ITEM 1. BUSINESS.
OVERVIEW
Advanta Corp. (the "Company") is a highly focused direct marketer of select consumer financial services. The Company primarily originates and services credit cards and mortgage loans. Other businesses include small ticket equipment leasing, credit insurance and deposit products. At year end 1993, assets under management totalled over $6.1 billion.
Approximately 75% of total revenues are derived from credit cards marketed through carefully targeted direct mail campaigns. By focusing primarily on the no fee gold card, the Company has successfully grown to one of the ten largest issuers of gold cards. Mortgage services contribute 10% of total revenues with a managed loan portfolio of $1.15 billion. Mortgage loans are originated through a network of branch offices, a direct originations center and an expanding number of correspondent relationships.
The Company was incorporated in Delaware in 1974 as Teachers Service Organization, Inc., the successor to a business originally founded in 1951. In January 1988, the Company's name was changed from TSO Financial Corp. to Advanta Corp. The Company's principal executive office is located at Brandywine Corporate Center, 650 Naamans Road, Claymont, Delaware 19703. Its principal operating office is located at Five Horsham Business Center, 300 Welsh Road, Horsham, Pennsylvania 19044-0749. The Company's telephone numbers at its principal executive and operating offices are, respectively, (302) 791-4400 and (215) 657-4000. References to the Company in this Report include its consolidated subsidiaries unless the context otherwise requires.
CREDIT CARDS
The Company, which has been in the credit card business since 1983, issues gold and standard MasterCard and VISA credit cards nationwide. The Company has built a substantial cardholder base which, as of December 31, 1993, totalled nearly 2.7 million accounts and $3.9 billion in managed receivables. According to industry statistics, the Company is one of the ten largest issuers of gold cards. Both gold and standard accounts undergo the same credit analysis, but gold accounts have higher initial credit limits because of the cardholders' higher incomes. In addition, gold accounts generally offer a wider variety of services to cardholders.
The primary method of account acquisition is direct mail solicitation. The Company generally uses credit scoring by independent third parties and a proprietary market segmentation and targeting model to target its mailings to profitable segments of the market.
In 1982, the Company acquired Colonial National Bank USA ("Colonial National"). As a national bank, Colonial National has the ability to make loans to consumers without many of the restrictions found in various state usury and licensing laws, to negotiate variable rate loans, to generate funds economically in the form of deposits insured by the Federal Deposit Insurance Corporation ("FDIC"), and to include in its product mix a MasterCard and VISA credit card program. Substantially all of the Company's credit card receivables and bank deposits, and most of its mortgage loan receivables, are held by Colonial National.
MasterCard and VISA license banks, such as Colonial National and other financial institutions, to issue credit cards using their trademarks and to utilize their interchange networks. Cardholders may use their cards to make purchases at participating merchants or to obtain cash advances at participating financial institutions. The purchase is submitted to a merchant bank which remits to the merchant the purchase amount less a merchant discount fee, and submits the purchase to the card issuing bank for payment through the interchange system. The card issuing bank receives an interchange fee as compensation for the funding and credit risk that it takes when its customers use its credit card. MasterCard or VISA sets the interchange fee as a percentage of each card transaction (currently approximately 1.4%).
The Company generates interest and other income from its credit card business through finance charges assessed on outstanding loans, interchange income, cash advance and other credit card fees, and securitization income as described below. Credit Card income also includes fees paid by credit card customers for product
enhancements they may select, and revenues paid to Colonial National by third parties for the right to market their products to the Company's credit card customers.
Most of the Company's MasterCard and VISA credit cards carry no annual fee, and those credit cards which do include an annual fee generally have lower fees than those charged by many of the Company's competitors. The Company believes that this characteristic of no or low annual fee credit cards has appealed to consumers, and that the Company's credit cards have also appealed to consumers because of their competitive interest rates, quality service, payment terms and credit lines.
While the Company believes that its credit card offers will continue to appeal to consumers for the reasons stated, the Company also notes that competition is increasing in the credit card industry. At the same time, the American people are becoming generally more sophisticated and demanding users of credit. These forces are likely to produce significant changes in the industry; in recent years they have resulted in slower growth and lower yields for the industry, and these trends may continue. The Company is devoting substantial resources to meeting the challenges, and taking advantage of the opportunities, which management sees emerging in the industry. In 1993, this included significant focus on balance transfer initiatives, in which the Company encouraged consumers to transfer account balances they were maintaining with other credit card issuers to a Colonial National account with a lower interest rate. Approximately one-half of the growth in the Company's managed credit card receivables in 1993 resulted from balance transfers. The Company intends to continue exploring new approaches to the credit card market.
The interest rates on the majority of the Company's credit card receivables are variable, tied to the prime rate. This helps the Company maintain net interest margins in both rising and declining interest rate environments. As Delaware, Colonial National's state of domicile, does not have a usury ceiling applicable to banks, there is no statutory maximum interest rate that the Company may charge its credit cardholders, nor does Delaware law limit the amount of any annual fees, late charges and other ancillary charges which may be assessed. While the state in which an individual cardholder resides may seek to regulate the annual fees and ancillary charges which Colonial National may charge to that state's residents, the enforceability of such regulation is unclear and is currently the subject of litigation in certain states. At the present time, the only Federal appellate decision addressing this issue held such regulation to be unenforceable. See "Government Regulation--Colonial National."
Since 1988, Colonial National has been active in the credit card securitization market, securitizing $1.0 billion of credit card receivables in 1993 and $3.2 billion since 1988. The Company continues to recognize income on a monthly basis from the securitized receivables. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 of the Notes to Consolidated Financial Statements.
Colonial National's securitization program provides a number of benefits: diversifying its funding base, providing liquidity, reducing the bank's regulatory capital requirements, lowering its cost of funds, providing a source of variable rate funding to complement the variable rate credit card portfolio and helping to limit the on-balance sheet growth of Colonial National to not more than 7% per annum. See "Government Regulation--The Company." Furthermore, Colonial National continues to own the credit card accounts and customer relationships, which the Company believes continue to build significant long-term value. While the Company believes that securitization will continue to be a reliable source of funding, there is no assurance that the Company will be able to continue securitizations in amounts or under terms comparable to its securitizations to date.
A securitization involves the transfer by the Company of the receivables generated by a pool of credit card accounts to a securitization trust. Certificates issued by the trust and sold to investors represent undivided ownership interests in receivables transferred to the trust. The securitization results in removal of receivables from the Company's balance sheet for financial and regulatory accounting purposes. For tax purposes, the investor certificates are characterized as a collateralized debt financing of the Company.
The trust receives finance and other charges paid by the credit card customers and pays a rate of return on a monthly basis to the certificate holders. While in most cases the rate of return paid to investors is variable in order to match the pricing dynamics of the underlying receivables, the Company also uses fixed rate securitizations where appropriate to balance interest rate exposure on its assets and liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management." Credit losses on the securitized receivables are paid from the funds in the trust. The Company continues to service the accounts for a fee, generally two percent per annum of the securitized receivables. Excess funds (defined as finance charges plus miscellaneous fees less interest paid to certificate holders, credit
losses and servicing fees) are first retained to build up a reserve fund to a certain level, after which amounts are remitted to the Company. The Company's relationship with its credit card customers is not affected by the securitization.
Investors in the trust receive payments of interest only during the first three to four years of the trust. Thereafter, an amortization period (generally between six and ten months) commences, during which the certificate holders are entitled to payment of principal and interest. Acceleration of the commencement of the amortization period (which may occur in limited circumstances) on a securitization would accelerate the Company's funding 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.
MORTGAGE LOANS
The Company's subsidiary, Advanta Mortgage Corp. USA ("Advanta Mortgage"), originates and services closed end mortgage loans for itself and for Colonial National's "Advanta Mortgage USA" Division, primarily through a broker network serviced by selected sales locations, a centralized direct origination center, and correspondent relationships. Closed end mortgage loans involve the loan of a fixed amount of funds to a residential borrower repayable over a contractual period of generally fifteen years. The Company does not extend mortgage lines of credit, which involve the extension of a revolving amount of credit to a borrower. Advanta Mortgage and Colonial National also purchase portfolios of mortgage loan receivables. Portfolio acquisitions totalled $6 million in 1991, $32 million in 1992 and $42 million in 1993.
Advanta Mortgage and Colonial National operate the Company's mortgage loan business as a mortgage banking enterprise, i.e., they originate or purchase loans and then sell or securitize them, generally retaining servicing rights and the related excess cash flows. Consequently, the mortgage loan receivables on the Company's balance sheet are generally its most recently originated loans being held for sale. Thus, while mortgage loan receivables owned at December 31, 1993 were $91 million, during 1993 the Company originated or purchased $510 million and securitized $608 million of such receivables. At the time the receivables are sold or securitized, the Company recognizes a gain which is included in its mortgage banking income. See Note 1 to the Consolidated Financial Statements.
Thus, Advanta Mortgage packages its loans for sale and customarily enters into agreements with the purchasers to continue to service the loans for a fee. Advanta Mortgage also services Colonial National's mortgage loan portfolio, packages Colonial National's mortgage loans for sale, and performs the servicing on loans sold by Colonial National where Colonial National retains the servicing rights and obligations. In addition, Advanta Mortgage performs fee-based servicing on loans originated and owned by unrelated third party mortgage lenders. Therefore, Advanta Mortgage and Colonial National's Advanta Mortgage USA Division have the following basic sources of income: net interest income on loans outstanding pending their sale, gains on sales of loans, loan servicing fees and loan origination fees ("points"). Points are deferred and amortized over the contractual life of a loan, and on sale or securitization of the loan are included in the computation of the gain on sale. Interest income earned on loans prior to their sale or securitization is included in the Company's interest revenues, as detailed in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Net Interest Income."
Advanta Mortgage and Colonial National began securitizing home loans in 1988, when they privately placed with institutional investors $72 million of certificates representing fractional ownership interests in securitization trusts. In February 1991, Advanta Mortgage and Colonial National securitized $108 million of loans in their first publicly offered mortgage securitization transaction and securitized approximately $193 million of additional loans in public offerings during the balance of 1991. They publicly securitized $385 million of loans in 1992, and $608 million in 1993.
Securitizations of mortgage loans are similar to credit card securitizations as described above. The Company transfers a specified pool of mortgage loans to a trust which issues certificates representing undivided ownership interests in the loans. The Company acts as servicing agent for the trust, providing customer service and collection efforts, and receives loan servicing fees equal to .5% per annum of the securitized receivables. Finance and other charges paid to the trust are used to pay the investors interest on their certificates and premiums on an insurance contract issued by a third party guaranteeing full repayment of principal and interest to
the investors. Excess amounts generally go into a reserve account, and after that account reaches a specified level, are paid to the Company. Credit losses on the securitized loans reduce the amount of these payments to the Company. Significant differences from the Company's credit card securitizations, however, include: (1) while in most cases the credit card securitization certificates pay a variable interest rate (which complements the variable rate pricing on the Company's credit cards), the mortgage securitization certificates generally carry a fixed rate of interest (as generally do each of the mortgage loans held by the trust), and (2) payments to investors in the mortgage loan securitizations include both principal and interest from the outset, since the loans held by the trust are not revolving credit lines.
At December 31, 1993, Advanta Mortgage and Colonial National had approximately $91 million of mortgage loan receivables outstanding secured by mortgages on properties located in 30 states plus the District of Columbia. Additionally, as of that date, Advanta Mortgage was servicing approximately $1.1 billion in mortgage loans sold by the Company's subsidiaries, as well as $125 million of "contract servicing" receivables. Contract servicing receivables are not included in the Company's "managed portfolio," as the performance of such loans does not have a material impact on either the Company's net income or its credit risk profile. In contrast, the performance of the managed portfolio, including loans sold by the Company, can materially impact ongoing mortgage banking income. See Note 1 to the Consolidated Financial Statements.
In 1993, loan loss and prepayment experience depressed mortgage banking income, resulted in higher charge-off rates and necessitated an increase in off-balance sheet mortgage loan recourse reserves. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - - Provision for Credit Losses" and "-- Credit Risk Management -- Asset Quality." As indicated by these higher off-balance sheet reserves, in 1994 the Company expects to experience a higher relative managed mortgage charge-off rate compared to 1993. A majority of this experience is due to a class of loan which the Company has not actively solicited since 1991, as well as to softening real estate values in certain areas in which the Company operates.
