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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-14120
ADVANTA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-1462070
(STATE OR OTHER JURISDICTION OF ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
WELSH & MCKEAN ROADS, P. O. BOX 844,
SPRING HOUSE, PENNSYLVANIA 19477
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
CLASS B COMMON STOCK, $.01 PAR VALUE
CLASS A RIGHT
CLASS B RIGHT
(TITLE OF EACH CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K Yes [ ].
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.)
$115,538,834 as of March 23, 2001 which amount excludes the value of all
shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the Company (however, this
does not constitute a representation or acknowledgment that any of such
individuals is an affiliate of the Registrant).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 23, 2001 there were 10,041,764 shares of the Registrant's Class
A Common Stock, $.01 par value, outstanding and 17,735,609 shares of the
Registrant's Class B Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(e) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
DOCUMENT FORM 10-K REFERENCE
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Definitive Proxy Statement relating to the Registrant's 2001 Part III, Items 10-13
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A not later than 120 days following the end of
the Registrant's last fiscal year
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PART I.
ITEM 1. BUSINESS
In this Form 10-K, "Advanta", "we", "us", "our" and the "Company" refer to
Advanta Corp. and its subsidiaries, unless the context otherwise requires.
OVERVIEW
Advanta is a highly focused financial services company. We have been providing
innovative financial products and solutions since 1951. Over the past five
years, we have become one of the nation's largest issuers of Mastercard(R)*
business credit cards to small businesses.
Currently, our lending business consists of Advanta Business Cards. In
addition to Advanta Business Cards, our other businesses include Advanta
Insurance and our venture capital investment business. We own two depository
institutions, or banks, Advanta National Bank and Advanta Bank Corp. Our banks
are able to offer a variety of deposit products, such as retail and large
denomination certificates of deposit, that are insured by the Federal Deposit
Insurance Corporation, also referred to as the "FDIC." During the year ended
December 31, 2000, our businesses also included Advanta Mortgage and Advanta
Leasing. We primarily funded and operated our business credit card, mortgage and
leasing businesses through our banks.
At December 31, 2000 we had approximately $20 billion in assets, consisting
of approximately $12 billion in managed assets and approximately $8 billion in
assets serviced for third parties.
Advanta Corp. was incorporated in Delaware in 1974 as Teachers Service
Organization, Inc., the successor to a business originally founded in 1951. In
January 1988, we changed our name from TSO Financial Corp. to Advanta Corp. Our
principal executive office is located at Welsh & McKean Roads, P.O. Box 844,
Spring House, Pennsylvania 19477-0844. Our telephone number at our principal
executive office is (215) 657-4000.
RECENT DEVELOPMENTS
Pursuant to the terms of the purchase and sale agreement, dated January 8, 2001,
by and between Advanta and Chase Manhattan Mortgage Corporation, a New Jersey
corporation ("Buyer"), Advanta and certain of its subsidiaries transferred and
assigned to Buyer and certain of its affiliates substantially all of the assets
and operating liabilities associated with Advanta's mortgage business. This
transaction is referred to throughout this Form 10-K as the "Mortgage
Transaction." The Mortgage Transaction was consummated on March 1, 2001,
effective as of February 28, 2001 (the "Closing Date").
The assets acquired by Buyer in the Mortgage Transaction consist of loans
receivable, retained interests in securitizations and other receivables,
contractual mortgage servicing rights and other contractual rights, property and
equipment, and prepaid assets. The liabilities assumed by Buyer in the Mortgage
Transaction consist primarily of certain of our contractual obligations and
other liabilities that appeared on our balance sheet, as well as specified
contingent liabilities arising out of the operation of the mortgage business
before closing that are identified in the purchase and sale agreement.
Following the Mortgage Transaction, we no longer operate a mortgage
business. However, we have retained contingent liabilities, primarily relating
to litigation, arising out of our operation of the mortgage business before the
Closing Date that were not specifically assumed by Buyer in the Mortgage
Transaction.
On January 23, 2001, after a thorough review of strategic alternatives
available to our leasing business, we announced that we would cease originating
new equipment leases. We will, however, continue to service the existing leasing
portfolio rather than sell the business or the portfolio.
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* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.
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As a result of the recent developments described above, during the year
2001 our continuing operations will focus primarily on Advanta Business Cards,
our business credit card business. Additionally, we will continue to operate our
other financial services businesses, the products of which include insurance and
deposit products, and to make venture capital investments through our
affiliates, including Advanta Partners LP. As described above, we will continue
to service the existing leases in our small ticket equipment leasing portfolio.
Prior to February 20, 1998, Advanta also issued consumer credit cards.
Under the terms of a contribution agreement, dated October 27, 1997 and amended
on February 20, 1998, we and Fleet Financial Group, Inc. each contributed
substantially all of the assets of our respective consumer credit card
businesses, subject to liabilities, to Fleet Credit Card, LLC, a newly formed
Rhode Island limited liability company controlled by Fleet Financial Group, Inc.
We acquired a 4.99% minority interest in Fleet Credit Card, LLC at the date of
the closing of the transaction. This transaction is referred to throughout this
Form 10-K as the "Consumer Credit Card Transaction."
CONTINUING BUSINESSES
ADVANTA BUSINESS CARDS
Overview
Advanta Business Cards, a business unit of Advanta, is one of the nation's
leading providers of business credit cards to small businesses. Advanta Business
Cards offers MasterCard business credit cards to small businesses using targeted
direct mail, the Internet and telemarketing solicitation of potential
cardholders. The "Advanta Business Card" is issued and funded by Advanta Bank
Corp. MasterCard licenses banks and other financial institutions, such as
Advanta Bank Corp., to issue business credit cards using its trademark and to
use its interchange network. Advanta Bank Corp. receives an interchange fee as
compensation for the funding and credit and fraud risk it assumes when its
cardholders use the Advanta Business Card. MasterCard sets the interchange fee
as a percentage of each card transaction (currently averaging approximately
2.1%).
Our principal objectives are to use our information based strategy to
continue to prudently grow our business while increasing profitability. Based on
our experience and expertise in analyzing the credit behavior and
characteristics of consumers and small businesses, we have developed an
extensive database of customer information and attributes. We use this
information in conjunction with proprietary credit scoring, targeting and other
sophisticated analytical models we have developed to market our products to
prospective customers. We measure the expected behavior of our prospects through
an integrated analysis of a prospect's responsiveness, creditworthiness and
sensitivity to price. We continually validate our models based on actual results
from marketing campaigns, and use this information to refine and improve our
analytical assumptions. The information we gather and analyze allows us to
market directly to specific customer segments, target prospects effectively,
anticipate customer needs, customize our products to meet those needs and price
our products in accordance with anticipated risk.
Our principal product is a MasterCard business credit card that provides
our customers with access, through merchants, banks and ATMs, to an instant
unsecured revolving business credit line. Under the terms of our cardholder
agreements, our business cards may be used for business purposes only. We offer
a number of benefits that we believe are important to small business owners
including:
- personalized company checks;
- additional cards for employees at no fee with the ability to set
individual spending limits; and
- detailed quarterly and annual expense management reports that categorize
purchases and itemize charges for record keeping and tax purposes.
Our business credit card also offers free auto rental insurance, free purchase
protection service for a specified time period and several free emergency
assistance and referral services.
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On a limited basis, we also offer a bonus miles program for an annual fee.
Under this program, the cardholder receives credit toward the purchase of
airline tickets with each card purchase. Additionally, we offer a travel card.
Use of the travel card entitles the cardholder to discounts at various hotels
and restaurants along with all of the benefits described above. We expect to
continue to expand our business credit card product offerings and look for
innovative ways to tailor products to the unique needs of small businesses.
The interest rate and credit line size we offer vary and are ultimately
determined based upon the credit history and creditworthiness of the borrower.
At December 31, 2000, the average credit line was approximately $10,000. The
interest rate is based on a LIBOR (London Interbank Offered Rate) index. In most
cases, the rate will change with changes in LIBOR and is subject to a minimum
below which the rate cannot fall.
We generate interest and other income through finance charges assessed on
outstanding loans, interchange income, and cash advance and other credit card
fees.
The managed portfolio of Advanta Business Cards grew from $1.04 billion at
December 31, 1999 to $1.66 billion at December 31, 2000. In 2000, approximately
45% of Advanta's total revenues were derived from Advanta Business Cards. See
Note 18 to the consolidated financial statements for additional segment
financial information about Advanta Business Cards.
Originations
We originate substantially all of our business credit card accounts using direct
marketing techniques, including direct mail, telemarketing solicitation and the
Internet. We currently mail solicitations monthly, inviting potential applicants
to apply for an Advanta MasterCard business credit card. Similarly, we use
inbound and outbound telemarketing to invite potential applicants to apply. In
July 1999, we became one of the first in the business credit card market to
offer instant credit decisions online.
Our marketing program is the result of extensive ongoing testing of various
marketing campaigns that target different segments of the small business market,
with the success of each campaign measured by both the cost of acquisition of
new business and the credit performance of the resulting business. We originated
over 311,000 new business credit card accounts during the year ended December
31, 2000.
In an effort to expand our customer reach, we are testing new sources by
which to identify potential customers. These sources include the use of other
external credit reporting agencies, as well as the purchase of customer lists
from establishments with a small business customer base and linking with other
websites on the Internet that serve small businesses.
Underwriting
We have developed sophisticated modeling techniques for assessing the
creditworthiness of potential cardholders. Because the owner of the business is
the ultimate obligor on our business credit card, we consider credit-related and
other relevant data about both the business and the individual owner of the
business in our assessment of the creditworthiness of potential cardholders.
