Name Title
---- -----
/s/ Dennis Alter Chairman of the Board
- -------------------------------
Dennis Alter
/s/ Alex W. Hart Chief Executive Officer and Director
- -------------------------------
Alex W. Hart
/s/ William A. Rosoff Vice Chairman and Director
- -------------------------------
William A. Rosoff
/s/ David D. Wesselink Senior Vice President and Chief Financial
- ------------------------------- Officer
David D. Wesselink
/s/ John J. Calamari Vice President, Finance and Chief
- ------------------------------- Accounting Officer
John J. Calamari
80
Advanta Corp. and Subsidiaries
Name Title
---- -----
/s/ Arthur P. Bellis Director
- ----------------------------
Arthur P. Bellis
/s/ Max Botel Director
- ----------------------------
Max Botel
/s/ Richard J. Braemer Director
- ----------------------------
Richard J. Braemer
/s/ William C. Dunkelberg Director
- ----------------------------
William C. Dunkelberg
/s/ Dana Becker Dunn Director
- ----------------------------
Dana Becker Dunn
/s/ Robert C. Hall Director
- ----------------------------
Robert C. Hall
/s/ James E. Ksansnak Director
- ----------------------------
James E. Ksansnak
- ---------------------------- Director
Ronald Lubner
/s/ Ronald J. Naples Director
- ----------------------------
Ronald J. Naples
/s/ Phillip A. Turberg Director
- ----------------------------
Phillip A. Turberg
81
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 21, 1997. 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 21, 1997
82
ADVANTA CORP. & SUBSIDIARIES
December 31, 1996
Schedule I - Condensed Financial Information of Registrant
Parent Company Only
CONDENSED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------------------
1996 1995
---------- ----------
ASSETS
Cash $ 93,019 $ 81,337
Investments available for sale 32,960 107,451
Other assets, principally investments in and
advances to wholly owned subsidiaries 2,023,559 1,373,926
---------- ----------
Total assets $2,149,538 $1,562,714
========== ==========
LIABILITIES
Accrued expenses and other liabilities $ 43,984 $ 7,965
Subordinated debt and other borrowings 1,253,518 881,785
---------- ----------
Total liabilities 1,297,502 889,750
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 435 415
Other stockholders' equity 850,591 671,539
---------- ----------
Total stockholders' equity 852,036 672,964
---------- ----------
Total liabilities and stockholders' equity $2,149,538 $1,562,714
========== ==========
83
Schedule I (cont'd)
Parent Company Only
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
Income:
Dividends from subsidiaries $ 135,006 $ 76,000 $ 39,000
Interest 62,144 53,745 23,983
Other 40,107 27,130 15,724
--------- --------- ---------
Total income 237,257 156,875 78,707
--------- --------- ---------
Expenses:
General and administrative 86,425 59,129 42,948
Interest 72,219 69,105 34,787
--------- --------- ---------
Total expenses 158,644 128,234 77,735
--------- --------- ---------
Income before income taxes
and equity in subsidiaries 78,613 28,641 972
Benefit for income taxes 24,784 20,469 16,419
--------- --------- ---------
Income before equity in
undistributed net profit
of subsidiaries 103,397 49,110 17,391
Equity in undistributed net profit
of subsidiaries 72,260 87,567 88,672
--------- --------- ---------
Net income $ 175,657 $ 136,677 $ 106,063
========= ========= =========
84
Schedule I (Cont'd)
Parent Company Only
Statements of Cash Flows
Year Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES
Net Income $ 175,657 $ 136,677 $ 106,063
Adjustments to reconcile net income to net cash
used by operating activities:
Equity in net profit of subsidiaries (207,266) (163,567) (127,672)
Dividends received from subsidiaries 135,006 76,000 39,000
Depreciation and amortization of intangibles 1,375 964 414
Change in other assets (265,658) (159,599) (2,823)
Change in accrued liabilities 51,853 8,387 7,865
- -------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by operating activities (109,033) (101,138) 22,847
INVESTING ACTIVITIES
Net change in premises & equipment (9,408) (1,901) (2,810)
Purchase of investments available for sale (3,754,047) (637,917) (1,161,420)
Proceeds from sales of investments available
for sale 77,404 340,177 295,196
Proceeds from maturing investments available
for sale 3,771,981 373,410 797,233
- -------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities 85,930 73,769 (71,801)
FINANCING ACTIVITIES
Change in lines of credit 40,000 (50,000) 50,000
Proceeds from issuance of subordinated/senior debt 41,036 147,200 39,398
Payments on redemption of subordinated/senior debt (38,541) (152,626) (58,618)
Change in repurchase agreements 0 (52,975) 52,975
Increase in affiliate borrowings (324,341) (35,444) (389,949)
Proceeds from issuance of medium-term notes 720,545 165,052 344,787
Payments on maturity of medium-term notes (494,400) (20,000) 0
Proceeds from issuance of affiliate subordinated debentures 103,093 0 0
Cash dividends paid (24,581) (15,501) (9,877)
Issuance of stock 11,974 94,179 4,498
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 34,785 79,885 33,214
- -------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash 11,682 52,516 (15,740)
Cash at beginning of year 81,337 28,821 44,561
Cash at end of year $ 93,019 $ 81,337 $ 28,821
===================================================================================================================
85
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
- ---------------------------------------------------------------------------------------------------------------------------------
1996 Reserve for losses on
securitized credit cards 167,425 0 553,884 (1) 386,719 (2)(3) 334,590
Reserve for credit losses
and prepayments on
securitized personal
finance loans (4) 30,606 0 71,050 (1)(3) 17,280 (2)(5) 84,376
Reserve for losses on
securitized business loans
and leases (6) 15,302 0 17,649 (1) 10,776 (2) 22,175
Reserve for uncollectable
receivables & unbillable fees 0 0 0 0 0
1995 Reserve for losses on
securitized credit cards 74,471 0 250,689 (1) 157,735 (2) 167,425
Reserve for credit losses and
prepayments on securitized
personal finance loans (4) 19,767 0 24,933 (1) 14,094 (2)(7) 30,606
Reserve for losses on
securitized business loans
and leases (6) 9,671 0 10,338 (1) 4,707 (2) 15,302
Reserve for uncollectable
receivables & unbillable fees 0 0 0 0 0
1994 Reserve for losses on
securitized credit cards 96,377 0 70,624 (1) 92,530 (2) 74,471
Reserve for credit losses and
prepayments on securitized
personal finance loans (4) 40,513 0 15,441 (1) 36,187 (2)(8) 19,767
Reserve for losses on
securitized business loans
and leases (6) 5,298 0 7,420 (1) 3,047 (2) 9,671
Reserve for uncollectable
receivables & unbillable fees 23 16 0 39 (2) 0
(1) Amounts netted against securitization income.
(2) Relates to net charge-offs.
(3) Includes $14.0MM transferred from off-balance sheet credit card reserves to
off-balance mortgage reserves.
(4) Includes mortgage and home equity loans.
(5) Includes $3.0MM transferred from off-balance sheet reserves to on-balance
sheet reserves.
(6) Includes business credit cards and leases.
(7) Includes $1.0MM transferred from off-balance sheet reserves to on-balance
sheet reserves.
(8) Includes $12.8MM transferred from off-balance sheet to on-balance sheet
reserves.