Approximately 43% of the managed portfolio is secured by second mortgages and the balance is secured by non-purchase money first mortgages. At December 31, 1993, total mortgage loans managed, and the nonperforming loans included in those totals, are concentrated in the following regions:
Geographic concentration carries a risk of increased delinquency and/or loss if an area suffers an economic downturn. Advanta Mortgage monitors economic conditions in those regions through market and trend analyses. A Credit Policy Committee meets through the year to update lending policies based on the results of analyses, which may include abandoning lending activities in economically unstable areas of the country. The Company believes that the concentrations of nonperforming loans reflected in the preceding table are not necessarily reflective of general economic conditions in each region, but rather reflect the credit risk inherent in the different grades of loans originated in each area. The interest rate charged and the maximum loan-to-value ratio permitted with respect to each grade of loans are adjusted to compensate for the credit risk inherent in that loan grade.
The Company generally limits the total dollar amount of all loans secured by a property, including both the Company's mortgage loan and any other lender's first mortgage, to between 60% and 80% (depending upon the creditworthiness of the borrower) of the appraised value of the property. The average total loan-to-value ratio is 68% (calculated based upon the appraised values of the properties at the time of origination). However, a substantial depreciation in home values may impair the Company's security for these loans. As a result of substantial refinancing activity by consumers as market interest rates declined, in 1992 over 60% and in 1993 over 70% of the mortgage loans originated by the Company were first lien loans.
EQUIPMENT LEASING
The Company's leasing subsidiary, Advanta Leasing Corp. ("Advanta Leasing"), engages primarily in non-cancelable financing leases of equipment, including computers, fax machines, copiers and commercial cleaning equipment, primarily to professionals and small businesses. Most of the equipment leased has an initial value of less than $150,000, while the average initial value of leased equipment is approximately $7,000. Costs relating to equipment maintenance, insurance and personal property taxes are the responsibility of the lessee. In October 1991, Advanta Leasing closed its first securitization of lease receivables with a private placement of $74.5 million of certificates and closed a similar transaction in the amount of $53 million in September 1992. In 1993, Advanta Leasing securitized $68 million of lease receivables.
Securitization of lease receivables is substantially similar to mortgage loan securitization as described above, except that the servicing fee payable to Advanta Leasing is 1.25% per annum of the securitized lease receivables. Including $138 million of remaining securitized receivables, at December 31, 1993 Advanta Leasing managed a portfolio of $189 million of net lease receivables.
The small ticket equipment leasing industry is experiencing change as many smaller companies' funding sources have retrenched. This has provided Advanta Leasing with attractive direct marketing and portfolio acquisition opportunities, as Advanta Leasing's funding capacity remains strong. Consequently, the Company anticipates Advanta Leasing's origination volume increasing in 1994.
CREDIT INSURANCE AND CREDIT PROTECTION
Through unaffiliated insurance carriers, the Company offers credit life, disability and unemployment insurance to its credit cardholders and credit life insurance and a limited life/disability/unemployment insurance product to its mortgage loan customers. The unaffiliated insurers reinsure 100% of the risk on the credit card credit life, disability and unemployment insurance (but not the mortgage loan credit life insurance) with one or more of the Company's insurance subsidiaries. Such subsidiaries receive reinsurance premiums approximating 94% of the net premiums written. The subsidiaries are obligated to pay all losses and refunds, and to maintain reserve amounts equal to all statutory reserves for the benefit of the unaffiliated insurance carriers. In 1992, the insurance subsidiaries began direct underwriting of the property insurance provided for the Company's equipment leasing customers. The insurance subsidiaries are domiciled in Arizona, and are subject to regulation by the Arizona Department of Insurance and other insurance departments in states where they are licensed.
The credit card credit life insurance insures the life of the borrower (and any joint borrower) in an amount equal to the unpaid loan balance and accrued interest (subject to a maximum amount of $5,000) and provides for payment to the lender of the borrower's obligation in the event of death. The credit disability insurance and credit unemployment insurance pay the minimum monthly payments required by the credit card loan with respect to the debt outstanding at the commencement of a period of disability or unemployment, up to a maximum of $5,000.
Through Colonial National, the Company offers to some of its credit cardholders in certain states a card enhancement program named Credit Protection PlusR which provides benefits similar to those provided to other customers by the credit life, disability and unemployment insurance coverages offered by the
unaffiliated insurance carriers. Colonial National, which insures its excess risk of loss on this product with the Company's insurance subsidiaries, began expanding its offering of Credit Protection PlusR in 1993.
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
The Company offers a range of insured savings and transaction accounts through Colonial National, and offers uninsured investment products through the direct and brokered public sale of its senior and subordinated debt securities. Bank deposit services include demand deposits, money market savings accounts, statement savings accounts, retail certificates of deposit, large denomination certificates of deposit (certificates of $100,000 or more) and individual retirement accounts. During 1993, both the senior debt securities of Advanta Corp. and the senior debt securities and deposits of Colonial National achieved investment-grade ratings from the nationally recognized rating agencies. These ratings have allowed the Company to further diversify its funding sources. In November 1993, the Company filed a shelf registration statement with the Securities and Exchange Commission for $1 billion of senior debt securities, and subsequently sold $150 million of three-year notes in an underwritten transaction as well as $90 million (as of March 1, 1994) of medium-term notes of varying maturities pursuant to its $500 million medium-term note program established under this registration statement. In addition, the Company's subordinated debt securities historically have been and continue to be offered to investors with a variety of maturities (ranging from demand to ten years) and yield options. Further, a wholly-owned subsidiary of the Company, Colonial National Financial Corp. ("CNF"), began taking deposits in the form of certificates of deposit in January 1992. CNF is an FDIC insured industrial loan corporation organized under the laws of the State of Utah. The activities of CNF are not currently material to the Company's business.
Consumer deposit business at Colonial National is generated from repeat sales to existing customers and new deposits from individuals attracted by newspaper, direct mail and radio advertisements. Also, Colonial National offers retail certificates of deposit to customers through several nationally recognized broker/dealer firms which offer "Master Certificate of Deposit" programs to banks throughout the nation. Under these programs, the customers of the broker/dealer firms may purchase Colonial National certificates of deposit in $1,000 increments, from $1,000 to $100,000. The award of investment grade ratings to Colonial National's senior debt securities has allowed the bank to acquire additional sources of institutional funds throuogh both deposit and non-deposit products. Together, these various programs provide Colonial National with cost effective sources of funding which are geographically diverse and improve control in managing interest rate sensitivity. Investments in the Company's senior debt securities are marketed primarily to institutional investors through underwritten offerings as well as direct placements pursuant to the Company's medium-term note program. Investments in the Company's subordinated debt securities are generated from newspaper advertisements, from direct mail marketing efforts to existing and prospective investors, and through broker/dealer firms.
GOVERNMENT REGULATION
THE COMPANY. The Company is not required to register as a bank holding Company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company owns Colonial National, which is a "bank" as defined under the BHCA as amended by the Competitive Equality Banking Act of 1987 ("CEBA"). However, under certain grandfathering provisions of CEBA, the Company is not required to register as a bank holding Company under the BHCA, because Colonial National, which takes demand deposits but does not make commercial loans, did not come within the BHCA's definition of the term "bank" prior to the enactment of CEBA and it complies with certain restrictions set forth in CEBA, such as limiting its activities to those in which it was engaged prior to March 5, 1987 and limiting its growth rate to not more than 7% per annum. Such restrictions also prohibit Colonial National from cross-marketing products or services of an affiliate that are not permissible for bank holding companies under the BHCA. In addition, the Company complies with certain other restrictions set forth in CEBA, such as not acquiring control of more than 5% of the stock or assets of an additional "bank" or "savings association" as defined for these purposes under the BHCA. Consequently, the Company is not subject to examination by the Federal Reserve Board (other than for purposes of assuring continued compliance with the CEBA restrictions referenced in this paragraph). Should the Company or Colonial National cease complying
with the restrictions set forth in CEBA, registration as a bank holding Company under the BHCA would be required.
Registration as a bank holding Company is not automatic. The Federal Reserve Board may deny an application if it determines that control of a bank by a particular Company will cause undue interference with competition or that such Company lacks the financial or managerial resources to serve as a source of strength to its subsidiary bank. While the Company believes that it meets the Federal Reserve Board's managerial standards and that its ownership of Colonial National has improved the bank's competitiveness, should the Company be required to apply to become a bank holding Company the outcome of any such application cannot be certain.
Registration as a bank holding Company would subject the Company and its subsidiaries to inspection and regulation by the Federal Reserve Board. Although the Company has no plans to register as a bank holding Company at this time, the Company believes that registration would not restrict, curtail, or eliminate any of its activities at current levels, except that some portions of the current business operations of the Company's insurance subsidiaries would have to be discontinued, the effects of which would not be material.
COLONIAL NATIONAL. The Company conducts substantially all its deposit-taking activities and credit card lending business, as well as a large portion of its mortgage lending business, through Colonial National. Under Federal law, Colonial National may "export" (i.e., charge its customers resident in other states) the finance charges permissible under the law of its state of domicile, Delaware, which state has no usury statute applicable to banks. Consistent with prevailing industry practice, the Company also exports credit card fees (including, for example, annual fees, late charges and fees for exceeding credit limits) permitted under Delaware law. There is no precedent clearly applicable to Colonial National as to the permissibility of exporting such fees. In a case involving this issue (to which the Company was not a party), the United States Court of Appeals for the First Circuit ruled that the Commonwealth of Massachusetts did not have the power to prevent a Delaware state-chartered financial institution from charging Massachusetts residents credit card fees in excess of those allowed under Massachusetts law. The United States Supreme Court declined to consider an appeal of the First Circuit's decision, and so that decision became final in 1992. However, litigation involving this issue has been initiated against other credit card issuers in several states, and it is possible that a contrary decision could be reached in a jurisdiction where the judgment of the First Circuit Court of Appeals is not binding. The Company cannot quantify the impact on its business, as a result of possible loss of fees, penalties or other sanctions, that could result from an adverse determination on this issue in one or more states.
Colonial National is subject primarily to regulation and periodic examination by the Office of the Comptroller of the Currency (the "Comptroller"). Such regulation relates to the maintenance of reserves for certain types of deposits, the maintenance of certain financial ratios, transactions with affiliates and a broad range of other banking practices. As a national bank, Colonial National is subject to provisions of federal law which restrict its ability to extend credit to its affiliates or pay dividends to its parent Company. See "Dividends and Transfers of Funds."
Colonial National is subject to capital adequacy guidelines approved by the Comptroller. These guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. As of December 31, 1993, the minimum ratio of total capital to risk-weighted assets (including certain off- balance sheet items) was 8%. At least half of the total capital is to be comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock ("Tier 1 capital"). The remainder may consist of other preferred stock, certain hybrid debt/equity instruments, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses ("Tier 2 capital"). In addition, the Comptroller has also adopted a minimum leverage ratio (Tier 1 capital divided by total average assets) of 3% for national banks that meet certain specified criteria, including that they have the highest regulatory rating. Under this guideline, the minimum leverage ratio would be at least 1 or 2 percentage points higher for national banks that do not have the highest regulatory rating, for national banks undertaking major expansion programs, and for other national banks in certain circumstances. As of December 31, 1993, Colonial National's Tier 1 capital ratio was 7.19%, its combined Tier 1 and Tier 2 capital ratio was 12.06%, and its leverage ratio was 6.03%.
Recognizing that the risk-based capital standards address only credit risk (i.e., not interest rate, liquidity, operational or other risks), the Comptroller has indicated that many national banks will be expected to maintain capital in excess of the minimum standards. As indicated above, Colonial National's capital levels currently exceed the minimum standards. To date, the Comptroller has not required Colonial National to maintain capital in excess of the minimum standards. However, there can be no assurance that such a requirement will not be imposed in the future, or if it is, what higher standard will be applicable.
In addition, pursuant to certain provisions of the FDIC Improvements Act of 1991 ("FDICIA") and regulations promulgated thereunder, FDIC insured institutions such as Colonial National may only accept brokered deposits without FDIC permission if they meet certain capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are "well-capitalized." To be "well-capitalized," a bank must have a ratio of total capital to risk-weighted assets of not less than 10%, Tier 1 capital to risk-weighted assets of not less than 6%, and a Tier 1 leverage ratio of not less than 5%. Based on the applicable standards under these regulations, Colonial National is currently "well-capitalized," and the Company intends to maintain Colonial National as a "well-capitalized" institution.