Through the application process, we verify the applicant's demographic
information and collect current sales and income statistics. This information,
coupled with credit reports received from external credit reporting agencies,
forms the basis for our decision to extend credit. Using a proprietary scoring
system, we rank our prospective cardholders based upon their expected
creditworthiness and profitability potential.
When a cardholder is first approved, our profile of that cardholder is
limited and based solely on historical information generated by third parties.
As we compile information regarding each cardholder's behavior over time, we
maintain and continually update our performance database. We believe that the
information we gather over time regarding actual account performance and
cardholder behavior becomes a better indicator of future performance than the
criteria initially used to score the cardholder. Therefore, we periodically
re-score
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the cardholder based on all of the information we accumulate, and use this
information to evaluate and potentially adjust the interest rate and the credit
line size that we make available to the cardholder.
Risk Based Pricing
Upon the completion of credit assessment and identification of potential
cardholders who meet our criteria via the prescreening process, we will offer a
range of potential interest rates for which the cardholder may be eligible. The
offer is not pre-approved and is subject to verification of information provided
by the potential cardholder through the application process. If the applicant is
approved, the actual interest rate and credit line size assigned will reflect
the level of risk in the cardholder's creditworthiness. We offer primarily
variable rate credit card accounts. The periodic finance charge assessed on
balances in most of these accounts is indexed to LIBOR plus an add-on percentage
or spread. The interest rate will typically range from approximately 9.9% to
20.99%. In most cases, the rate will change with changes in LIBOR and is subject
to a minimum below which the rate cannot fall. Currently our typical business
credit card interest rate is between 15% and 20%. With minimal notice, we may
reprice any account at our discretion, typically based upon changes in a
cardholder's credit standing. The credit line size may also be adjusted up or
down based on our continual credit monitoring. To discourage delinquent
payments, we use "penalty pricing" and automatically apply a 3% increase to the
interest rate on any account that is two payment cycles delinquent.
Servicing and Collections
We perform most of the servicing for our business credit card accounts in-house.
Other data processing and administrative functions associated with the servicing
of our business credit card portfolio are outsourced to First Data Resources,
Inc. Services performed by First Data Resources include: authorizing
transactions through the MasterCard system; performing billing and settlement
processes; generating and monitoring monthly billing statements; and issuing
credit card plastics and new account agreements.
We have a collections staff that performs the collection activities for our
business credit cards. Accounts are "contractually delinquent" if the minimum
payment is not received by the due date. We discourage delinquent payments by
assessing a late fee and the collections staff pursues late payments
aggressively and immediately.
Efforts to collect contractually delinquent credit cards currently are made
by our servicing and collections personnel or their designees. Collection
activities include statement messages, formal collection letters and telephone
calls. Collection personnel initiate telephone contact with delinquent
cardholders as early as the first day the cardholder becomes contractually
delinquent. The intensity at which collection activity is pursued depends on the
risk the account presents us, which is determined by behavioral scoring and
adaptive control techniques. If initial telephone contact fails to resolve the
delinquency, we continue to contact the cardholder by telephone and by mail.
Delinquency levels are monitored by management of both our collections and
asset quality departments and information is reported daily to Advanta senior
management. Accounts are charged-off when they become 180 days contractually
delinquent, at which time delinquent accounts of cardholders who have not filed
bankruptcy are generally referred to outside collection agencies. We charge-off
accounts suspected of being fraudulent after a 90-day investigative period
unless our investigation shows no evidence of fraud.
Beginning in the fourth quarter of 2000, we changed our charge-off policy
for accounts for which we have received a notice of the cardholder's bankruptcy.
Under the new policy, the accounts of customers who become debtors in bankruptcy
cases are charged-off when they become 180 days contractually delinquent or
within 60 days of receipt of notification of filing from the bankruptcy court,
whichever is shorter. In the past, instead of a 60-day investigation period we
used a 90-day investigation period prior to charge-off to determine whether we
should challenge the cardholder's bankruptcy petition or the discharge of
amounts owed to us. Once an account is charged-off, it cannot revert to
non-charged-off status. Our credit evaluation, servicing and charge-off policies
and collection practices may change from time to time in accordance with our
business judgment and applicable laws and regulations.
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OTHER CONTINUING BUSINESSES
Advanta Insurance Companies
Our life/health and property/casualty insurance subsidiaries, Advanta Life
Insurance Company and Advanta Insurance Company, respectively, provide insurance
and related products to two distinct markets, existing Advanta customers and the
public at large.
Together with unaffiliated insurance carriers, we offer specialty
credit-related insurance products and services to our existing business credit
card and leasing customers and to our former mortgage customers. Advanta
Insurance uses direct mail marketing and telemarketing to enroll customers in
these programs. The focus of these products is on the customers' ability to
repay their debt. These products include coverage for loss of life, disability,
involuntary unemployment, accidental death, and lost or damaged equipment. Our
insurance subsidiaries generally reinsure all or a portion of the risks
associated with these products or services. Under reinsurance agreements, our
insurance subsidiaries assume a proportional quota share of the risk from the
unaffiliated insurance carriers. In consideration for assuming these risks, our
insurance subsidiaries receive reinsurance premiums equal to the proportional
percentage of the net premiums collected by the insurance carriers, less a
ceding fee as defined by the reinsurance treaties, and proportional acquisition
expenses, premium taxes and loss payments made by the carriers on these risks.
Advanta Insurance also markets insurance and related products and services
of third parties to the public at large. Through a strategic alliance with
Progressive Casualty Insurance Company formed in 1996 for an initial term of 5
years, Advanta Insurance provides its direct marketing expertise to market
Progressive's automobile insurance policies nationwide. Generally, Progressive's
automobile policies provide for automobile liability protection up to $500,000
and automobile physical damage protection up to $100,000, as defined under
specific policy and customer requirements. As part of the alliance, Advanta
Insurance Company and Progressive are each entitled to 50% of the written
premiums. Advanta Insurance Company and Progressive also entered into a quota
share reinsurance agreement that provides that Advanta Insurance Company assumes
50% of all risks and expenses on automobile policies written by Progressive
under the insurance programs being marketed. We have been notified by
Progressive that it does not intend to renew the strategic alliance with Advanta
Insurance when the original five-year term for the alliance expires during 2001.
The agreement governing the relationship between Advanta Insurance and
Progressive requires that upon termination, we transfer our interest in the
assets and liabilities of the strategic alliance to Progressive and that
Progressive make certain payments to us, subject to adjustments. Advanta
Insurance and Progressive are currently pursuing alternative termination
structures for the strategic alliance that would allow for early termination and
financial settlement.
In addition, prior to the closing of the Consumer Credit Card Transaction,
we offered credit-related insurance products to our consumer credit card
customers. Our insurance subsidiaries no longer reinsure these insurance risks.
Our insurance subsidiaries are, however, obligated to reimburse the unaffiliated
insurance carriers for losses and loss adjustment expenses paid and our
insurance subsidiaries maintain loss and loss expense reserves on losses
incurred on risks assumed on or before February 20, 1998.
Venture Capital Investments
We make venture capital investments through our affiliates, including Advanta
Partners LP and Advanta Growth Capital Fund L.P. Advanta Partners LP focuses
primarily on growth capital financings, restructurings and management buyouts in
the financial services, electronic commerce relationship management services and
other consumer and data information management services industries. Our smaller
fund, Advanta Growth Capital Fund L.P., focuses primarily on earlier stage
investment opportunities in the technology and information services sectors,
including the areas of wireless services, electronic commerce and direct
marketing. The investment objective of our investment affiliates is to earn
attractive returns by building the long-term values of the businesses in which
they invest. Our investment affiliates combine transaction expertise, management
skills and a broad contact base with strong industry-specific knowledge.
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DEPOSITORY INSTITUTIONS
We own two depository institutions, Advanta National Bank and Advanta Bank Corp.
Advanta National Bank is a national banking association organized under the laws
of the United States of America with its headquarters and sole branch currently
located in Wilmington, Delaware. During 2000, we conducted a large portion of
our mortgage business through Advanta National Bank. Before February 20, 1998,
we also conducted a large portion of our consumer credit card business through
Advanta National Bank.
Advanta Bank Corp. is an industrial loan corporation organized under the
laws of the State of Utah with its principal executive offices located in Salt
Lake City, Utah. Currently, Advanta Bank Corp.'s principal activity consists of
the issuance of the "Advanta Business Card" credit card to small businesses.
Prior to first quarter 2001, Advanta Bank Corp. was involved in our small ticket
equipment leasing business and our mortgage business. We no longer operate a
mortgage business or originate new equipment leases. However, Advanta Bank Corp.
continues to be involved in the small ticket equipment leasing business because
we are continuing to service our existing lease portfolio. See "DISCONTINUED
OPERATIONS."
DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS
Deposits with each of our bank subsidiaries are insured by the FDIC. Through our
banks we are able to offer a range of insured deposit products. Advanta National
Bank's deposit products have included money market savings accounts, retail
certificates of deposit and large denomination certificates of deposit of
$99,000 or more. Advanta Bank Corp.'s deposit products include retail
certificates of deposit and large denomination certificates of deposit of
$99,000 or more. At December 31, 2000, we had total deposits of $1.3 billion at
our banks, compared to $1.5 billion as of December 31, 1999. The banks generate
retail deposits from repeat deposits from existing customers and from new
depositors attracted by direct mail solicitations, newspaper and other media
advertising and the Internet.
Since 1951, Advanta Corp. and its predecessor, Teachers Service
Organization, Inc., have offered unsecured debt securities of Advanta Corp., in
the form of RediReserve Certificates and Investment Notes to retail investors
through Advanta's retail note programs. These debt securities, also referred to
in this Form 10-K as "retail notes," have been sold predominantly on a direct
basis by Advanta in select states. The RediReserve Variable Rate Certificates
are payable on demand and the maturities on the Investment Notes range from 90
days to ten years. The RediReserve Certificates and Investment Notes generally
require an initial minimum investment of $5,000 and are obligations of Advanta
Corp. and are not insured or guaranteed by any public or private entity. We
change the interest rates that we offer frequently, depending on market
conditions and our funding needs. The rates also vary depending on the size of
each investment. At December 31, 2000, $404.9 million of RediReserve
Certificates and Investment Notes were outstanding with interest rates ranging
from 6.02% to 11.47%.
Following the Mortgage Transaction, Advanta Corp. and Advanta National Bank
each have excess cash liquidity. As a result, Advanta National Bank has
suspended originating deposit accounts and Advanta Corp. is temporarily not
originating or renewing Investment Notes.
DISCONTINUED OPERATIONS
ADVANTA LEASING SERVICES
Overview
On January 23, 2001, after a thorough review of strategic alternatives available
to our leasing business, we decided to cease originating new equipment leases.
We will, however, continue to service the existing leasing portfolio rather than
sell the business or the portfolio.
Prior to January 23, 2001, Advanta Leasing Services, a business unit of
Advanta, offered flexible lease financing programs to small businesses. The
primary products that we offered through our leasing business consisted of
leases for small-ticket items such as computers, copiers, fax machines and other
office equipment.
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Advanta Leasing Services originated and funded its leases and other equipment
financing arrangements through Advanta Bank Corp. Advanta Business Services
Corp. conducted the marketing, lease originations, customer service and
collections for our leasing business.
Our leases are generally priced on a fixed rate basis. At December 31,
2000, the leases in our portfolio had an average lease size of approximately
$7,800 and an average lease term remaining of 33 months.
Managed lease receivables at December 31, 2000 totaled approximately $758
million, compared to approximately $796 million at December 31, 1999. Advanta
Leasing Services originated leases in the amount of approximately $320 million
for the year ended December 31, 2000 and approximately $454 million for the year
ended December 31, 1999. In 2000, approximately 5% of Advanta's revenues were
derived from Advanta Leasing Services. See Note 18 to consolidated financial
statements for additional segment financial information about Advanta Leasing
Services.
Originations
Prior to January 23, 2001, Advanta Leasing Services originated leases through
marketing programs, vendors, brokers and bulk or portfolio purchases.
Underwriting
In connection with the origination or acquisition of leases, Advanta Leasing
Services performed a thorough credit review of all prospective customers. The
credit review process typically began when the prospective customer completed a
credit application. We would enter the completed credit application into our
computerized application processing system. Our credit decisions were based on
several credit-related attributes using our customized, proprietary credit
scoring model.
Credit applications could be automatically approved or rejected based on
the dollar amount of the application and a credit score falling within a range
in the model. For those credit applications not falling within a specified
dollar amount and/or credit score, we based our credit decision on an analysis
by our credit staff utilizing criteria developed by Advanta Leasing Services. In
addition, personnel in our credit department were dedicated to performing
reviews of potential new vendors and brokers and were responsible for ensuring
compliance with our overall credit policies and procedures.
Servicing and Collections
We are continuing to service our existing portfolio of equipment leases. As part
of our servicing we will continue to perform collection activities with respect
to delinquent contracts. Each lease contract has a provision for assessing late
charges in the event that a customer fails to make a payment on the contract on
the related due date. We typically initiate telephone contact when an account is
between one and 16 days past due, depending on certain established criteria.
Telephone contact is continued throughout the delinquency period. If the account
continues to be delinquent, Advanta Leasing Services may exercise any remedies
available to it under the terms of the contract, including termination and
acceleration of the lease contract. We evaluate each contract on the merits of
the individual situation taking into consideration the equipment value and the
current financial strength of the customer.
If collection activities are unsuccessful, we typically charge-off the
account at 120 days past due. An account may be charged-off prior to 120 days if
we determine that no further payments will be made.
At the time an account is charged-off, the account is referred to our
in-house litigation department to determine whether we will pursue the customer
or any personal guarantor on the contract through litigation. If we determine
not to pursue an account through litigation it may be referred to a third party
collection agency to enforce the original terms of the contract. In cases where
the customer files for bankruptcy, the Advanta Leasing Services' Legal Recovery
Department follows up with the debtor to determine whether the debtor intends to
assume or reject the contract. In many cases, although the customer has filed
for bankruptcy protection from its creditors, it continues to make regular
payments on its contract.
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ADVANTA MORTGAGE
Effective February 28, 2001, we closed the Mortgage Transaction and no longer
operate a mortgage business. In accordance with the terms of the purchase and
sale agreement, Buyer acquired substantially all of the assets and operating
liabilities associated with our mortgage business for a purchase price, net of
operating liabilities assumed by Buyer, exceeding $1.0 billion. Following the
Mortgage Transaction, we retained contingent liabilities, primarily relating to
litigation arising out of the operation of the mortgage business through the
Closing Date, that were not specifically assumed by Buyer. See
"-- Overview -- Recent Developments."
Prior to the closing of the Mortgage Transaction, Advanta Mortgage, a
business unit of Advanta, offered a broad range of mortgage products and
services to consumers throughout the country. Advanta Mortgage originated and
serviced non-conforming credit first and second lien mortgage loans, including
home equity lines of credit. During the year ended December 31, 2000, we funded
and operated our mortgage business primarily through our banks, Advanta National
Bank and Advanta Bank Corp.
Advanta Mortgage's portfolio of managed receivables included owned loans
and securitized loans which we serviced and in which we retained an interest. At
December 31, 2000, Advanta Mortgage had total owned loans receivables of $293.3
million and total managed receivables of $7.9 billion.
In addition to servicing and managing the loans we originated, Advanta
Mortgage serviced the home equity loans of unaffiliated third parties through
our subservicing business. Subserviced loans are not included in our portfolio
of managed receivables and we did not bear the risk of credit loss on our
subserviced portfolio. Advanta Mortgage's portfolio of subserviced loans totaled
approximately $7.9 billion at December 31, 2000. Our total serviced portfolio,
including the "subserviced" portfolio, was $15.8 billion at December 31, 2000,
compared to $20.3 billion at December 31, 1999.
In 2000, approximately 39% of Advanta's total revenues were derived from
Advanta Mortgage. See Note 18 to consolidated financial statements for
additional segment financial information about Advanta Mortgage.
GOVERNMENT REGULATION
ADVANTA CORP.
Advanta Corp. is not required to register as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). We own Advanta
National Bank, which is a "bank" as defined under the BHCA as amended by the
Competitive Equality Banking Act of 1987 ("CEBA"). However, under grandfathering
provisions of CEBA, we are not required to register as a bank holding company
because Advanta National Bank, which takes demand deposits but does not make
commercial loans, did not come within the BHCA definition of the term "bank"
prior to the enactment of CEBA. Under CEBA, our other banking subsidiary,
Advanta Bank Corp., also is not considered a "bank" for purposes of the BHCA.
Accordingly, our ownership of Advanta Bank Corp. does not impact our exempt
status under the BHCA.
Under CEBA, Advanta National Bank is subject to certain restrictions, such
as the limitation that it may either take demand deposits or make commercial
loans, but may not do both. In addition, under CEBA Advanta National Bank may
not acquire control of more than 5% of the stock or assets of an additional
"bank" or "savings association," as these terms are defined in the BHCA. Because
we are not a bank holding company, we are not subject to examination by the
Federal Reserve Board, other than for purposes of assuring continued compliance
with the CEBA restrictions discussed above. Prior to the enactment of the Gramm-
Leach-Bliley Financial Modernization Act, if Advanta Corp. or Advanta National
Bank had ceased complying with the restrictions set forth in CEBA, registration
as a bank holding company under the BHCA would have been required. Registration
as a bank holding company is not automatic and, if we were to register, it would
subject us and our subsidiaries to inspection and regulation by the Federal
Reserve Board. The Gramm-Leach-Bliley Financial Modernization Act of 1999 was
adopted on November 12, 1999 and became effective on May 12, 2000. Under the
Gramm-Leach-Bliley Financial Modernization Act, should Advanta Corp. or Advanta
National Bank fail to comply with any of the restrictions applicable to them
under CEBA, there is a 180-day right to cure period following receipt of a
notice from the Federal Reserve Board. During the cure
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period we would be required to either cease or correct the activity that is not
in compliance or submit to the Federal Reserve Board a plan to cease the
activity within a timely manner that is not in excess of one year and implement
procedures that would avoid a reoccurrence of the activity. The opportunity to
cure or remediate an activity that is out of compliance significantly reduces
the risk that Advanta Corp. will be required to register as a bank holding
company under the BHCA.
ADVANTA NATIONAL BANK
Advanta National Bank is subject to regulation and periodic examination,
primarily by the Office of the Comptroller of the Currency (the "OCC"). The
OCC's regulations relate to the maintenance of reserves for certain types of
deposits and other products offered by a bank, the maintenance of certain
financial ratios, the terms on which a bank may engage in transactions with its
affiliates and a broad range of other banking practices. As a national bank,
Advanta National Bank is also subject to provisions of federal law which
restrict its ability to extend credit to its affiliates or pay dividends to
Advanta Corp.