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 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, and regulate the dissemination and use of information relating to a borrower's creditworthiness. Certain of these statutes and regulations also apply to the Company's leasing activities. In addition, Advanta Mortgage and its subsidiaries are subject to licensure and regulation in various states as mortgage bankers, mortgage brokers, and originators, sellers and servicers of mortgage mortgage loans.
DIVIDENDS AND TRANSFERS OF FUNDS. There are various legal limitations on the extent to which Colonial National can finance or otherwise supply funds through dividends, loans or otherwise to the Company and its affiliates. The prior approval of the Comptroller is required if the total of all dividends declared by Colonial National in any calendar year exceeds its net profits (as defined) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus accounts. In addition, Colonial National may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. The Comptroller also has authority under the Financial Institutions Supervisory Act to prohibit a national bank from engaging in any unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the Comptroller could claim that a dividend payment might under some circumstances be an unsafe or unsound practice.
Colonial National is also subject to restrictions under Sections 23A and 23B of the Federal Reserve Act. These restrictions limit the transfer of funds 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 Colonial National's transactions with its affiliates be on terms no less favorable to the bank than comparable transactions with unrelated third parties. These transfers by Colonial National to the Company or any single affiliate are limited in amount to 10% of Colonial National's capital and surplus and transfers to all affiliates are limited in the aggregate to 20% of Colonial National'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, Colonial National may not make any loans to the Company or any of its subsidiaries.
The Company's insurance subsidiaries are insurance companies organized under and regulated by Arizona law. Arizona insurance regulations restrict the amount of dividends which an insurance Company may distribute without the prior consent of the Director of Insurance.
GENERAL. Because the banking and finance businesses in general are the subject of such extensive regulation at both the state and federal levels, and because numerous legislative and regulatory
proposals are advanced each year which, if adopted, could affect the Company's profitability or the manner in which the Company conducts its activities, the Company cannot now predict the extent of the impact of any such new laws or regulations.
Various legislative proposals have been introduced in Congress in recent years, including, among others, proposals relating to imposing a statutory cap on credit card interest rates, permitting interstate branching by banks, permitting affiliations between banks and commercial or securities firms, and proposals which would place new restrictions on a lender's ability to utilize pre-screening of consumers' credit reports through credit reporting agencies (credit bureaus) in connection with the lender's direct marketing efforts. It is impossible to determine whether any of these proposals will become law and, if so, what impact they will have on the Company. In September 1992, the Federal Communications Commission established rules implementing the Telephone Consumer Protective Act of 1991 which limits telephone solicitations to residences. Because the statute exempts telemarketing to existing or former customers, it will not materially impact the Company's current business operations.
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 seeking investment funds from the public, the Company faces competition from banks, savings institutions, money market funds, credit unions and a wide variety of private and public entities which sell debt securities, some of which are publicly traded. Many of the competitors are larger and have more capital and other resources than the Company. Competition relates to such matters as rate of return, collateral, insurance or guarantees applicable to the investment (if any), the amount required to be invested, convenience and the cost to and conditions imposed upon the investor in investing and liquidating his investment (including any commissions which must be paid or interest forfeited on funds withdrawn), customer service, service charges, if any, and the taxability of interest.
EMPLOYEES
As of December 31, 1993, the Company had 1,614 employees, up from 1,327 employees at the end of 1992. The Company believes that it has good relationships with its employees. None of its employees is represented by a collective bargaining unit.
ITEM 2.


ITEM 2. PROPERTIES.
The Company leases an aggregate of approximately 189,000 square feet of office space in six office buildings located in Horsham, Pennsylvania, a Philadelphia suburb, and owns a 95,000 square foot building in Horsham. The Company also leases an aggregate of approximately 75,000 square feet of office space for its Advanta Mortgage offices in California, New Jersey, New York and Maryland, and 41,000 square feet of office space for its Advanta Leasing offices in New Jersey.
The Company's principal executive and Colonial National's principal operating offices are currently located in approximately 81,000 square feet of leased space in two office buildings in Delaware.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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.
Mr. Alter became Executive Vice President and a director of the Company in 1967. He was elected President and Chief Executive Officer in 1972, and Chairman of the Board of Directors in August 1985. In February 1986, he relinquished the title of President.
Mr. Hart joined the Company in March 1994 as Executive Vice Chairman. For the five years prior to that he had been President and Chief Executive Officer of MasterCard International, Inc., a worldwide association of over 29,000 member financial institutions. Prior to joining MasterCard in November 1988, Mr. Hart was Executive Vice President of First Interstate Bancorp, Los Angeles, California.
Mr. Greenawalt was elected President and Chief Operating Officer of the Company in November 1987. Prior to joining the Company, Mr. Greenawalt served as President of Transamerica Financial Corp., Los Angeles, California, from May 1986. For the 15 years prior to that, Mr. Greenawalt served in various capacities with Citicorp, including most recently as Chairman and Chief Executive Officer of Citicorp Person-to-Person, Inc., St. Louis, Missouri, and, prior to that, as President and Chief Executive Officer of Citicorp Retail Services, Inc., New York, New York.
Mr. Kantor became a Senior Vice President of the Company in April 1986, a director in May 1986, Chief Financial Officer in September 1986 and Executive Vice President in December 1986. In November 1993, he was promoted to the position of Vice Chairman, and he relinquished the title of Chief Financial Officer. Prior to joining the Company, Mr. Kantor was the partner in charge of the Financial Services Division of Arthur Andersen & Co. in Philadelphia, Pennsylvania where he served for more than ten years, and was also the audit partner assigned to the Company's account.
Mr. Wesselink joined the Company in November 1993 as Senior Vice President and Chief Financial Officer. Prior to joining the Company, Mr. Wesselink was Vice President and Treasurer of Household International. Previous positions held at Household include Vice President-Director of Research, Group Vice President-Chief Financial Officer of Household Finance Corporation (HFC) and Senior Vice President-Chief Financial Officer of HFC.
Mr. Marshall joined the Company in January 1988 and was elected Senior Vice President in February 1988. Prior to joining the Company, from July 1987 he was Chief Operations Officer of a Scudder, Stevens & Clark joint venture. Prior to that, Mr. Marshall served in various capacities at Citibank from 1976. At the time he left Citibank, he was a Senior Vice President of Citicorp Retail Services, managing a major portion of its client relationships.
Mr. Riseman came to the Company in June 1992 as Senior Vice President, Administration. He was appointed to his present position in February 1994. Prior to joining the Company, Mr. Riseman had 27 years experience with Citicorp, most recently as Director of Training and Development. Prior to that he held Citicorp positions as Business Manager for the Long Island Region, Head of Policy and Administration for New York's Retail Bank, and Chairman of Citicorp Acceptance Co. which was involved in the financing and leasing of autos and financing of mobile homes.
Mr. Lindenberg had been the Chairman of the Board and President of an equipment leasing business, LeaseComm Financial Corporation, from that Company's inception in June 1985 until its purchase by the Company. Following the acquisition, Mr. Lindenberg was elected President and Chief Executive Officer of Advanta Leasing Corp., the successor to LeaseComm. Prior to starting LeaseComm, Mr. Lindenberg had been with First Pennsylvania Bank, Philadelphia, Pennsylvania since 1982, where he had served in various capacities, most recently as Vice President of the national division responsible for that bank's commercial lending activities in leasing and electronics.
Mr. Averett came to the Company as Vice President in January 1988. Prior to joining the Company, Mr. Averett worked with Citicorp from 1980 to 1987. Most of this tenure was in a retail credit card division (CRS) holding a wide array of positions from financial analyst to credit cycle manager and eventually Regional Collections Manager.
Mr. Beck joined the Company in 1986 as Senior Vice President of Colonial National and was elected Vice President and Treasurer in 1992. Prior to joining the Company, he was Vice President, Fidelity Bank,
N.A., responsible for asset/liability planning, as well as for managing a portfolio of investment securities held at the bank. From 1970 through 1980, he served in various treasury and planning capacities for Wilmington Trust Company.
Mr. Calamari joined the Company in May 1988. From May 1985 through April 1988, Mr. Calamari served in various capacities in the accounting departments of Chase Manhattan Bank, N.A. and its subsidiaries, culminating in the position of Chief Financial Officer of Chase Manhattan of Maryland. From 1976 until May 1985, Mr. Calamari was an accountant with the public accounting firm of Peat, Marwick, Mitchell in New York.
Ms. Dyer joined the Company as Vice President, Marketing in 1992. Prior to joining the Company, she was Vice President and Director of Marketing for the Retail Finance Division of MNC Financial. From 1985 to 1989, she was Director, Product Development and Management at the Student Loan Marketing Association and had previously held marketing management positions with Citicorp in their credit card, mortgage and consumer finance businesses.
Mr. Fread joined the Company in 1986 as Director of Internal Audit, and was elected to the office of Vice President, Asset Quality in June 1987. Prior to joining the Company, he was an audit manager for Arthur Andersen & Co. where he was responsible for audit and consulting engagements for a variety of financial service companies.
Mr. Fried joined the Company as Vice President, Strategic Planning and Business Development in 1992. Prior to joining the Company, he was Vice President, New Business Development for Chase Manhattan's Direct Response Banking Sector. Prior to that position, Mr. Fried had 11 years of senior level marketing, planning and development experience in the Credit Card, Consumer Branch Banking and Private Label Retail Credit Divisions at Citicorp.
Mr. Girman joined the Company as Vice President, Accounting Operations, Policies and Procedures in July 1988, and was elected Vice President, Audit and Control, in April 1991. Prior thereto, Mr. Girman served as Vice President, Management Accounting and Accounting Policies and Procedures for The Chase Manhattan Bank (USA), N.A. from April 1985 until joining the Company.
Mr. Hofmann came to the Company as Director of Human Resources in November 1986 and was elected Vice President, Human Resources in March 1987. Prior to joining the Company, he was Manager, Human Resources Planning and Development for Subaru of America, Inc. from October 1984, and Manager, Management and Organization Development for Shared Medical Systems Corporation from March 1981 until October 1984.
Mr. Millman joined the Company in September 1989 and was elected Assistant Treasurer in July 1990 and Vice President, Corporate Funds Management in August 1991. In November 1993, he became Chief Financial Officer of the Consumer Financial Services unit. Prior to joining the Company, Mr. Millman served as Director of Financial Planning for Knight Ridder, Inc. from March 1987 to January 1988, and as Chief Financial Officer of Osteotech, Inc. from January 1988 to September 1989.
Mr. Perlet joined the Company in November 1987, and was elected as Vice President, Insurance in June 1988. Prior to joining the Company, Mr. Perlet was with Colonial Penn Group, Inc. for 13 years, where he served in a variety of capacities, most recently as Senior Vice President.
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.
ADVANTA CORP. AND SUBSIDIARIES
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
At December 31, 1993, the Company had approximately 1,000 and 850 holders of record of Class B and Class A common stock, respectively.
ADVANTA CORP. AND SUBSIDIARIES
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
ADVANTA CORP. AND SUBSIDIARIES
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Net income for 1993 rose to $76.6 million or $1.92 per share. This reflects increases of 60% and 39%, respectively, from the $48.0 million or $1.38 per share reported in 1992. Net income before extraordinary item was $77.9 million or $1.95 per share, increases of 62% and 41%, respectively, from 1992. Earnings per share for 1993 incorporated a 15% increase in the number of common shares outstanding versus 1992, reflecting an equity offering by the Company in March 1993. Earnings per share for 1992 have been adjusted to reflect an effective three-for-two stock split as a result of the October 15, 1993 stock dividend.
Earnings for 1993 increased primarily as a result of a $1.1 billion or 34% increase in average managed receivables, continued improvement in credit quality with the total managed charge-off rate decreasing from 3.4% in 1992 to 2.9% in 1993, and controlled growth in operating expenses. The Company continues to securitize a majority of the growth in its receivables and to report the performance of the securitized receivables as noninterest revenues. Consequently, the 34% increase in average managed receivables resulted in a $62.5 million or 32% increase in noninterest revenues to $255.6 million in 1993, from $193.1 million in 1992. As a result of improved credit quality, the provision for credit losses in 1993 fell to $29.8 million from $47.1 million in 1992. Despite a lower provision, reserve coverage of impaired owned assets was higher at December 31, 1993 compared to a year ago. Disciplined cost management resulted in operating expenses increasing only 27%, while average managed receivables grew 34% and the operating expense ratio fell to 4.1% for 1993 compared to 4.4% in 1992.