Advanta National Bank is subject to capital adequacy guidelines issued by
the Federal Financial Institutions Examination Council (the "FFIEC"). 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. Under the rules and regulations of
the FFIEC, at least half of a bank's total capital is required to be "Tier I
capital," comprised of common equity, retained earnings and a limited amount of
non-cumulative perpetual preferred stock. The remaining capital, "Tier II
capital," 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. The FFIEC has also adopted minimum
leverage ratios for national banks, which are calculated by dividing Tier I
capital by total average assets. Recognizing that the risk-based capital
standards address only credit risk, and not interest rate, liquidity,
operational or other risks, many national banks are expected to maintain capital
in excess of the minimum standards. See "-- Regulatory Agreements"
In addition, pursuant to provisions of the FDIC Improvement Act of 1991
(the "FDICIA") and related regulations with respect to prompt corrective action,
FDIC insured institutions such as Advanta National Bank may only accept brokered
deposits without FDIC permission if they meet specified 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 combined Tier I and Tier II capital to risk-weighted assets
of not less than 10%, Tier I capital to risk-weighted assets of not less than
6%, and a Tier I leverage ratio of not less than 5%. See "-- Regulatory
Agreements."
Advanta National Bank's ratio of combined Tier I and Tier II capital to
risk-weighted assets was 15.08% at December 31, 2000, and 14.86% at December 31,
1999. In each case, Advanta National Bank had capital at levels a bank is
required to maintain to be classified as well-capitalized under the regulatory
framework for prompt corrective action. However, Advanta National Bank does not
meet the definition of "well-capitalized" because of the existence of our
agreement with the OCC, even though we have achieved the higher imposed ratios
required by the agreement with the OCC. See " -- Regulatory Agreements."
ADVANTA BANK CORP.
Advanta Bank Corp., a Utah-chartered industrial loan corporation, is a
depository institution subject to regulatory oversight and examination by both
the FDIC and the Utah Department of Financial Institutions. See "-- Regulatory
Agreements." Under its banking charter, Advanta Bank Corp. may make consumer and
commercial loans and may accept all FDIC-insured deposits other than demand
deposits such as checking accounts. Advanta Bank Corp. is subject to the same
regulatory and supervisory processes as commercial banks.
Advanta Bank Corp. is subject to provisions of federal law which restrict
and control its ability to extend credit and provide or receive services between
affiliates. Advanta Bank Corp. is subject to the same FFIEC capital adequacy
guidelines as Advanta National Bank. See "-- Advanta National Bank." In
addition, the
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FDIC has regulatory authority to prohibit Advanta Bank Corp. from engaging in
any unsafe or unsound practice in conducting its business.
Advanta Bank Corp.'s combined total capital ratio of Tier I and Tier II
capital to risk-weighted assets was 14.60% as of December 31, 2000 and 13.28% as
of December 31, 1999. In each case, Advanta Bank Corp. met the capital
requirements of the FDICIA, and was categorized as well-capitalized under the
regulatory framework for prompt corrective action.
REGULATORY AGREEMENTS
In June 2000, we announced that our banking subsidiaries, Advanta National Bank
and Advanta Bank Corp., reached agreements with their respective bank regulatory
agencies, primarily relating to the banks' subprime lending operations. The
agreements outlined a series of steps to modify processes and formalize and
document certain practices and procedures for the banks' subprime lending
operations. The agreements also required us to change our charge-off policy for
delinquent mortgages to 180 days and to modify our accounting processes and
estimate of our allowance for credit losses and valuation of residual assets.
The agreement between Advanta Bank Corp. and the FDIC established temporary
deposit growth limits at Advanta Bank Corp. and provides for prior FDIC approval
of the payment by Advanta Bank Corp. of any future dividends. The agreement
between Advanta National Bank and the OCC established temporary asset growth
limits at Advanta National Bank and imposed restrictions on taking brokered
deposits at Advanta National Bank. The agreement with the OCC required that by
September 30, 2000 Advanta National Bank achieve and thereafter maintain a ratio
of 14% of Tier 1 capital to risk-weighted assets and a ratio of 17% of Tier 1
capital to adjusted total assets.
In July 2000, we announced that Advanta National Bank signed a second
agreement with the OCC regarding the carrying value of Advanta National Bank's
retained interests in mortgage securitizations and allowance for mortgage credit
losses. The agreement required that, based on assumptions specified in the
agreement, the carrying value of Advanta National Bank's contractual mortgage
servicing rights be reduced by $13 million and the carrying value of Advanta
National Bank's subordinated trust assets and retained interest-only strip be
reduced by a total amount of $201 million. The agreement further required that
Advanta National Bank's allowance for credit losses be increased by $22 million.
The agreement also contained provisions regarding the use of similar assumptions
for the calculation of the carrying value of the residual assets in future
periods. Beginning with the third quarter of 2000, the agreement required ANB to
maintain its allowance for loan losses at a level of at least 5.38% of the
unpaid principal balance of all loans owned by ANB or reported on its books,
less any loans held for sale. See Note 3 to consolidated financial statements.
Management believes that Advanta National Bank and Advanta Bank Corp. were
each in compliance with their respective regulatory agreements at December 31,
2000.
In connection with the Mortgage Transaction, Advanta National Bank sought
approval of the OCC for a return of capital to Advanta Corp. in the amount of
$261 million. On February 28, 2001, the OCC approved the amount requested and,
at the same time, Advanta National Bank entered into an agreement with the OCC
regarding restrictions on new business activities and product lines at Advanta
National Bank after the sale of the mortgage business and the resolution of
outstanding Advanta National Bank liabilities. The agreement also reduces the
existing capital requirements for Advanta National Bank to 12.7% for Tier 1
capital and Total capital to risk-weighted assets, and to 5% for Tier 1 capital
to adjusted total assets, as defined in the agreement. The agreement requires
that Advanta National Bank obtain prior OCC approval of any future dividends.
Advanta Bank Corp. is unaffected by Advanta National Bank's agreements with the
OCC.
LENDING AND LEASING ACTIVITIES
Although our current lending activities are principally directed to small
businesses, certain aspects of various federal and state laws, including the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Community
Reinvestment Act, the Electronic Funds Transfer Act and the Fair Credit
Reporting Act, apply to us. Provisions of these statutes and related regulations
require disclosure to borrowers of finance charges in
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terms of an annual percentage rate, prohibit discriminatory practices in
extending credit, require our FDIC-insured banking institutions to serve the
banking needs of their local communities and regulate the dissemination and use
of information relating to a borrower's creditworthiness.
Additionally, the Gramm-Leach-Bliley Financial Modernization Act imposes
new privacy requirements dealing with the use of nonpublic information about
consumer customers. Retail deposit customers of Advanta National Bank and
Advanta Bank Corp. as well as investors who purchase Advanta Corp.'s retail
notes are subject to the Act and its accompanying regulations. This statute is
not preemptive and states may impose additional and more burdensome privacy
requirements.
DIVIDENDS
There are various legal limitations on the extent to which Advanta National Bank
can supply funds through dividends to us and our affiliates. The prior approval
of the OCC is required if the total of all dividends declared by Advanta
National Bank in any calendar year exceeds its net profits for that year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus accounts. In addition, Advanta National Bank may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts. The OCC 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 OCC, pursuant to its authority under the Financial
Institutions Supervisory Act, could claim that a dividend payment might under
some circumstances be an unsafe or unsound practice.
In February 2001, in connection with the Mortgage Transaction, the OCC
approved the payment of a return of capital in the amount of $261 million from
Advanta National Bank to Advanta Corp. Under Advanta National Bank's current
agreement with the OCC, Advanta National Bank will not be eligible to pay any
dividends without the OCC's prior approval. In addition, as a result of Advanta
Bank Corp.'s agreement with the FDIC, Advanta Bank Corp. may not pay dividends
without prior FDIC approval. See "-- Regulatory Agreements."
TRANSFERS OF FUNDS
Sections 23A and 23B of the Federal Reserve Act also impose restrictions on
Advanta National Bank and Advanta Bank Corp. These restrictions limit the
transfer of funds by the depository institution to certain of its affiliates,
including Advanta Corp., in the form of loans, extensions of credit, investments
or purchases of assets. These transfers by any one depository institution to us
or any other single affiliate are limited in amount to 10% of the depository
institution's capital and surplus, and transfers to all affiliates are limited
in the aggregate to 20% of the depository institution's capital and surplus.
These loans and extensions of credit are also subject to various collateral
requirements. Sections 23A and 23B of the Federal Reserve Act also require
generally that the depository institution's transactions with its affiliates be
on terms no less favorable to the bank than comparable transactions with
unrelated third parties. In addition, in order for us to maintain our
grandfathered exemption under CEBA, Advanta National Bank is not permitted to
make any loans to us or any of our subsidiaries.
REGULATION OF INSURANCE
Our insurance subsidiaries are subject to the laws and regulations of, and
supervision by, the states in which they are domiciled or have obtained
authority to transact insurance business. These states have adopted laws and
regulations which govern all insurance policy underwriting, rating, licensing,
marketing, administration and financial operations of an insurance company,
including dividend payments and financial solvency. In addition, our insurance
subsidiaries have registered as an Arizona Holding Company which requires an
annual registration and the approval of certain transactions between all
affiliated entities.
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The maximum dividend that any of our insurance subsidiaries can distribute
to Advanta Corp., in any twelve-month period without prior approval of the State
of Arizona Department of Insurance, is the lesser of:
- 10% of the subsidiary's statutory surplus; or
- for any given twelve-month period, the subsidiary's net income, if it is
a life insurance company; or
- for any given twelve-month period, the subsidiary's net investment
income, if it is a property and casualty insurance company.
There were no dividends paid to Advanta Corp. by its insurance subsidiaries
during 2000. The State of Arizona has adopted minimum risk-based capital
standards as developed by the National Association of Insurance Commissioners.
Risk-based capital is the quantification of an insurer's investment,
underwriting, reserve and business risks in relation to its total adjusted
capital and surplus. The ratio of an insurer's total adjusted capital and
surplus is compared to various levels of risk-based capital to determine what
intervention, if any, is required by either the insurance company or an
insurance department. At December 31, 2000, our insurance subsidiaries met all
risk-based capital standards and required no intervention by any party.
Our insurance subsidiaries reinsure risks using underwriting insurance
practices and rates, which are regulated in part or fully by state insurance
departments. State insurance departments continually review and modify these
rates based on prior historical experience. Any modifications may impact the
future profitability of our insurance subsidiaries.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The banking and finance businesses in general are the subject of the extensive
regulation described above at both the state and federal levels, and numerous
legislative and regulatory proposals are advanced each year which, if adopted,
could affect our profitability or the manner in which we conduct our activities.
It is impossible to determine the extent of the impact of any new laws,
regulations or initiatives, or whether any of the federal or state proposals
will become law and, if so, what impact they will have on us.
On January 31, 2001, the FFIEC agencies issued a "Guidance" related to
capital requirements of subprime loans. Under the Guidance, regulatory capital
required to be held for certain loans that are considered subprime is expected
to increase. In a separate draft proposal issued jointly by the regulatory
agencies, dated August 7, 2000, capital requirements associated with certain
residual interests would be amended to require capital equal to the residual
retained, regardless of retained recourse levels. Further, the draft proposal
requires residuals in excess of 25% of Tier 1 capital to be treated as a
deduction of Tier 1 capital for purposes of risk-based and leverage capital
calculations. In another draft proposal recently issued jointly by the federal
bank regulatory agencies, the agencies would use credit ratings and certain
alternative approaches to match the risk based capital requirement more closely
to a banking organization's relative risk of loss in asset securitizations. This
draft proposal also requires the sponsor of a revolving credit securitization
that involves an early amortization feature to hold capital against the amount
of assets under management (the off-balance sheet securitized receivables) and
treats recourse obligations and direct credit substitutes more consistently than
under the agencies' current risk-based capital standards.
Other federal legislative proposals and initiatives that could impact
Advanta and its businesses include financial privacy initiatives that would
restrict the permissible use of customer-specific financial and other credit
information and statutory changes to the Truth in Lending Act. In addition,
Congress is currently considering legislation to reform the Bankruptcy Code. The
bankruptcy reform bills would require that debtors pass a means test to
determine eligibility for bankruptcy relief while adding new consumer
protections, such as new minimum payment and introductory rate disclosures for
credit cards and exemptions for retirement savings in bankruptcy. They also
would promote education and credit counseling as alternatives to resolving
financial difficulties, allowing more debtors to avoid a bankruptcy filing.
Additionally, a number of states are considering, and others likely will
consider, legislative and regulatory initiatives related to financial privacy,
credit scoring disclosure and credit card lending and marketing.
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COMPETITION
As a marketer of credit products, we face intense competition from numerous
financial services providers. Many of these companies are substantially larger
and have more capital and other resources than we do. 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, the nature of the risk the lender is willing to assume and the type of
security, if any, required by the lender. Although we believe we are generally
competitive in most of the geographic areas in which we offer our products and
services, there can be no assurance that our ability to market our services
successfully or to obtain an adequate yield on our loans will not be impacted by
the nature of the competition that now exists or may develop.
In seeking investment funds from the public, we face competition from
banks, savings institutions, money market funds, mutual funds, credit unions and
a wide variety of private and public entities that sell debt securities, some of
which are publicly traded. Many of our competitors are larger and have more
capital and other resources than we have. Competition relates to matters such
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 the
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, 2000, we had 2,649 employees. We believe that we have good
relationships with our employees. None of our employees is represented by a
collective bargaining unit.
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Information or statements provided by the Company from time to time may
contain certain "forward-looking information" including information relating to:
anticipated earnings per share; anticipated returns on equity; realizability of
net deferred tax asset; anticipated growth in loans outstanding and credit card
accounts; anticipated net interest margins; anticipated operations costs and
employment growth; anticipated payment and prepayment rates of outstanding
loans; anticipated marketing expense; estimated values of our retained interests
in securitizations and anticipated cash flows; our ability to replace existing
credit facilities, when they expire, with appropriate levels of funding on
similar terms and conditions; anticipated delinquencies and charge-offs; and
anticipated outcome and effects of litigation. The cautionary statements
provided below are being made pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995 (the "Act") and with the intention of
obtaining the benefits of the "safe harbor" provisions of the Act for any such
forward-looking information.
We caution readers that any forward-looking information provided by us is
not a guarantee of future performance and that actual results may differ
materially from those in the forward-looking information as a result of various
factors, including but not limited to:
- The ultimate amount of restructuring and other related charges associated
with the conclusion of the strategic alternatives process for our
mortgage and leasing businesses.
- Increased credit losses and collection costs associated with a worsening
of general economic conditions, rising interest rates, shifts in product
mix within our portfolio of loans, rising delinquency levels, increases
in the number of customers seeking protection under the bankruptcy laws
resulting in accounts being charged off as uncollectible, and the effects
of fraud by third parties or customers.
- Intense and increasing competition from numerous providers of financial
services who may employ various competitive strategies. We face
competition from originators of business credit cards, some of which have
greater resources than we do.
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- The effects of interest rate fluctuations on our net interest margin and
the value of our assets and liabilities; the continued legal or
commercial availability of techniques, including interest rate swaps and
similar financial instruments, loan repricing, hedging and other
techniques, that we use to manage the risk of those fluctuations and the
continuing operational viability of those techniques and the accounting
and regulatory treatment of such instruments.
- Difficulties or delays in the securitization of our receivables and the
resulting impact on the cost and availability of such funding.
Difficulties and delays may result from the current economic, legal,
regulatory, accounting and tax environments and adverse changes in the
performance of the securitized assets.
- The amount, type and cost of financing available to us, including secured
financing, and any changes to that financing including any impact from
changes in the current economic, legal, regulatory, accounting and tax
environments, adverse changes in the performance of our owned loan
portfolio, any impact from changes in our debt ratings and the activities
of parties with which we have agreements or understandings, including any
activities affecting any investment.
- Changes in our aggregate accounts or loan balances, and the growth rate
thereof, including changes resulting from factors such as shifting
product mix, amount of actual marketing investment made by us, payment
and prepayment of loan balances, changes in relationships with
significant customers and general economic conditions and other factors
beyond our control.
- The impact of "seasoning" (the average age of a lender's portfolio) on
our level of delinquencies and losses which may require a higher
allowance for loan losses for on-balance sheet assets and may adversely
impact securitization income. The addition of account originations or
balances and the attrition of those accounts or balances could
significantly impact the seasoning of our overall portfolio.
- The amount of, and rate of growth in, our expenses (including employee
and marketing expenses) as our businesses develop or change and we expand
into new market areas; the acquisition or disposition of assets
(interest-earning, fixed or other); the effects of changes within our
organization or in its compensation and benefit plans; and the impact of
unusual items resulting from the ongoing evaluation of our business
strategies, asset valuations and organizational structures.
- Difficulties or delays in the development, production, testing and
marketing of products or services, including, but not limited to, a
failure to implement new product or service programs when anticipated,
the failure of or delay in customers' acceptance of these products or
services, losses associated with the testing of new products or services
or financial, legal or other difficulties as may arise in the course of
such implementation.
- The effects of, and changes in, tax laws, rates, regulations and
policies.
- The effects of, and changes in, social conditions and general economic
conditions, including inflation, recession or other adverse economic
conditions.
- The effects of, and changes in the level of scrutiny, regulatory
requirements and regulatory initiatives resulting from the fact that our
banking and finance businesses are highly regulated and subject to
periodic review and examination by federal and state regulators,
including the OCC and the FDIC.
- The effects of, and changes in, monetary and fiscal policies, federal and
state laws and regulations (financial, consumer, regulatory or
otherwise), and other activities of governments, agencies and other
similar organizations, including the OCC and the FDIC.
- The costs and other effects of legal and administrative cases and
proceedings, settlements and investigations, claims and changes in those
items, developments or assertions by or against us or any of our
subsidiaries; adoptions of new, or changes in existing, accounting
policies and practices and the application of such policies and
practices.
- Our relationships with significant vendors, business partners and
customers.
- Our ability to attract and retain key personnel.
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ITEM 2. PROPERTIES
At December 31, 2000, Advanta owned two buildings in Horsham, Pennsylvania
totaling 198,000 square feet. During 2000, these buildings were primarily used
by Advanta Mortgage and Advanta Business Cards. Advanta leased 109,511 square
feet in Spring House, Pennsylvania for its principal executive offices as well
as some of its Advanta Mortgage operations. Advanta leased an additional 39,203
square feet in two buildings in the Pennsylvania suburbs of Philadelphia for
certain corporate staff functions. In the adjoining state of New Jersey, at
December 31, 2000, Advanta owned one building consisting of 56,196 square feet
and leased 24,090 square feet of office space in two buildings for Advanta
Leasing Services and a portion of Advanta Business Cards operations. In
Delaware, Advanta leased 36,589 square feet of office space for Advanta National
Bank. In New York, Advanta leased 7,061 square feet of office space in two
buildings for Advanta Partners LP and Advanta Growth Capital Fund, LP. Advanta
also leased an additional 164,650 square feet of office space located in two
buildings in California for Advanta Mortgage and 50,625 square feet of office
space in Utah for Advanta Bank Corp.