Net interest income of $72.1 million for 1993 increased $3.4 million or 5% from 1992 as a result of a $170 million increase in average earning asset balances, offset by a 22 basis point drop in the owned net interest margin. The Company is executing a strategy to market a "risk-adjusted" credit card product in which 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" strategy). This strategy resulted in a drop in credit card yields thereby lowering the owned net interest margin.
Over the last three years, average managed receivables have grown at a compound annual rate of 34%. This receivable growth has generated higher financial returns, net income and earnings per share. The Company intends to continue pursuing a strategy of receivable growth with a goal of increasing average managed receivables by 30% or more in 1994.
Net income for 1992 of $48.0 million or $1.38 per share increased 91% and 72%, respectively, from $25.2 million or $.81 per share in 1991.
Earnings increased in 1992 primarily as a result of an $807 million or 34% increase in average managed receivables and a 51 basis point increase in the managed net interest margin. Average securitized assets rose 67% in 1992 increasing noninterest revenues $59.8 million or 45%. The largest single component of noninterest revenues, credit card securitization income, rose $38.3 million or 90% as average securitized credit card receivables increased 85%.
The provision for credit losses was down 15% in 1992 compared to 1991 as a result of lower charge-offs and delinquency levels on owned receivables. Operating expenses increased 28% with a 34% increase in average managed receivables, while operating expenses as a percentage of average managed receivables fell to 4.4% in 1992 from 4.6% in 1991.
(1)See Note 1 to Consolidated Financial Statements.
ADVANTA CORP. AND SUBSIDIARIES
The owned net interest margin fell to 4.85% in 1993 from 5.07% in 1992, due to a 173 basis point decrease in the yield on interest earning assets partially offset by a 151 basis point improvement in the cost of funding those assets. In 1993, the owned net interest margin of 4.85% reflects the benefit of the March 1993 equity offering and increased retained earnings.
Credit card, mortgage and lease receivable securitization activity shifts revenues from interest income to noninterest revenues. This ongoing securitization activity reduces the level of higher-yielding receivables on the balance sheet while increasing the quantity of lower-yielding money market assets. While the money market assets are subsequently replaced with new receivables, the active securitization program reduces the average yield of the on-balance sheet portfolio. Net interest income on securitized credit card balances is reflected in credit card securitization income. Net interest income on securitized mortgage loans is reflected in income from mortgage banking activities, and net interest income on securitized lease receivables is reflected in leasing revenues, net. All securitization income is included in noninterest revenues. See Note 1 to Consolidated Financial Statements.
Average managed credit card receivables of $3.0 billion for 1993 increased $755 million or 34% from 1992. This increase can be attributed to several successful credit card campaigns which generated approximately 853,000 new accounts and a large volume of balance transfers by card- holders. Owned receivable balances would have been higher in both years had it not been for the securitization of $1.0 billion of credit card receivables in 1993 and $950 million in 1992. The 241 basis point decline in the yield on owned credit card receivables was the result of the Company's "risk-adjusted" strategy and the influence of a predominance of newer, lower-yielding accounts in the owned portfolio. It is anticipated that these accounts will start repricing upwards in 1994.
Average managed mortgage loans increased to $1.0 billion in 1993, a 34% increase from $786.3 million in 1992. The average balance of owned mortgage loans de-creased to $154.2 million in 1993 from $185.6 million in 1992 primarily due to the securitization of $608 million of receivables in 1993. Mortgage loan originations of $510 million in 1993 were up $84 million or 20% from 1992. Yields on owned mortgage loans decreased to 9.91% from 11.40% in 1992 reflecting the lower rate environment and a significant increase in the proportion of first lien mortgage loans in the portfolio.
Average managed lease receivables of $154.8 million increased $45 million or 42% from 1992. Average owned balances on leases increased $12.7 million during 1993 due to increased originations and portfolio purchases. Yields on owned leases increased from 17.46% in 1992 to 18.70% in 1993 due to a higher amount of late fees.
A significant decline in the owned average cost of funds was experienced in 1993 as the cost of funds fell to 5.18% from 6.39% in 1992. The rollover of deposits in a lower rate environment, lower money market rates, and the Company's entrance into funding markets not previously available to them with a newly acquired investment-grade rating were the primary reasons for this decline.
Net interest income of $68.7 million in 1992 dropped slightly from $69.3 million in 1991 primarily as a result of a 61 basis point decline in the owned net interest margin. This decline in the owned net interest margin was a result of a 218 basis point decline in yields on interest earning assets partially offset by a 157 basis point improvement in the cost of funding those assets. Offsetting this decline in the owned net interest margin was a $96 million increase in average interest earning asset balances.
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 1991 through 1993. Average owned loan and lease receivables and the related interest revenues exclude deferred origination costs and the amortization thereof (see Note 1 to Consolidated Financial Statements) and include certain loan fees.
ADVANTA CORP. AND SUBSIDIARIES
INTEREST RATE ANALYSIS
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, excluding the amortization of deferred origination costs 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.
(1) Includes income from assets held and available for sale.
PROVISION FOR CREDIT LOSSES - - - --------------------------- The provision for credit losses of $29.8 million in 1993 decreased $17.3 million or 37% from $47.1 million in 1992. This decrease can be attributed to lower charge-offs on owned receivables, which on a consolidated basis were 2.4% of average receivables compared to 3.9% in 1992, and to lower levels of impaired assets. The owned impaired asset level fell to $22.5 million at December 31, 1993, from $31.6 million a year ago. Lower delinquency levels helped to strengthen the Company's reserve coverage of impaired assets to 138.6% at December 31, 1993, from 127.4% a year ago.
During 1993, the Company transferred $11 million of on-balance sheet unallocated loan loss reserves to increase off-balance sheet mortgage loan recourse reserves, which reserves are netted against excess mortgage servicing rights.
The provision for credit losses of $47.1 million in 1992 decreased $8.4 million or 15% from $55.5 million in 1991. This decrease was primarily due to lower charge-offs on owned receivables and lower impaired asset levels.
A description of the credit performance of the loan portfolio is set forth under the section entitled "Credit Risk Management."
ADVANTA CORP. AND SUBSIDIARIES
Noninterest revenues of $255.6 million in 1993 increased $62.5 million or 32% from $193.1 million in 1992.
Due to the securitization of credit card receivables, activity from securitized account balances normally reported as net interest income and charge-offs is reported in securitization income and servicing income, both of which are included in noninterest revenues. Credit card securitization income increased 68% to $135.8 million from $80.8 million in 1992 while average securitized credit card receivables increased 46% to $2.1 billion in 1993 from $1.5 billion in the prior year. Securitization income as a percentage of average securitized receivables was 6.4% in 1993 compared with 5.6% for 1992. See Note 1 to Con-solidated Financial Statements for further description of securitization income.
Credit card securitization income is the revenue collected on the securitized receivables, including interest, interchange income and certain fees, less the related ex-penses, including interest payments to investors in the trusts, charge-offs, servicing costs and transaction expenses.
Credit card servicing income increased to $41.6 million in 1993 from $28.6 million in 1992. Servicing income represents fees paid to the Company for continuing to service accounts which have been securitized. Such fees approximate 2% of securitized receivables.
Total interchange income earned represents approximately 1.4% of credit card purchases. The amount of inter-change paid to the securitization trusts ranges from 1% to 2% of securitized balances and is included in credit card securitization income. Interchange income decreased 39% to $18.8 million in 1993 from $30.7 million in 1992 due to a larger proportion of interchange revenues being included in securitization income. Other credit card revenues, which include credit insurance, cash advance fees and other credit card related revenues, were basically flat year-to-year due to an increasing proportion of credit card revenues becoming part of securitization income. Additionally, the amortization of annual fee income on owned credit card receivables previously had been included in other credit card revenues; beginning in 1993, this amoritization is included as a com-ponent of net interest income.
During 1993, the Company securitized $608 million of mortgage loans compared to $385 million in 1992. In 1993, increased credit losses on the securitized portfolio decreased income from mortgage banking activities by approximately $14 million. Increased prepayments also de-creased income from mortgage banking activities by $14 million in 1993. Consequently, mortgage banking income of $24.1 million was relatively flat compared with 1992. See Note 1 to Consolidated Financial Statements for a description of mortgage banking income.
Noninterest revenues of $193.1 million in 1992 increased $59.7 million or 45% from $133.4 million in 1991 primarily due to increases in credit card securitization and servicing income.
ADVANTA CORP. AND SUBSIDIARIES
Operating expenses of $174.6 million for 1993 increased $37.0 million or 27% from $137.6 million in 1992, driven by a 34% growth in average managed receivables. The increase in operating expenses can be primarily attrib-uted to: (a) a $13.9 million, or 27%, increase in salaries and employee benefits with a 22% increase in the number of employees from 1992, (b) a $4.9 million increase in marketing expenses as the Company promoted its finan-cial products as well as enhanced its general public visibility, (c) a $3.6 million increase in external processing resulting primarily from a 26% increase in the number of accounts managed year-to-year, (d) a $5.1 million increase in professional fees as the Company invested in long-term planning projects, and (e) an overall increase in credit card related costs due to a 27% increase in the number of accounts managed.
Operating expenses of $137.6 million for 1992 were up $29.8 million or 28% from $107.8 million in 1991 while average managed receivables grew 34%. This increase in operating expenses can be primarily attributed to: (a) a $9.0 million, or 21%, increase in salaries and employee benefits with a 23% increase in the number of employees year-to-year, (b) a $5.7 million increase in marketing expenses to market the Company's financial products and enhance its general visibility, (c) a $2.3 million increase in credit card fraud losses, due to the growth in managed credit card receivables and a higher incidence of fraud, and (d) an overall increase in credit card related costs due to a 15% increase in the number of accounts managed. In 1991, credit card fraud losses included $3.9 million related to the acceleration of charge-offs (see discussion in "Asset Quality" on page 30). The operating expense ratio fell to 4.4% in 1992 from 4.6% in 1991.
INCOME TAXES The Company's consolidated income tax expense was $45.3 million for 1993, or an effective tax rate of 37%, compared to tax expense of $29.1 million, or 38%, in 1992 and tax expense of $14.2 million, or 36%, in 1991. The decrease in the effective tax rate from 1992 to 1993 resulted from a higher level of tax-free income, while the increase in the effective tax rate from 1991 to 1992 resulted from higher pretax income and less tax-free income year-to-year.
ASSET/LIABILITY MANAGEMENT - - - ------------------------------------------------------------------------------- The financial condition of Advanta Corp. is managed with a focus on maintaining high credit quality standards, disci-plined interest rate risk management and prudent levels of leverage and liquidity.
INTEREST RATE SENSIVITY Interest rate sensitivity refers to the net interest income volatility resulting from changes in interest rates, product spread variability and mismatches in the repricing intervals between interest-rate-sensitive assets and liabilities.
The Company attempts to minimize the impact of market interest rate fluctuations on net interest income and net income by regularly evaluating the risk inherent in its asset and liability structure, including securitized assets. This risk arises from continuous changes in the Company's asset/liability mix, market interest rates, the yield curve, prepayment trends and the timing of cash flows. Computer simulations are used to evaluate net interest income volatility under varying rate, spread and volume projections over monthly time periods of up to two years.
In managing its interest rate sensitivity position, the Company periodically securitizes, sells and purchases assets, alters the mix and term structure of its retail and institutional funding base and complements its basic business activities by changing the investment portfolio and short-
ADVANTA CORP. AND SUBSIDIARIES
term asset positions. The Company has primarily utilized variable rate funding in pricing its credit card securitization transactions in an attempt to match the pricing dynamics of the underlying receivables sold to the trusts. Although credit card receivables are priced at a spread over the prime rate, they generally contain interest rate floors. These floors have the impact of converting the credit card receivables to fixed rate receivables in a low interest rate environment. In instances when a significant portion of credit card receivables are at their floors, the Company may convert part of the underlying funding to a fixed rate by using interest rate hedges, swaps and fixed rate securitizations. In pricing mortgage and lease securitizations, primarily fixed rate fund-ing is used as nearly all of the receivables sold to investors carry a fixed rate.
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 inter-est 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 fluc-tuating 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 1993, the Company, through its subsidiaries, securitized $1.0 billion of credit card receivables, $608 million of mortgage loans and $68 million of lease receivables. Cash generated from these transactions was temporarily invested in short-term, high quality investments at money market rates awaiting redeployment to pay down deposits and to fund future credit card, mortgage loan and lease receivable growth. See Consolidated Statements of Cash Flows for more information regarding liquidity, funding and capital resources. In addition, see Note 5 to Consolidated Financial Statements and Supplemental Schedules thereto for additional information regarding the Company's investment portfolio.