In addition to the principal locations in Pennsylvania, New Jersey, New
York, Delaware California and Utah, during 2000 Advanta leased approximately
84,923 square feet of office space in twenty-one states to support the mortgage
loan production offices. Advanta leased an additional 6,213 square feet of
office space in five states to support Advanta Mortgage and Advanta Leasing
Services.
At December 31, 2000, the total leased and owned office space was
approximately 777,061 square feet. Effective February 28, 2001, upon the closing
of the Mortgage Transaction, Advanta leased the 800 and 850 Ridgeview Drive
buildings in Horsham, Pennsylvania to Buyer for a two-year term with an option
to renew for an additional one year term. In addition, Buyer assumed our leases
for the California real estate as of February 28, 2001.
ITEM 3. LEGAL PROCEEDINGS
On January 22, 1999, Fleet Financial Group, Inc. and certain of its affiliates
("Fleet") filed a lawsuit against Advanta Corp. and certain of its subsidiaries
in Delaware Chancery Court. Fleet's allegations, which we deny, center around
Fleet's assertions that we failed to complete certain post-closing adjustments
to the value of the assets and liabilities we contributed to Fleet LLC in
connection with the Consumer Credit Card Transaction. Fleet seeks damages of
approximately $141 million. We have filed an answer to the complaint denying the
material allegations of the complaint, but acknowledging that we contributed
$1.8 million in excess liabilities in the post-closing adjustment process, after
taking into account the liabilities we have already assumed. We also have filed
a countercomplaint against Fleet for approximately $101 million in damages we
believe have been caused by certain actions of Fleet following the closing of
the Consumer Credit Card Transaction. Formal discovery has begun and is ongoing.
The court has scheduled trial in this matter to begin in July 2001. Management
expects that the ultimate resolution of this litigation will not have a material
adverse effect on our financial position or future operating results.
On December 5, 2000, a former executive of Advanta obtained a jury verdict
against Advanta in the amount of $3.9 million, in connection with various claims
against Advanta related to the executive's termination of employment. Both
parties filed post-trial motions. The former executive has filed a motion for a
new trial with respect to his claims that were dismissed. The former executive
is seeking, among other things, an award of approximately $6 million based upon
the jury verdict and additional amounts, including attorney's fees and costs. We
will vigorously pursue our post-trial motions, and if necessary, an appeal to
the United States Court of Appeals for the Third Circuit and will continue to
contest the former executive's positions. Management expects that the ultimate
resolution of this litigation will not have a material adverse effect on our
financial position or future operating results.
On December 21, 2000, Banc One Financial Services, Inc. and Bank One, N.A
(together "Banc One") filed a complaint that alleges, among other things, that
Advanta breached two mortgage loan servicing agreements by wrongfully
withholding as termination fees an amount in excess of $23 million, from amounts
that we had collected under the loan servicing agreements, and by failing to
perform under those agreements in certain respects. We dispute these claims and
allegations. An answer to the complaint was filed
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February 23, 2001 denying liability and raising affirmative defenses. Management
expects that the ultimate resolution of this litigation will not have a material
adverse effect on our financial position or future operating results.
On February 1, 2001, Fleet and certain of its affiliates filed a complaint
in an attempt to block the sale of our mortgage business to Chase Manhattan
Mortgage Corp. The complaint alleged that the terms of the proposed sale breach
a provision of the 1998 Contribution Agreement with Fleet, as amended (the
"Contribution Agreement") which essentially requires a buyer of "substantially
all" of our assets to assume any remaining obligations under the Contribution
Agreement at the time of the sale of "substantially all" of our assets. In
February 2001, we announced that we had reached an agreement with Fleet, with
regard to Fleet's attempt to block the sale. As part of the agreement, Fleet
dismissed its injunction claim and agreed that it would raise no future issue
with respect to the sale of the mortgage business. Under the agreement, $70
million of our reserves in connection with our long-standing litigation with
Fleet were funded in an escrow account. The court presiding over the claims will
order the funds paid to Advanta or to Fleet depending upon the outcome of that
litigation. The amount escrowed, $70 million, represents our maximum exposure to
Fleet in the litigation, assuming a court were to rule in favor of Fleet on
every claim involved in the litigation.
Advanta and its subsidiaries are involved in other legal proceedings,
claims and litigation, including those arising in the ordinary course of
business. Management believes that the aggregate liabilities, if any, resulting
from those actions will not have a material adverse effect on the consolidated
financial position or results of operations of Advanta. However, as the ultimate
resolution of these proceedings is influenced by factors outside of Advanta's
control, it is reasonably possible that Advanta's estimated liability under
these proceedings may change.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers of Advanta Corp. and its subsidiaries listed
below was elected by the applicable Board of Directors, to serve at the pleasure
of the Board in the capacities indicated.
NAME AGE OFFICE DATE ELECTED
- ------------------------------------------------------------------------------------------------------
Dennis Alter 58 Chairman of the Board and Chief Executive 1972
Officer
William A. Rosoff 57 Vice Chairman of the Board and President 1996
Philip M. Browne 41 Senior Vice President and Chief Financial 1998
Officer
David Weinstock 36 Vice President and Chief Accounting Officer 2001
Mr. Alter became Executive Vice President and a Director of Advanta Corp.'s
predecessor organization in 1967. He was elected President and Chief Executive
Officer in 1972, and Chairman of the Board of Directors in August 1985. Mr.
Alter has remained as Chairman of the Board since August 1985. In February 1986,
he relinquished the title of President, and in August 1995 he relinquished the
title of Chief Executive Officer. In October 1997, Mr. Alter reassumed the title
of Chief Executive Officer. Mr. Alter is a director of Next Left, Inc. a
privately held Internet service company.
Mr. Rosoff joined Advanta Corp. in January 1996 as a Director and Vice
Chairman. In October 1999, Mr. Rosoff became President and Vice Chairman of the
Board of Advanta Corp. Prior to joining Advanta Corp., Mr. Rosoff was a long
time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen LLP, Advanta
Corp.'s outside counsel, where he advised Advanta Corp. for over 20 years. While
at Wolf, Block, Schorr and Solis-Cohen LLP, he served as Chairman of its
Executive Committee and, immediately before joining Advanta Corp., as a member
of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff is a
Trustee of Atlantic Realty Trust, a publicly held real estate investment trust.
Mr. Browne joined Advanta Corp. in June 1998 as Senior Vice President and
Chief Financial Officer. Prior to joining Advanta Corp., he was an Audit and
Business Advisory Partner at Arthur Andersen LLP
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where, for over sixteen years, he audited public and private companies and
provided business advisory and consulting services to financial services
companies. Mr. Browne had served as the Arthur Andersen engagement partner for
Advanta Corp. since 1994. Mr. Browne is a director of AF&L Insurance Company, a
privately held long-term care and home health care insurance company.
Mr. Weinstock joined Advanta Corp. in 1998 and became Vice President and
Chief Accounting Officer in March 2001. Mr. Weinstock joined the Company in
December 1998 as Controller and he became Vice President of Investor Relations
in October 1999. Prior to joining Advanta Corp., Mr. Weinstock served as Senior
Manager at Arthur Andersen LLP from 1996 to 1998, where he audited public and
private companies and provided business advisory and consulting services to
financial services companies.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK PRICE RANGES AND DIVIDENDS
The Company's common stock is traded on the National Market System of The Nasdaq
Stock Market, Inc. under the symbols ADVNA (Class A voting common stock) and
ADVNB (Class B non-voting common stock).
Following are the high, low and closing sale prices and cash dividends
declared for the last two years as they apply to each class of stock:
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- -------------- ------ ------ ------ ---------
CLASS A:
March 1999 $15.19 $10.31 $11.06 $.063
June 1999 18.25 9.63 18.06 .063
September 1999 23.94 14.63 14.63 .063
December 1999 20.38 14.63 18.25 .063
March 2000 $21.88 $16.88 $20.31 $.063
June 2000 21.00 10.88 12.19 .063
September 2000 13.56 10.69 11.25 .063
December 2000 11.88 5.75 8.81 .063
CLASS B:
March 1999 $12.31 $ 7.75 $ 8.94 $.076
June 1999 14.75 7.59 13.56 .076
September 1999 19.13 11.38 11.75 .076
December 1999 15.88 10.44 14.06 .076
March 2000 $15.50 $11.50 $14.48 $.076
June 2000 15.13 7.75 8.50 .076
September 2000 10.19 7.50 8.14 .076
December 2000 8.38 4.13 7.19 .076
At March 23, 2001, the Company had approximately 287 and 598 holders of
record of Class A and Class B common stock, respectively.