Over the last six years, the Company has accessed the securitization market to efficiently support its growth strate-gy. While securitization should continue to be a reliable source of funding for the Company, other funding sources are available and include deposits, subordinated debt, medium-term notes and the ability to sell assets and raise additional equity.
At December 31, 1993, the Company was carrying $668 million of loans available for sale. The fair value of such loans was in excess of their carrying value at year end. In connection with managing liquidity and asset/liability management, the Company had $308 million of investments available for sale at December 31, 1993. See Note 18 to Consolidated Financial Statements for fair value disclosures.
In August 1993, the Company's principal subsidiary, Colonial National Bank USA ("Colonial National" or the "Bank"), sold $50 million of subordinated notes which had received an investment-grade rating and qualified as Tier 2 capital.
The following table details the composition of the deposit base at year end for each of the past five years.
ADVANTA CORP. AND SUBSIDIARIES
It is expected that deposits will increase slightly in 1994, as the Bank is likely to expand its asset base within the limits permitted under the Competitive Equality Banking Act of 1987 ("CEBA"). As a grandfathered institution under CEBA, the Company must limit the Bank's asset growth to 7% per annum. For the fiscal CEBA year ended September 30, 1993, the Bank's average assets did not exceed the allowable amount and, accordingly, the Bank was in full compliance with CEBA growth limits.
Deposits at December 31, 1993 include $38 million of deposits at Colonial National Financial Corp. ("CNF"), a Utah state-chartered, FDIC- insured industrial loan corporation (a wholly-owned subsidiary of the Company). CNF's assets or operations are not currently material to the Company, and the Company does not expect them to become material in the near term.
During 1993, the debt securities of Advanta Corp. achieved investment-grade ratings from the nationally recognized rating agencies. These ratings have allowed the Company to further diversify its funding sources. In November 1993, the Company filed a shelf registration statement with the Securities and Exchange Commission for $1 billion of debt securities, and subsequently sold $150 million of three-year notes under this registration statement. The Company also anticipates selling up to an additional $500 million of medium-term notes as needed. In addition, steady building of liquidity and capital in 1993 and 1992 was achieved as a result of $76.5 million of dividends from subsidiaries in 1993 and $40.0 million in 1992, and retained earnings of $69.3 million in 1993 and $44.0 million in 1992. The Board of Directors currently intends to have the Company pay regular quarterly dividends to its shareholders, maintaining a 20% premium on the dividend paid on the Class B shares; however, the Company plans to reinvest the majority of its earnings to support future growth.
During 1993, the Company raised $90 million in new equity through a 3.0 million share (pre-split) Class B common stock offering. Proceeds were used to support future growth.
Other elements contributed to liquidity at the subsidiary level (other than the Bank) in 1993. Advanta Mortgage Corp. USA ("Advanta Mortgage") had lines of credit totaling $190 million, which, because of other available funding sources, were not renewed when they expired in December 1993. Advanta Leasing Corp. ("Advanta Leasing") also has lines of credit totaling approximately $86 million.
While there are no specific capital requirements for Advanta Corp., the Office of the Comptroller of the Currency requires that Colonial National maintain a risk-based capital ratio of at least 8%. Colonial National's risk-based capital ratio of 12.06% at December 31, 1993 was in excess of the required level and, in fact, exceeded the mini-mum required capital level of 10% for designation as a "well capitalized" depository institution. The Company intends to take the necessary actions to maintain Colonial National as a "well capitalized" bank. In addition, the Company is subject to various rate setting rules and capital regulations related to the Advanta Insurance Companies. At December 31, 1993, the Company was in full compliance with these rules and regulations.
CAPITAL EXPENDITURES The Company spent $11.3 million for capital expenditures in 1993, primarily for the purchase of a building, improvements to that building and additional space in other build-ings, office and voice communication equipment and furniture and fixtures. This compared to $5.3 million for capital expenditures in 1992 and $4.2 million in 1991.
In 1994, the Company anticipates capital expenditures to exceed those of 1993 as its facilities are expanding and the Company is continuing to upgrade its voice and comm-unication systems.
In 1994, the Company anticipates that its marketing expenditures will exceed those of 1993 as the Company continues to manage account retention, originate new accounts and develop new consumer products for its customers.
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 eco-nomic 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 and Amounts Due From Securitizations. Recourse reserves are intended to cover all probable credit losses over the life of the securitized receivables.
ADVANTA CORP. AND SUBSIDIARIES
The reserve for credit losses on a consolidated basis was $31.2 million, or 2.4% of receivables, at December 31, 1993, down from $40.2 million, or 4.0% of receivables, in 1992. Due to improved credit quality, this reserve level resulted in higher reserve coverage of impaired assets (nonperforming assets and accruing loans past due 90 days or more on credit cards) of 138.6% at December 31, 1993, compared to 127.4% at December 31, 1992. Reserve cover-age of impaired credit card assets was 183.7% at December 31, 1993, down slightly from 187.6% at year end 1992.
The reserve for credit losses on a consolidated basis increased to $40.2 million, or 4.0% of receivables, in 1992 up from $36.4 million, or 2.9% of receivables, in 1991. This reserve level and a decrease in impaired assets resulted in higher reserve coverage of impaired assets.
ASSET QUALITY
Impaired assets include both nonperforming assets (mortgage loans and leases past due 90 days or more, real estate owned, credit card receivables due from cardholders in bankruptcy, and off-lease equipment) and accruing loans past due 90 days or more on credit cards. The carrying values for both real estate owned and equipment held for lease or sale are based on net realizable value after taking into account holding costs and costs of disposition and are reflected in other assets.
On the total managed portfolio, impaired assets were $95.1 million, or 1.8% of receivables, at year end 1993 compared to $92.7 million, or 2.5% of receivables, in 1992. Nonperforming assets on the total managed portfolio were $63.6 million, or 1.2% of receivables, compared to $57.8 million, or 1.6%, in 1992. A key credit quality statistic, the 30-plus-day delinquency rate on managed credit cards, dropped to 2.4% from 3.7% a year ago. The total managed charge-off rate for 1993 was 2.9%, compared to 3.4% for 1992. The charge-off rate on managed credit cards was 3.5% for 1993, down from 4.5% for 1992.
On the total owned portfolio, impaired assets were $22.5 million, or 1.8% of receivables, in 1993 compared to $31.6 million, or 3.2%, in 1992. Gross interest income that would have been recorded in 1993 and 1992 for owned nonperforming assets, had interest been accrued through-out the year in accordance with the assets' original terms, was approximately $1.5 million and $1.8 million, respectively. The amount of interest on nonperforming assets included in income for 1993 and 1992 was $.3 million and $.5 million, respectively.
Past due loans represent accruing loans that are past due 90 days or more as to collection of principal and interest. Credit card receivables, except those on bankrupt, decedent and fraudulent accounts, continue to accrue interest until the time they are charged off at 186 days contractual delinquency. In contrast, all mortgage loans and leases are put on nonaccrual when they become 90 days past due. Owned credit card receivables past due 90 days or more and still accruing interest were $11.0 million or 1.0% of receivables at December 31, 1993, compared to $16.3 million, or 2.2% of receivables, a year ago.
Through 1990, when the Company received notice that a credit cardholder had filed a bankruptcy petition or was deceased, the Company established a reserve equal to the full balance of the receivable. The receivable, if not paid, would be charged off in accordance with the Com-pany's normal credit card charge-off policy at 186 days contractual delinquency. Likewise, receivables in accounts identified as fraudulent would be reserved against and written off (as an operating expense) when they became 186 days contractually delinquent. These policies are consistent with many leading competitors in the credit card industry.
During 1991, the Company adopted a new policy for the charge-off of bankrupt, decedent and fraudulent credit card accounts. Under the new policy, the Company charges off bankrupt or decedent accounts within 30 days of notification and accounts suspected of being fraudulent after a 90-day investigation period, unless the investigation shows no evidence of fraud. Consequently, in 1991, both newly identified bankrupt, decedent and fraudulent accounts, as well as those previously identified, were written off. The 1991 charge-off rates included in the following tables exclude the effect of this acceleration.
With respect to the mortgage loan business, in 1993 the Company continued to face several difficult challenges: softening real estate values, increased prepayments and a higher level of charge-offs. The managed charge-off rate on mortgage loans increased from .8% in 1992 to 1.3% in 1993. The 1993 charge-off amount includes $3.0 million of accelerated charge-offs. The managed mortgage charge-off rate in 1994 is anticipated to stay at a high level.
ADVANTA CORP. AND SUBSIDIARIES
The following tables provide a summary of reserves, impaired assets, delinquencies and charge-offs for the past five years:
(1) Restated, where necessary, to exclude interest advances on the serviced mortgage portfolio to be consistent with presentation of owned portfolio. (2) The 1991 charge-off rates are normalized to exclude the acceleration of the charge-off of bankrupt and decedent accounts related to the adoption of a new credit card charge-off policy in 1991. Including these amounts, the charge-off rates for 1991 were 3.8% and 5.3% on a consolidated-managed and credit card-managed basis, respectively.
ADVANTA CORP. AND SUBSIDIARIES
(1) The 1991 charge-off rates are normalized to exclude the acceleration of the charge-off of bankrupt and decedent accounts related to the adoption of a new credit card charge-off policy in 1991. Including these amounts, the charge-off rates for 1991 were 4.7% and 5.8% on a consolidated-owned and credit card-ownedbasis, respectively.
ADVANTA CORP. AND SUBSIDIARIES
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Notes to Consolidated Financial Statements.
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
See Notes to Consolidated Financial Statements.
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements.
ADVANTA CORP. AND SUBSIDIARIES
See Notes to Consolidated Financial Statements.
ADVANTA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - - - --------------------------------------------------- PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of Advanta Corp. (the "Company") and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
RECLASSIFICATION Certain prior-period amounts have been reclassified to conform with current-year classifications.
CREDIT CARD ORIGINATION COSTS, SECURITIZATION INCOME AND FEES CREDIT CARD ORIGINATION COSTS The Company accounts for credit card origination costs under Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"). This accounting standard requires certain loan and lease origination fees and costs to be deferred and amortized over the life of a loan or lease as an adjustment to interest income. Origination costs are defined under this standard to include costs of loan origination associated with transactions with independent third parties and certain costs relating to underwriting activities and preparing and processing loan documents. The Company engages third parties to solicit and originate credit card account relationships. Amounts deferred under these arrangements approximated $29.5 million in 1993, $20.3 million in 1992 and $24.4 million in 1991. For credit card receivables, deferred origination costs have been amortized over 60 months.
At the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board, the task force reached a consensus regarding the acquisition of individual credit card accounts from independent third parties (EITF Issue 93-1). The consensus was that credit card accounts acquired individually should be accounted for as originations under SFAS 91 and EITF Issue 92-5. Amounts paid to a third party to acquire indi-vidual credit card accounts should be deferred and netted against the related credit card fee, if any, and the net amount should be amortized on a straight-line basis over the privilege period. If a significant fee is charged, the privilege period is the period that the fee entitles the cardholder to use the card. If there is no significant fee, the privilege period should be one year.
In accordance with this recent consensus, direct origi-nation costs incurred related to credit card originations initiated after the May 20, 1993 consensus date are deferred and amortized over 12 months. Costs incurred for originations which were initiated prior to May 20, 1993 will continue to be amortized over a 60 month period. Prior to the EITF Issue 93-1 consensus, it was the Company's practice to write off deferred origination costs related to credit card receivables that have been securitized. This practice had effectively written off credit card origination costs much more quickly than the 60 month period previously utilized. In connection with the prospective adoption of a 12 month amortization period for deferred credit card origination costs, the Company will no longer write off deferred origination costs related to credit card receivables being securitized, as under the EITF Issue 93-1 consensus such costs are not directly associated with the receivables.
CREDIT CARD SECURITIZATION INCOME Since 1988, the Company, through its subsidiary Colonial National Bank USA ("Colonial National" or "CNB") has completed 16 credit card securitizations totalling $3.2 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 the repayment term, including prepayments. Prior to the EITF Issue 93-1 consensus, net gains were not recorded at the time each transaction was completed as excess servicing income was offset by the write off of deferred origination costs and the establishment of recourse reserves. Subsequent to the prospective adoption discussed above, excess servicing income has been recorded at a lower level at the time of each transaction, and is predominantly offset by the establishment of recourse reserves. The lower level of excess servicing income corresponds with the discontinuance of
ADVANTA CORP. AND SUBSIDIARIES
deferred origination cost write-offs upon securitization of receivables as discussed above. During the "revolving period" of each trust, income is recorded based on additional cash flows from the new receivables which are sold to the trusts on a continual basis to replenish the investors' interest in trust receivables which have been repaid by the credit cardholders.
CREDIT CARD FEES Annual fees on credit cards are deferred and amortized on a straight-line basis over the fiscal year of the account.
The changes relating to origination costs and securitization income, as discussed above, in the aggregate did not have a material effect on the Company's 1993 financial statements.
MORTGAGE LOAN ORIGINATION FEES The Company generally charges origination fees ("points") for mortgage loans where permitted under state law. Origi-nation fees 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 that the Company generally intends to sell or securitize within the next six months. These assets are reported at the lower of cost or fair market value.
INVESTMENTS HELD TO MATURITY Investments held to maturity include those investments that the Company has the positive intent and ability to hold to maturity. These investments are reported at cost, adjusted for amortization of premiums or accretions of discounts.
INVESTMENTS AVAILABLE FOR SALE Investments available for sale include securities that the Company sells from time to time to provide liquidity and in response to changes in the market. In 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement requires that debt and equity securities classified as Available for Sale be reported at market value. This Statement is effective for fiscal years beginning after December 15, 1993, although a company may elect earlier adoption as of the end of a fiscal year for which annual statements have not been previously issued. The Company has elected to adopt this statement as of December 31, 1993, and as such, these securities are recorded at market value at that date. Unrealized holding gains and losses on these securities are reported as a separate component of stockholders' equity and included in retained earnings. These securities are reported at the lower of cost or market value at December 31, 1992. The market value was $202,708 at December 31, 1992.
FORWARD CONTRACTS A short sale of U.S. Treasury securities for forward settlement involves an agreement between two parties to sell Treasury securities at a specified future date and at a speci-fied future price. The Company periodically sells U.S. Treasury securities short for forward settlement for the purpose of hedging the pricing of anticipated mortgage loan securitizations. Gains or losses are deferred and included in the measurement of the dollar basis of the assets sold. The contractual amounts of forward contracts at December 31, 1993 and 1992 were $72 million and $165 million, respectively.
FINANCIAL FUTURES A financial future is a contract to take or make delivery of the underlying financial instrument at a specified price at a future date. The Company periodically sells financial futures contracts expressly for the purpose of managing and reducing interest rate risk specifically related to the reset of one-month LIBOR on outstanding credit card securitiza-tions. Gains or losses are included in securitization income. At December 31, 1993 and 1992, there were no futures contracts outstanding.
INTEREST RATE SWAPS An interest rate swap is a contract between two counter-parties to exchange interest payments on a specified notion-al amount at agreed upon rates. The Company enters into these agreements for the primary purpose of managing its interest rate risk. At December 31, 1993, the Company had $500 million notional amount of interest rate swap agreements fixed at a 4.95% weighted average rate and $150 million notional amount of floating rate swaps priced at one-month LIBOR. The fixed rate contracts mature throughout 1994 and the floating rate contracts mature in 1996.
INCOME FROM MORTGAGE BANKING ACTIVITIES The Company, through its subsidiaries, sells mortgage loans through both secondary market securitizations and whole loan sales, typically with servicing retained. Income is
ADVANTA CORP. AND SUBSIDIARIES
recognized at the time of sale approximately equal to the present value of the anticipated future cash flows resulting from the retained yield adjusted for an assumed prepayment rate, net of any anticipated charge-offs, and allowing for a normal servicing fee. Changes in the anticipated future cash flows, as well as the receipt of cash flows which differ from those projected, affect the recognition of current and future mortgage banking income. Also included in this 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 in-clude certain fees and costs related to acquiring and pro-cessing a loan held for resale. These deferred origination fees and costs are netted against income from mortgage banking activities when the loans are sold. Mortgage banking income also includes loan servicing fees equal to .5% of the outstanding balance of securitized loans and, beginning in 1992, loan servicing fees on mortgage loan portfolios which were never owned by the Company ("contract servicing").
INCOME FROM LEASE SECURITIZATIONS The Company, through its subsidiaries, sells equipment lease receivables through secondary market securitizations. Income is recorded at the time of sale approximately equal to the present value of the anticipated future cash flows net of anticipated charge-offs, partially offset by deferred initial direct costs, transaction expenses and estimated credit losses under certain recourse requirements of the trust. Also included in income is the difference between the net sales proceeds and the carrying amount of the receivables sold. Subsequent to the initial sale, securitization income is recorded in proportion to the actual cash flows received from the trusts.
INSURANCE Insurance premiums, net of commissions on credit life, disability and unemployment policies on credit cards, are earned monthly based upon the outstanding balance of the underlying receivables. The cost of acquiring new rein-surance is deferred and amortized over the reinsurance period in order to match the expense with the anticipated premium revenue. Insurance claim reserves are based on estimated settlement amounts for both reported and incurred but not reported losses.
CREDIT LOSSES During 1991, the Company adopted a new charge-off policy related to bankrupt, decedent and fraudulent credit card accounts. Under the previous policy, whenever the Company received notification that a credit cardholder had filed a bankruptcy petition or was deceased, a reserve was established equal to the full balance of the receivable. The receivable, if not paid, would be charged off at 186 days contractual delinquency. Likewise, receivables in accounts identified as fraudulent would be reserved against and written off (as an operating expense) when they became 186 days contractually delinquent. Under the policy adopted in 1991, bankrupt and decedent accounts are written off within 30 days of notification, and accounts suspected of being fraudulent are written off after a 90 day investigation period, unless the investigation shows no evidence of fraud. During the 1991 transition period, both newly identified bankrupt, decedent and fraudulent accounts, as well as those previously identified, were written off.
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 being amortized on a straight-line basis over 25 years.
INCOME TAXES Effective January 1, 1993, the Company implemented the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") with no material effect on the financial statements. SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Prior to the implementation of SFAS 109, the Company accounted for income taxes using Accounting Principles Board Opinion No. 11.
EARNINGS PER SHARE Earnings per common share are computed by dividing net earnings after preferred stock dividends by the average number of shares of common stock and common stock equivalents outstanding during each year. The outstanding preferred stock is not a common stock equivalent. Earnings
ADVANTA CORP. AND SUBSIDIARIES
per share in 1992 and 1991 have been adjusted to reflect the effective three-for-two stock split as a result of the October 15, 1993 stock dividend. See Note 7.
CASH FLOW REPORTING For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks. Cash paid during 1993, 1992 and 1991 for interest was $78.8 million, $94.4 million and $107.7 million, respectively. Cash paid for taxes during these periods was $30.0 million, $17.7 million and $8.7 million, respectively.
(A) Includes credit card receivables available for sale of $564 million and $250 million in 1993 and 1992, respectively. (B) Includes mortgage loan receivables available for sale of $74.6 million and $190.5 million in 1993 and 1992, respectively. (C) Includes lease receivables available for sale of $28.6 million and $31.5 million in 1993 and 1992, respectively, and is net of unearned income of $11.9 million and $10.8 million in 1993 and 1992, respectively, and also includes residual interest for both years. (D) Includes approximately $.6 million and $1.7 million in 1993 and 1992, respectively, related to loan and lease receivables available for sale.
Receivables serviced for others consisted of the following items:
The geographic concentration of managed receivables was as follows:
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, 1993 and 1992, the Company had $16.0 billion and $11.7 billion, respectively, of commitments to extend credit outstanding for which there is potential credit risk. The Company believes that its customers' utilization of these lines of credit will continue to be substantially less than the amount of the commitments, as has been the Company's experience to date. At December 31, 1993 and 1992, out-standing managed credit card receivables represented 24% and 23%, respectively, of outstanding commitments.
ADVANTA CORP. AND SUBSIDIARIES
NOTE 3. CREDIT CARD, MORTGAGE LOAN AND EQUIPMENT LEASE SECURITIZATIONS - - - --------------------------------------- Colonial National has completed 16 sales of credit card receivables through asset-backed securitizations aggregating $3.2 billion. In each transaction, credit card receivables were transferred to a trust which issued certificates representing ownership interests in the trust to institutional investors. Colonial National retained a participation interest in each trust, reflecting the excess of the total amount of receivables transferred to the trust over the portion represented by certificates sold to investors. The retained participation interests in the credit card trusts were $371.8 million and $393.5 million at December 31, 1993 and 1992, respectively. Although Colonial National continues to service the underlying credit card accounts and maintain the customer relationships, these transactions are treated as sales for financial reporting purposes to the extent of the investors' interests in the trusts. According-ly, the associated receivables are not reflected on the balance sheet.
Colonial National is subject to certain recourse provi-sions in connection with these securitizations. At December 31, 1993 and 1992, Colonial National had reserves of $96.4 million and $108.8 million, respectively, related to these recourse provisions. These reserves are netted against the excess servicing-credit card securitization. See Note 16. At December 31, 1993, the Company had amounts receivable from credit card securitizations, which include the related interest-bearing deposits, excess servicing and other amounts related to securitization of $191.0 million, $104.7 million of which was subject to liens by the providers of the credit enhancement facilities for the individual securitizations. At December 31, 1992, the amounts receivable and amounts subject to lien were $192.0 million and $106.5 million, respectively.
Through December 31, 1993, the Company had sold, through securitizations and whole loan sales, approximately $1.7 billion of mortgage loan receivables which sales are subject to certain recourse provisions. The Company had reserves of $32.1 million and $10.1 million at year end 1993 and 1992, respectively, related to these recourse provisions which are netted against the excess mortgage servicing rights. See Note 16. At December 31, 1993, the Company had amounts receivable from mortgage loan sales and securitizations of $102.8 million, $39.7 million of which was subject to liens. At December 31, 1992, the amounts receivable and amounts subject to lien were $82.0 million and $32.8 million, respectively.
Through December 31, 1993, the Company had securitized approximately $196 million of equipment lease receiv-ables which are subject to certain recourse provisions. The asset-backed certificates carry a fixed rate to investors. There were reserves of $5.3 million and $3.1 million at year end 1993 and 1992, respectively, related to these recourse provisions which are netted against the excess servicing-lease securitizations. See Note 16. The Company had accounts receivable from lease securitizations of $9.7 million at year end 1993 and $4.0 million at year end 1992, of which $5.9 million and $1.7 million, respectively, were subject to liens by the providers of the credit enhancement facility. Total interest in residuals for lease assets sold was $9.6 million and $7.7 million at December 31, 1993 and 1992, respectively, and is also subject to recourse provisions.
NOTE 4. RESERVE FOR CREDIT LOSSES - - - -------------------------------------- The reserve for credit losses for lending and leasing transactions is established to reflect losses anticipated from delinquencies that have already occurred. Any adjustments to the reserves are reported in the Income Statements in the periods they become known.
During 1993, the Company used $11 million of its on-balance sheet unallocated reserves to increase its off-balance sheet mortgage loan recourse reserves, which are a component of excess mortgage servicing rights.
In 1992, the Company used $3.3 million of its on-balance sheet unallocated reserves to increase its off-balance sheet mortgage loan recourse reserves.
ADVANTA CORP. AND SUBSIDIARIES
The following table displays five years of reserve history:
ADVANTA CORP. AND SUBSIDIARIES
At December 31, 1993, investment securities with a book value of $17,473 were pledged as collateral for swap and hedge transactions. At December 31, 1991, investment securities with a book value of $101,847 were pledged as collateral for repurchase transactions. There were no investment securities pledged as collateral at December 31, 1992. At December 31, 1993, 1992 and 1991, investment securities with a book value of $7,927, $9,147 and $8,748, respectively, were deposited with insurance regu-latory authorities to meet statutory requirements or held by a trustee for the benefit of primary insurance carriers. At December 31, 1993, $806 of net unrealized gains on securities was included in investments available for sale. During 1993, the net change in unrealized gains on available for sale securities included as a separate component of stockholders' equity was $563. Maturity of investments available for sale at December 31, 1993:
Proceeds from sales of available for sale securities during 1993 were $841,000. Gross gains of $3,430 and losses of $888 were realized on these sales. Proceeds during 1992 were $353,000. Gross gains of $2,414 and losses of $427 were realized on these sales. Proceeds during 1991 were $147,000. Gross gains of $1,085 and losses of $508 were realized on these sales. The specific identification method was the basis on which cost was determined in computing realized gains and losses. Equity securities primarily includes FRB, FHLB and FNMA stock that the Company is required to hold.