Although the Company anticipates that comparable cash dividends will
continue to be paid in the future, the payment of future dividends by the
Company will be at the discretion of the Board of Directors and will depend on
numerous factors including the Company's cash flow, financial condition, capital
requirements and such other factors as the Board of Directors deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Summary of Operations(1)
Noninterest revenues $ 157,081 $ 105,370 $ 140,408 $ 655,605 $ 670,593
Interest revenues 136,100 104,584 111,502 331,021 299,311
Interest expense 86,508 80,800 101,226 266,118 240,948
Gain on transfer of consumer credit card
business 0 0 541,288 0 0
Provision for credit losses 36,309 22,506 38,329 199,494 93,329
Minority interest in income of
consolidated subsidiary 8,880 8,880 8,880 8,880 222
Operating expenses 150,292 95,506 136,835 466,550 416,185
Unusual charges(2) -- 16,713 125,072 0 0
Income (loss) before income taxes 11,192 (14,451) 382,856 45,584 219,220
Income from continuing operations 11,192 41,334 408,604 25,920 136,117
Income (loss) from discontinued
operations, net of tax (163,578) 8,484 39,276 45,705 39,540
Loss on discontinuance of leasing
business, net of tax (4,298) -- -- -- --
Net income (loss) (156,684) 49,818 447,880 71,625 175,657
- ----------------------------------------------------------------------------------------------------------
Per Common Share Data
Basic income from continuing operations
Combined(3) $ 0.44 $ 1.63 $ 15.18 $ 0.45 $ 3.18
Class A 0.39 1.59 15.14 0.38 3.11
Class B 0.47 1.66 15.21 0.50 3.22
Basic net income (loss)
Combined(3) (6.24) 1.99 16.65 1.52 4.15
Class A (6.28) 1.95 16.62 1.45 4.08
Class B (6.21) 2.02 16.68 1.57 4.19
Diluted income from continuing
operations
Combined(3) 0.44 1.62 14.33 0.45 3.02
Class A 0.39 1.58 14.32 0.38 2.99
Class B 0.46 1.65 14.35 0.49 3.04
Diluted net income (loss)
Combined(3) (6.19) 1.98 15.71 1.50 3.89
Class A (6.23) 1.94 15.69 1.43 3.86
Class B (6.16) 2.00 15.73 1.54 3.91
Cash dividends declared
Class A 0.252 0.252 0.252 0.440 0.380
Class B 0.302 0.302 0.302 0.528 0.456
Book value-combined 17.06 23.14 21.26 19.01 18.06
Closing stock price
Class A 8.81 18.25 13.25 26.25 42.75
Class B 7.19 14.06 11.06 25.38 40.88
- ----------------------------------------------------------------------------------------------------------
Financial Condition -- Year End
Investments(4) $ 866,376 $ 893,819 $1,290,373 $1,378,772 $1,124,526
Gross business credit card receivables
Owned 335,087 275,095 150,022 140,399 72,348
Securitized 1,324,137 765,019 664,712 522,688 229,000
--------------------------------------------------------------
Managed 1,659,224 1,040,114 814,734 663,087 301,348
Total assets 2,843,472 3,538,560 3,662,062 6,637,617 5,479,415
Deposits 1,346,975 1,512,359 1,749,790 3,017,611 1,860,058
Long-term debt 755,184 788,508 1,030,147 2,248,172 2,305,081
Capital securities(5) 100,000 100,000 100,000 100,000 100,000
Stockholders' equity 440,902 589,631 560,304 926,950 852,036
- ----------------------------------------------------------------------------------------------------------
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Selected Financial Ratios
Return on average assets (4.35)% 1.34% 11.95% 1.09% 3.16%
Return on average common equity (31.37) 8.82 82.76 8.47 25.31
Return on average total equity(6) (25.11) 8.30 64.81 8.12 22.07
Equity/owned assets(6) 19.02 19.49 18.03 15.47 17.37
Dividend payout(7) N/M 15.67 1.62 33.34 10.75
As a percentage of managed receivables:
Total loans 30 days or more
delinquent(8) 5.0 3.7 4.4 5.2 4.9
Net charge-offs(8) 4.6 5.1 6.7 6.8 3.7
- ----------------------------------------------------------------------------------------------------------
(1) Results through February 1998 include the results of the consumer credit
card unit.
(2) 1999 amounts included charges associated with cost reduction initiatives in
the first quarter and additional costs associated with products exited in
the first quarter of 1998. 1998 amounts included severance and outplacement
costs associated with workforce reduction, option exercises and other
employee costs associated with the Consumer Credit Card Transaction/Tender
Offer, expense associated with exited business/products and asset
impairment.
(3) Combined represents a weighted average of Class A and Class B (see Note 1 to
consolidated financial statements).
(4) Includes federal funds sold, trading investments and investments available
for sale.
(5) Represents company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debentures of Advanta Corp.
(6) Return on average total equity and equity/owned assets include capital
securities as equity. The ratios without capital securities for 2000 were
(31.28%) and 15.51%, respectively, for 1999 were 8.82% and 16.66%,
respectively, for 1998 were 74.75% and 15.30%, respectively, for 1997 were
8.33% and 13.97%, respectively and for 1996 were 22.31% and 15.55%,
respectively.
(7) The dividend payout ratio for the year ended December 31, 2000 is negative
and therefore, not meaningful.
(8) Effective October 1, 2000, business credit card charge-off and delinquency
statistics reflect the adoption of a new charge-off policy for bankruptcies.
Bankrupt business credit cards are charged off within a 60-day investigative
period after receipt of notification. The previous policy provided a 90-day
investigative period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW
During the years ended December 31, 2000, 1999 and 1998, our lending and leasing
business units consisted of Advanta Business Cards, Advanta Mortgage and Advanta
Leasing. In addition to our lending and leasing businesses, we have an insurance
business and venture capital investments. In the first quarter of 2001, we sold
our mortgage business and announced the discontinuance of our leasing business.
We will continue to service the existing leasing portfolio rather than sell the
business or the portfolio. The results of the mortgage and leasing businesses
are reported as discontinued operations in all periods presented. Prior to
February 20, 1998, we issued consumer credit cards. Results of the consumer
credit card business through February 20, 1998 are reported in continuing
operations.
For the year ended December 31, 2000, we reported income from continuing
operations of $11.2 million or $0.44 per combined common share, assuming
dilution, compared to $41.3 million or $1.62 per combined diluted common share
for the year ended December 31, 1999. For the year ended December 31, 1998, we
reported income from continuing operations of $408.6 million or $14.33 per
combined diluted common share. Pretax income for Advanta Business Cards was
$71.2 million for the year ended December 31, 2000, $34.2 million for the year
ended December 31, 1999, and $15.2 million for the year ended December 31, 1998.
In 2000, income from continuing operations includes pretax investment
gains, net, on venture capital investments of $7.7 million, a pretax increase in
the provision for credit losses on business credit cards of $18.4 million, and a
$7.0 million pretax charge for an increase in litigation reserves.
In 1999, income from continuing operations includes a tax benefit of $50.0
million related to the former consumer credit card business. Income from
continuing operations for the year ended December 31, 1999 also includes pretax
unusual charges of $6.7 million for severance and outplacement costs associated
with cost cutting initiatives implemented in the first quarter of 1999 and $10.0
million of additional costs associated with products exited in the first quarter
of 1998. In addition, in 1999 we recognized a pretax investment gain on a
venture capital investment of $28.1 million, and non-operating charges of $16.9
million related to our exit from the auto finance business.
In 1998, income from continuing operations includes a $541.3 million gain
on the Consumer Credit Card Transaction (see Note 11 to the consolidated
financial statements), a $62.3 million pretax charge for severance and
outplacement costs associated with workforce reduction, option exercises and
other employee costs associated with the Consumer Credit Card Transaction/Tender
Offer, a $54.1 million pretax charge for expenses associated with exited
businesses and products, $41.8 million of equity securities losses and an $8.7
million pretax charge for facility impairments.
Income (loss) from discontinued operations, net of tax, was ($163.6)
million for the year ended December 31, 2000, $8.5 million for the year ended
December 31, 1999 and $39.3 million for the year ended December 31, 1998. In
addition to the operating results of the discontinued operations, we recorded a
loss on the discontinuance of our leasing business of $4.3 million, net of tax,
effective December 31, 2000.
ADVANTA BUSINESS CARDS
OVERVIEW
Advanta Business Cards offers MasterCard business credit cards to small
businesses using targeted direct mail and the Internet as well as telemarketing
solicitation of potential cardholders. This product provides approved customers
with access, through merchants, banks, checks and ATMs, to an instant unsecured
revolving business credit line. Advanta Business Cards generates interest and
other income through finance charges assessed on outstanding balances,
interchange income, and cash advance and other credit card fees.
Pretax income for Advanta Business Cards was $71.2 million for the year
ended December 31, 2000 as compared to $34.2 million for year ended December 31,
1999. Pretax income for Advanta Business Cards was $15.2 million for the year
ended December 31, 1998. The increase in pretax income in both years resulted
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from increases in the volume of managed receivables, portfolio yields due to
changes in pricing and interchange income. These increases in revenues were
partially offset by increases in provisions for credit losses, and increases in
operating expenses due to increased marketing and account origination
activities.
Pretax income for Advanta Business Cards for the year ended December 31,
2000 includes an increase in the provision for credit losses of $18.4 million.
Approximately $8 million of the $18.4 million increase in 2000 is attributable
to a revision of our estimate of the allowance for credit losses as a result of
the following factors: (1) discussions with our banking regulators relating to
the implementation of the agreement between Advanta Bank Corp. and the FDIC that
was disclosed in June 2000; (2) changes in the economic environment; and (3) the
use of more conservative loss estimates for certain segments of the loan
portfolio. The remainder of the increase in allowance is due to the maturing and
growth of the portfolio. See further discussion in the "Provision and Allowance
for Credit Losses" section of Management's Discussion and Analysis.
Advanta Business Cards originated 311,275 new accounts in the year ended
December 31, 2000, 146,436 new accounts in 1999 and 102,181 new accounts in
1998. The increases in new business credit card accounts over prior years
resulted from the successful application of our information based strategy to
expand the universe of potential business credit card customers.