The annual maturities of long-term debt at December 31, 1993 for the years ending December 31 are as follows: $70.4 million in 1995; $180.7 million in 1996; $51.4 million in 1997; $10.4 million in 1998; and $55.5 million thereafter. The average interest cost of the Company's debt during 1993, 1992 and 1991 was 7.59%, 9.01% and 10.27%, respectively.
NOTE 7. STOCK DIVIDENDS - - - ------------------------------------ On April 24, 1992, the Company's shareholders approved a dual class stock plan pursuant to which the Company's Common Stock was reclassified as Class A Common Stock and a new class of non-voting stock, Class B Common Stock, was authorized. Promptly following shareholder approval, the Board of Directors declared a dividend of one share of Class B Common Stock on each outstanding share of Class A Common Stock to shareholders of record as of April 24, 1992, which dividend was paid on May 5, 1992.
ADVANTA CORP. AND SUBSIDIARIES
On September 23, 1993, the Board of Directors approved a three-for-two stock split in the form of a 50% stock dividend on both the Class A and Class B Common Stock to shareholders of record as of October 4, 1993, which dividend was paid on October 15, 1993. All share and per share amounts have been adjusted to reflect the three-for-two stock split as a result of the stock dividend. The balance sheet presentation of stockholders' equity for prior years and earnings per share for the years ended December 31, 1992 and 1991, have been adjusted to reflect the impact of this dividend, as if it had already occurred at such respective dates.
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 1993 as the Company paid dividends on its common stock. The redemption price of the Class A Preferred Stock is equivalent to the par value.
NOTE 9. ISSUANCE OF COMMON STOCK - - - ------------------------------------ On March 24, 1993, in a public offering, the Company sold 2,575,000 shares (pre-split) of Class B Common Stock. Proceeds from the offering, net of the underwriting discount, were $77.5 million. On April 21, 1993, the underwriters of the offering purchased an additional 450,000 shares (pre-split) of Class B Common Stock, pursuant to the overallotment option granted to them by the Company. This brought the Company's total proceeds of the offering, net of related expenses, to approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including to finance the growth of its subsidiaries.
NOTE 10. EXTRAORDINARY ITEM - - - ------------------------------------ In April of 1993, the Company repurchased the remaining $33.2 million of its 12 3/4% Senior Subordinated Debentures at a price equal to 104% of par. This transaction resulted in an extraordinary loss of $1.3 million (net of a tax benefit of $.7 million) or $.03 per share for the year ended December 31, 1993.
Current tax payable includes earnings of certain subsidiaries which are not included in the consolidated federal income tax return. In 1993 and 1992, the tax provision includes $2.0 million and $6.5 million of direct entries to equity accounts, respectively.
ADVANTA CORP. AND SUBSIDIARIES
In 1991, the Company's consolidated tax return reflects alternative minimum taxes payable. The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. The net deferred tax liability is comprised of the following:
The Company did not record any valuation allowances against deferred tax assets at December 31, 1993. The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows:
NOTE 12. BENEFIT PLANS - - - ---------------------------------- In 1991, the Company adopted the Advanta Management Incentive Plan With Stock Election II ("AMIPWISE II"), which plan was designed to provide incentives to participating employees to remain in the employ of the Company and devote themselves to its success. Under the plan, employees eligible to participate in the Advanta Management Incentive Plan (a bonus program) were given the opportunity to elect to take portions of their anticipated or "target" bonus payments for 1993, 1994 and 1995 in the form of restricted shares of common stock. To the extent such elections were made, restricted shares were issued to the employees, with the number of shares granted to each employee determined by dividing the amount of future bonus payments the employee had elected to receive in stock by the market price of the stock on February 7, 1991 ($4.75). 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 vesting was and will be accelerated annually with respect to one-third of an employee's restricted shares, to the extent that the employee and the Company met or meet their respective performance goals for each of 1993, 1994 and 1995. When newly eligible employees elect to participate in AMIPWISE II, the number of restricted shares issued to them with respect to their "target" bonus payments for the relevant years is determined based on the average market price of the stock for the 90 days prior to eligibility. Under the plan, 1,062,009 shares of restricted stock have been issued, of which 283,130 shares were vested as the result of 1993 performance bonus awards.
ADVANTA CORP. AND SUBSIDIARIES
In 1992, the Company implemented a plan similar to AMIPWISE II, for key employees below the management level, under which eligible employees were awarded shares of restricted Class B common stock with respect to "target" bonus payments for 1992, 1993, 1994 and 1995. The num-ber of shares issued to them with respect to their "target" bonus payments for the relevant years was determined based on the average market price of the stock for the year ended December 31, 1991 ($7.07). Under this plan, a total of 83,853 restricted shares of Class B common stock have been issued, of which 35,531 shares have vested as the result of 1992 and 1993 bonus awards. In 1993, the Company adopted a plan substantially similar to AMIPWISE II ("AMIPWISE III") under which elections were made to take "target" bonus payments for 1996, 1997 and 1998 in shares of Class B common stock. The number of shares was determined using the market price of the stock on the election date ($17.00). Under this plan, 386,304 shares of restricted Class B common stock have been issued. At December 31, 1993, a total of 1,229,829 shares issued under these plans and under the predecessor plan to AMIPWISE II (with respect to which employees made elections with respect to "target" bonuses for 1990, 1991 and 1992) were subject to restrictions and were included in the number of shares outstanding. These shares are considered common stock equivalents in the calculation of earnings per share. Deferred compensation of $11.0 million and $5.1 million related to these plans is reflected as a reduction of equity at December 31, 1993 and 1992, respectively.
The Company has an Employee Stock Purchase Plan which allows employees and directors to purchase Advanta common stock at a 15% discount from the market price without paying brokerage fees. The Company reports this 15% discount as compensation expense. During 1993, shares were issued under the plan from unissued stock at the average market price on the day of purchase. Effective with the stock dividend on May 5, 1992, only Class B shares are issued for this plan.
The Company has two Stock Option Plans which together authorize the grant to employees and directors, of options to purchase an aggregate of 7,425,000 shares of common stock. In connection with the implementation of the dual class stock plan described in Note 7, each option granted prior to the May 5, 1992 stock dividend was converted into two options, each covering an equal number of Class A common shares and Class B common shares as were covered by the original option, and each with an exercise price per share equal to one-half the original exercise price. In connection with the October 15, 1993 stock dividend, the number of options and the exercise price of each option were modified to reflect the three-for-two stock split. Although under these plans options issued after the May 5, 1992 dividend date may be for either Class A or Class B common stock, the Company presently intends only to issue options to purchase Class B common stock. Beginning in 1992, options generally vest over a four-year period, and expire 10 years after the date of grant.
Shares available for future grant aggregated 2,051,508 at December 31, 1993, and 2,629,209 at December 31, 1992. Transactions under the plans for the two years ended December 31, 1993, were as follows:
The Company also has outstanding, options to purchase 718,500 shares of common stock at a price range of $1.52 to $11.00 per share, which were not issued pursuant to either of the predecessor plans and generally vest over a three-year period.
At December 31, 1993, 1,547,115 of the 3,039,000 out-standing options issued under the Stock Options Plans had vested and 709,500 of the 718,500 issued outside the Plans had vested.
The Company has a tax-deferred employee savings plan which provides employees savings and investment opportunities, including the ability to invest in the Company's 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, 1993, 1992 and 1991, the Company contributions equalled 100% of the first 5% of participating employees' compensation contributed to the plan. The expense for this plan totalled
ADVANTA CORP. AND SUBSIDIARIES
$1,189, $882 and $753 in 1993, 1992 and 1991, respectively. At December 31, 1993, 133,018 of the 337,500 shares of common stock reserved for issuance under the employee savings plan had been purchased by the plan from the Company at the market price on each purchase date. All other shares purchased by the plan for the three years ended December 31, 1993, 1992 and 1991 were purchased on the open market.
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, 1993, 1992 and 1991 was $4.8 million, $3.5 million and $3.1 million, respectively. The future minimum lease payments of all non-cancellable operating leases are as follows:
In January 1994, the Company hired a new senior executive and agreed to the following compensation arrangement. In addition to a base salary, the executive received 200,000 restricted shares of Class B common stock and an option to purchase 100,000 shares of Class B common stock at $27.75 per share. The restricted shares, which as of the date of the grant had a market value of $5.6 million, will vest at the rate of 25% per annum for four years, and the options will become exercisable at the same rate. Should the executive leave the Company's employ before four years have passed, these benefits will vest upon the departure, except in certain limited circumstances. The executive is also to receive a guaranteed one-time bonus of $525, other annual benefits and perquisites estimated at $250, and will also be eligible to receive annual bonuses under AMIPWISE II and AMIPWISE III (see Note 12).
NOTE 14. OTHER BORROWINGS - - - --------------------------------- The Company had lines of credit and term funding arrangements of $63.5 million at December 31, 1993, which were collateralized by lease receivables, as well as equipment under operating lease. At December 31, 1992, the Company had lines of credit and term funding arrangements of $208.7 million which were collateralized by lease receivables and mortgage loans. These facilities carry variable interest rates which range from 1 1/4 % above LIBOR to 1 1/4% above the prime rate. There is a quarterly facility fee of 1/4 to 1/2 of 1% of the average unused portion on the lines of credit.
The composition of other borrowings was as follows:
The following table displays information related to selected types of short-term borrowings:
ADVANTA CORP. AND SUBSIDIARIES
The weighted average interest rates were calculated by dividing the interest expense for the period for such borrowings by the average amount outstanding during the period.
(A) Represents initial deposits and subsequent excess collections up to the required amount on each of the credit card, mortgage and leasing securitizations.
(A) Carried at the lower of cost or fair market value.
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.
At December 31, 1992, Advanta Leasing had $6.3 million of cash related to its securitizations which is restric-ted as to its use. This cash represents the initial deposits and subsequent excess collections up to the required amount on each of the equipment lease-backed securitizations. In 1993, this amount is included in interest-bearing deposits.
The Federal Reserve Act imposes various legal limitations on the extent to which banks that are members of the Federal Reserve System can finance or otherwise supply funds to certain of their affiliates. In particular, Colonial National is subject to certain restrictions on any extensions of credit to, or other covered transactions, such as certain purchases of assets, with the Company or its affiliates. Such restrictions prevent Colonial National from lending to the Company and its affiliates unless such extensions of credit are secured by U.S. Government obligations or other specified collateral. Further, such secured extensions of credit by Colonial National are limited in amount: (a) as to the Company or any such affiliate, to 10 percent of Colonial National's capital and surplus, and (b) as to the Com-pany and all such affiliates in the aggregate, to 20 percent of Colonial National's capital and surplus.
Under certain grandfathering provisions of the Competitive Equality Banking Act of 1987, the Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so long as the Company and Colonial National continue to comply with certain restrictions on their activities. With respect to Colonial National, these restric-tions include limiting the scope of its activities to those in which it was engaged prior to March 5, 1987. Since Colonial National was not making commercial loans at that time, it must continue to refrain from making commercial loans--which would include any loans to the Company or any of its subsidiaries--in order for the Company to maintain its grandfathered exemption under the BHCA. The Company has no present plans to register as a bank holding company under the BHCA. Colonial National is subject to various legal limitations on the amount of dividends that can be paid to its parent, Advanta Corp. Colonial National is eligible to declare a dividend provided that it is not greater than the current year's net profits plus net profits of the preceding two years, as defined. During 1993, Colonial National paid $75.0 million of dividends to Advanta Corp., while $30.5 million of dividends were paid during 1992.
The Office of the Comptroller of the Currency requires that Colonial National maintain a risk-based capital ratio of at least 8%. Colonial National's risk-based capital ratio of 12.06% at December 31, 1993 was in excess of the required level and exceeded the minimum required capital level of 10% for designation as a "well capitalized" depository institution.
ADVANTA CORP. AND SUBSIDIARIES
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS - - - ------------------------------------------------ The estimated fair values of the Company's financial instruments are as follows:
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.
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, fair values are based on quoted market prices, dealer quotes or estimated using quoted market prices for similar securities.
LOANS, NET OF RESERVE FOR CREDIT LOSSES For credit card receivables and mortgage loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for credit card receivables and mortgage loans also includes the estimated value of the portion of the interest payments and fees which are not sold with the securities backed by these types of loans. The value of the retained interest payments (i.e., excess servicing) is estimated by discounting the future cash flows, adjusted for prepayments, net of anticipated charge-offs and allowing for the value of the servicing. The value of direct finance lease receivables and other loans are estimated based on the market prices of similar receivables with similar characteristics.
EXCESS SERVICING-CREDIT CARD AND MORTGAGE SERVICING RIGHTS The fair values of excess mortgage servicing rights and credit card excess servicing rights are estimated by dis-counting the future cash flows at rates which management believes to be reasonable. However, because there is no active market for these financial instruments, management
ADVANTA CORP. AND SUBSIDIARIES
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.
DEMAND AND SAVINGS DEPOSITS The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. This fair value does not include the benefit that results from the low cost of funding provided by these deposits compared to the cost of borrowing funds in the market.
TIME DEPOSITS AND DEBT The fair value of fixed-maturity certificates of deposit and notes are estimated using the rates currently offered for deposits and notes of similar remaining maturities.
SENIOR SUBORDINATED DEBENTURES The fair value of the senior subordinated debentures is based on dealer quotations.
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 AND FORWARD CONTRACTS The fair value of interest rate swaps and forward contracts (used for hedging purposes) is the estimated amount that the Company would pay to terminate the agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparty.
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 $12.1 billion of unused commitments to extend credit, there is no market value associated with these financial instruments, as any fees charged are consistent with the fees charged by other companies at the reporting date to enter into similar agreements.
NOTE 19. CALCULATION OF EARNINGS PER COMMON SHARE - - - -------------------------------------------------------- The following table shows the calculation of earnings per common share for the years ended December 31, 1993, 1992 and 1991:
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, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. 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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN & CO. ------------------------- Philadelphia, PA January 25, 1994
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 pre-pared 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 & Co., 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.
ADVANTA CORP. AND SUBSIDIARIES
QUARTERLY DATA (UNAUDITED)
ADVANTA CORP. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES
Allocation of Reserve for Credit Losses
COMPOSITION OF GROSS RECEIVABLES
(A) Yield computed on a taxable equivalent basis using a statutory rate of 35% in 1993.
ADVANTA CORP. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the caption "Election of Directors" and the last paragraph under the caption "Security Ownership of Management" are hereby incorporated herein by reference, as is the text in Part I of this Report under the caption, "Executive Officers of the Registrant". Graeme K. Howard, Jr., age 61, who has served as a director of the Company since 1985, will not stand for re-election when his term expires in May 1994.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive Compensation" and "Committees, Meetings and Compensation of the Board of Directors" are hereby incorporated herein by reference.
ITEM 12.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the third paragraph under the caption "Election of Directors -- Nominees for Election for a Term Expiring in 1997" in the Proxy Statement is hereby incorporated herein by reference.
PART IV
ITEM 14.
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, 1993 and 1992.
2. Consolidated Income Statements for each of the three years for the period ended December 31, 1993.
3. Consolidated Statements of Changes in Stockholders' Equity for each of the three years for the period ended December 31, 1993.
4. Consolidated Statements of Cash Flows for each of the three years for the period ended December 31, 1993.
5. Notes to Consolidated Financial Statements.
(a) (2) Schedules
1. Schedule I -- Marketable Securities.
2. Schedule III -- Condensed Financial Information of Registrant
3. Schedule VIII -- Valuation and Qualifying Accounts.
4. Schedule IX -- Short-Term Borrowings.
5. 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, as amended (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988 and Exhibit 3 to the Company's Quarterly Report on Form 10- Q for the period ended March 31, 1992).
3-b By-Laws of the Registrant, as amended (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989).
4-a* Trust Indenture dated April 22, 1981 between Registrant and CoreStates Bank, N.A. (formerly, The Philadelphia National Bank), as Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A,
respectively, both dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 of the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993.
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).**
10-b Advanta Corp. 1992 Stock Option Plan (incorporated by reference to Exhibit 10-t to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).
10-c Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of May 1, 1991 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-40368), filed with Amendment No.1 thereto on May 21, 1991)
10-d Registrant's Advanta Management Incentive Plan (incorporated by reference to Exhibit 10-n to the Registrant's Registration Statement on Form S-2, Registration No.33-39343, filed March 8, 1991).**
10-e* Application for membership in VISA U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983.
10-f* Application for membership in MasterCard International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983.
10-g* Indenture of Trust dated May 11, 1984 between Linda M. Ominsky, as settlor, and Dennis Alter, as trustee.
10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda A. Ominsky, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).
10-h Agreement dated as of January 21, 1994 betweenn the Registrant and Alex W. "Pete" Hart (filed herewith).**
10-i Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (No. 33-33350) filed February 21, 1990).**
10-j Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of August 1, 1990 (incorporated by reference to Exhibit 4 to the Registrant's Report on Form 8-K filed September 11, 1990).
10-k Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of November 15, 1990 (incorporated by reference to Exhibit 4 to the Registrant's Report on Form 8-K filed November 30, 1990).
10-l Registrant's 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, Registration No. 33-39343, filed March 8, 1991).**
10-m Pooling and Servicing Agreement between Colonial National Bank USA and Banker's Trust Company, as Trustee, dated as of September 1, 1991 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No.33- 42682), filed with Amendment No. 1 thereto on September 23, 1991).
10-n Pooling and Servicing Agreement between Colonial National Bank USA and Banker's Trust Company, as Trustee, dated as of February 1, 1992 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No.33- 45306), filed with Amendment No.1 thereto on February 3, 1992).
10-o Amended and Restated Master Pooling and Servicing Agreement between Colonial National Bank USA and Chemical Bank, as Trustee, dated as of April 1, 1992 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-49602), filed with Amendment No. 1 thereto on August 19, 1992).
10-p Advanta Management Incentive Plan with Stock Election III (incorporated by reference to Exhibit 10-s to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).**
10-q Life Insurance Benefit for Certain Key Executives and Directors (incorporated by reference to Exhibit 10-u to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).**
10-r $122.5 Million 364-day Unsecured Revolving Credit Agreement dated as of March 24, 1994 among the Registrant, Mellon Bank, N.A. as Agent and the several bank parties thereto (filed herewith).
10-s $122.5 Million 3-year Unsecured Revolving Credit Agreement dated as of March 24, 1994 among the Registrant, Mellon Bank, N.A. as Agent and the several bank parties thereto (filed herewith).
11 Inapplicable.
12 Inapplicable.
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21. Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of independent public accountants (filed herewith).
24 Powers of Attorney of Messrs. Bellis, Botel, Braemer, Brenner, Dunkelberg and Naples (filed herewith).
28 Inapplicable.
99 Inapplicable.
_________
*Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985.
**Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
1. A Report Form 8-K was filed by the Registrant on October 25, 1993 regarding consolidated earnings of the Registrant and its subsidiaries for the fiscal quarter ended September 30, 1993. Summary earnings and balance sheet information as of that date were filed with such report.
2. A Report Form 8-K was filed by the Registrant on December 3, 1993 regarding the commencement of the Registrant's $500,000,000 medium-term note program. No financial statements were filed with such Report.
3. A Report Form 8-K was filed by the Registrant on January 20, 1994 regarding consolidated earnings for the Registrant and its subsidiaries for the fiscal quarter ended and fiscal year ended December 31, 1993. Summary earnings and balance sheet information as of that date were filed with such report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADVANTA Corp.
Dated: March 28, 1994 By: /S/ Dennis Alter ------------------- Dennis Alter, Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 28th day of March, 1994.
FINANCIAL SCHEDULES AND INDEPENDENT PUBLIC ACCOUNTANTS' REPORT THEREON
Schedule I
ADVANTA CORP. & SUBSIDIARIES Marketable Securities December 31, 1993 (Dollars in thousands)
ADVANTA CORP. & SUBSIDIARIES December 31, 1993
Schedule III - Condensed Financial Information of Registrant
Parent Company Only CONDENSED BALANCE SHEETS
(Dollars in thousands)
Schedule III (cont'd)
Parent Company Only CONDENSED STATEMENT OF INCOME
(Dollars in thousands)
Schedule III (Cont'd)
Parent Company Only Statement of Cash Flows
Schedule VIII
ADVANTA Corp. & Subsidiaries Valuation & Qualifying Accounts ($000's)
(1) Amounts netted against securitization income. (2) Includes $11.0MM transferred from on-balance sheet unallocated reserves. (3) Relates to net charge-offs. (4) Includes $3.3MM transferred from on-balance sheet unallocated reserves.
Schedule IX
ADVANTA CORP. & SUBSIDIARIES Short-Term Borrowings ($000's)
[ARTHUR ANDERSEN LETTERHEAD]
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 25, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedules 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 stataments. 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.
/S/ ARTHUR ANDERSEN & CO.
Philadelphia, PA January 25, 1994
EXHIBIT INDEX
3-a Restated Certificate of Incorporation of Registrant, as amended (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988 and Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1992).
3-b By-Laws of the Registrant, as amended (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989).
4-a* Trust Indenture dated April 22, 1981 between Registrant and CoreStates Bank, N.A. (formerly, The Philadelphia National Bank), as Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 of the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993.
9 Inapplicable.
10-a Registrant's Stock Option Plan, as amended (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).**
10-b Advanta Corp. 1992 Stock Option Plan (incorporated by reference to Exhibit 10-t to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).
10-c Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of May 1, 1991 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-40368), filed with Amendment No.1 thereto on May 21, 1991)
10-d Registrant's Advanta Management Incentive Plan (incorporated by reference to Exhibit 10-n to the Registrant's Registration Statement on Form S-2, Registration No.33-39343, filed March 8, 1991).**
10-e* Application for membership in VISA U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983.
10-f* Application for membership in MasterCard International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983.
10-g* Indenture of Trust dated May 11, 1984 between Linda M. Ominsky, as settlor, and Dennis Alter, as trustee.
10-g(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda A. Ominsky, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).
10-h Agreement dated as of January 21, 1994 betweenn the Registrant and Alex W. "Pete" Hart (filed herewith).**
10-i Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (No. 33-33350) filed February 21, 1990).**
10-j Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of August 1, 1990 (incorporated by reference to Exhibit 4 to the Registrant's Report on Form 8-K filed September 11, 1990).
10-k Pooling and Servicing Agreement between Colonial National Bank USA and Bankers Trust Company, as Trustee, dated as of November 15, 1990 (incorporated by reference to Exhibit 4 to the Registrant's Report on Form 8-K filed November 30, 1990).
10-l Registrant's 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, Registration No. 33-39343, filed March 8, 1991).**
10-m Pooling and Servicing Agreement between Colonial National Bank USA and Banker's Trust Company, as Trustee, dated as of September 1, 1991 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No.33-42682), filed with Amendment No. 1 thereto on September 23, 1991).
10-n Pooling and Servicing Agreement between Colonial National Bank USA and Banker's Trust Company, as Trustee, dated as of February 1, 1992 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1(No.33-45306), filed with Amendment No.1 thereto on February 3, 1992).
10-o Amended and Restated Master Pooling and Servicing Agreement between Colonial National Bank USA and Chemical Bank, as Trustee, dated as of April 1, 1992 (incorporated by reference to Exhibit 4.1 to Colonial National's Registration Statement on Form S-1 (No. 33-49602), filed with Amendment No. 1 thereto on August 19, 1992).
10-p Advanta Management Incentive Plan with Stock Election III (incorporated by reference to Exhibit 10-s to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).**
10-q Life Insurance Benefit for Certain Key Executives and Directors (incorporated by reference to Exhibit 10-u to the Registrant's Registration Statement on Form S-3, Registration No. 33-58660, filed February 23, 1993).**
10-r $122.5 Million 364-day Unsecured Revolving Credit Agreement dated as of March 24, 1994 among the Registrant, Mellon Bank, N.A. as Agent and the several bank parties thereto (filed herewith).
10-s $122.5 Million 3-year Unsecured Revolving Credit Agreement dated as of March 24, 1994 among the Registrant, Mellon Bank, N.A. as Agent and the several bank parties thereto (filed herewith).
11 Inapplicable.
12 Inapplicable.
13 Inapplicable.
16 Inapplicable.
18 Inapplicable.
21. Subsidiaries of the Registrant (filed herewith).
22 Inapplicable.
23 Consent of independent public accountants (filed herewith).
24 Powers of Attorney of Messrs. Bellis, Botel, Braemer, Brenner, Dunkelberg and Naples (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.