SECURITIZATION INCOME
Advanta Business Cards recognized securitization income of $70.8 million for the
year ended December 31, 2000, $33.5 million for the year ended December 31,
1999, and $18.2 million for the year ended December 31, 1998. Advanta Business
Cards sells interests in receivables through securitizations. Advanta Business
Cards also sells receivables to existing securitization trusts on a continuous
basis to replenish the investors' interest in trust receivables that have been
repaid by the card holders. The increase in securitization income in both years
was due to increased yields on the securitized receivables and increased volume
of securitized receivables. The increase in 2000 was partially offset by
increased credit losses on securitized receivables.
The following table provides selected information on a managed loan
portfolio basis.
MANAGED PORTFOLIO DATA
($ IN THOUSANDS) 2000 1999 1998
- ---------------- ---------- ---------- --------
Average managed business credit card receivables $1,372,717 $ 892,862 $744,192
Ending managed business credit card receivables 1,659,224 1,040,114 814,734
Ending number of accounts -- managed 585,836 352,312 245,853
Managed net interest margin 12.6% 11.2% 9.9%
As a percentage of gross managed receivables:
Total loans 30 days or more delinquent 5.0% 3.7% 4.4%
Net charge-offs 4.7 5.0 5.9
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities- a
Replacement of FASB Statement No. 125." SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without amendment. SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
have adopted the disclosure provisions of SFAS No. 140 for the year ended
December 31, 2000. We anticipate that the adoption of the accounting provisions
of SFAS No. 140 will not have a material effect on our financial position or
results of operations.
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SERVICING REVENUES
Advanta Business Cards recognized servicing revenue of $17.3 million for the
year ended December 31, 2000, $13.8 million for the year ended December 31,
1999, and $12.3 million for the year ended December 31, 1998. The increase in
servicing revenue in both years was due to increased volume of securitized
receivables.
DISCONTINUED OPERATIONS
On January 8, 2001, we signed an agreement with Chase Manhattan Mortgage
Corporation, a subsidiary of J.P. Morgan Chase & Co., to sell our mortgage
business, Advanta Mortgage. Advanta Mortgage made nonconforming home equity
loans directly to consumers and through brokers. This business unit originated
and serviced first and second lien mortgage loans, including home equity lines
of credit, through subsidiaries of Advanta. In addition to servicing and
managing the loans it originated, Advanta Mortgage contracted with third parties
to service their nonconforming home equity loans on a subservicing basis.
Effective February 28, 2001, we completed the sale of our mortgage business
to Chase Manhattan Mortgage Corporation. Following the transaction, we no longer
operate a mortgage business. The purchase and sale agreement provided for the
sale, transfer and assignment of substantially all of the assets and operating
liabilities associated with our mortgage business, as well as specified
contingent liabilities arising out of our operation of the mortgage business
prior to closing that were identified in the purchase and sale agreement. We
retained contingent liabilities, primarily relating to litigation, arising out
of our operation of the mortgage business before closing that were not
specifically assumed by the buyer. The proceeds from the sale exceeded $1
billion, subject to closing adjustments, resulting in an estimated gain of
approximately $59.7 million before transaction expenses, severance expenses and
other costs. Transaction expenses, severance expenses and other costs associated
with the sale are expected to be significant. The gain will also be reduced by a
charge of approximately $19.7 million associated with certain equipment,
facilities and derivative instruments related to hedging activities not
purchased by the buyer. We will use part of the proceeds from the sale of
mortgage assets to pay off our outstanding medium-term notes via a tender offer
to repurchase the outstanding notes at par value plus accrued interest. We also
intend to use the proceeds to reduce a significant portion of our outstanding
retail notes, and to provide working capital for our remaining businesses.
Although the transaction resulted in a gain for financial reporting purposes,
due to book/tax differences we expect that we will not be required to pay any
material federal income tax as a result of the sale. We also expect to record a
restructuring charge in the first quarter of 2001 as we restructure corporate
functions to a size commensurate with the ongoing business after closing.
On January 23, 2001, we announced that after a thorough review of strategic
alternatives available for our leasing business, Advanta Leasing Services, we
decided to cease originating leases. Advanta Leasing Services offered flexible
lease financing programs on small-ticket equipment to small businesses. The
primary products financed included office machinery, security systems and
computers. The commercial equipment leasing business was generated primarily
through third-party referrals from manufacturers or distributors of equipment,
as well as independent brokers, direct mail marketing and telemarketing. We will
continue to service the existing portfolio rather than sell the business or the
portfolio. In connection with the discontinuance of the leasing business, we
recorded a $4.3 million pretax loss effective December 31, 2000.
Income (loss) from discontinued operations, net of tax, was ($163.6)
million for the year ended December 31, 2000, $8.5 million for the year ended
December 31, 1999 and $39.3 million for the year ended December 31, 1998.
Loss from discontinued operations for the year ended December 31, 2000
includes charges which were made in response to our regulatory review process,
including the implementation of the agreements with the bank regulators that
were signed during the second and third quarters of 2000, and changes during the
second quarter in the market and the political and regulatory environment for
subprime lending. These charges include a pretax reduction in the valuation of
Advanta National Bank's retained interests in mortgage securitizations of $214.0
million and an increase in Advanta National Bank's on-balance sheet allowance
for credit losses related to mortgage loans of $22.0 million. These Advanta
National Bank charges reduced net income by $236.0 million or $9.31 per combined
common diluted share.
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In addition, loss from discontinued operations for the year ended December
31, 2000 includes $20.3 million of pretax charges resulting from changes in
valuation assumptions related to retained interests in leasing securitizations,
primarily due to higher credit losses associated with certain unprofitable
segments of broker originations from prior periods. These charges reduced net
income by $20.3 million or $.80 per combined common diluted share. Loss from
discontinued operations for the year ended December 31, 2000 also includes $25.3
million of revenues related to termination fees received under a mortgage
servicing agreement. See Note 12 to the consolidated financial statements.
Income from discontinued operations for the year ended December 31, 1999
includes $28.8 million of pretax valuation adjustments to the retained interests
in mortgage securitizations and contractual mortgage servicing rights, which
decreased net income by $17.4 million or $0.73 per combined diluted share. Of
the total valuation adjustment, $10 million was recorded in the second quarter
of 1999, which resulted from an increase in credit losses expected in the
off-balance sheet mortgage loan portfolio based on portfolio trends and
experience. The majority of the remaining charge was recorded in the fourth
quarter of 1999 and resulted from an increase in the discount rate on the
retained interest-only strip and an increase in the credit loss assumption. The
discount rate was increased due to an increase in market interest rates and an
observed trend toward higher discount rates in available public disclosures
relating to comparable instruments. The increase in the loss assumption was due
to an additional increase in credit losses expected in the off-balance sheet
mortgage loan portfolio based on trends and experience. The decrease in the
valuation caused by the increased discount rate and credit loss assumption was
slightly offset by a decrease in prepayment speeds experienced.
Additionally, in the first quarter of 1999, we recorded pretax valuation
adjustments to the retained interests in auto loan securitizations of $12
million, which decreased net income by $7.4 million, or $0.31 per combined
diluted share. In the first quarter of 1999, management implemented a plan to
exit the auto finance business and engaged an investment banker to solicit bids
for the business as a whole, including our retained interests in auto
securitizations and certain auto loan receivables. Although management did not
ultimately accept any offers to acquire the retained interests, the informal
bids received were considered as part of our fair value analysis of the retained
interests, which resulted in a decrease in the valuation of the assets as of
March 31, 1999.
Income from discontinued operations for the year ended December 31, 1998
includes $59.3 million of pretax valuation adjustments to the retained interests
in mortgage securitizations and contractual mortgage servicing rights, which
decreased net income by $41.5 million or $1.46 per combined diluted share. This
charge resulted from an increase in prepayment speeds experienced.
INTEREST INCOME AND EXPENSE
Interest income on receivables and investments increased by $31.5 million for
the year ended December 31, 2000 as compared to the year ended December 31,
1999. During the same period, interest expense increased by $5.7 million. The
increase in interest income was due to an increase in yields on business credit
card receivables as well as an increase in average on-balance sheet business
credit card receivables. The increase in interest expense was due to an increase
in the cost of funds.
Interest income on receivables and investments decreased $6.9 million for
the year ended December 31, 1999 as compared to 1998. During the same period,
interest expense decreased by $20.4 million. The decrease in interest income was
mainly attributable to the decrease in average interest-earning assets as a
result of the transfer of consumer credit card receivables in the Consumer
Credit Card Transaction in 1998. This decrease was partially offset by an
increase in yields on business credit card receivables and an increase in
average on-balance sheet business credit card receivables. The decrease in
interest expense was due to a decrease in the cost of funds, as well as a
reduction in interest-bearing liabilities in connection with the Consumer Credit
Card Transaction in 1998.
Our cost of funds increased to 6.89% in 2000 from 5.87% in 1999. Our cost
of funds was 6.26% in 1998. The increase in the cost of funds in 2000 as
compared to 1999 was primarily attributable to rising market interest rates. The
decrease in the cost of funds in 1999 as compared to 1998 was primarily
attributable to the
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increase in the use of deposits as a funding source. Deposits represented 68% of
total average interest-bearing liabilities for the year ended December 31, 2000
as compared to 66% in 1999 and 50% in 1998.
The following table provides an analysis of owned interest income and
expense data, average balance sheet data, net interest spread, and net interest
margin. Net interest spread represents the difference between the yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Net interest margin represents the difference between the yield on
interest-earning assets and the average rate paid to fund interest-earning
assets. Average owned loans and the related interest revenues include certain
loan fees and costs.
INTEREST RATE ANALYSIS
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) ---------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET
- ----------------------------
Interest-earning assets:
Receivables:
Business credit cards $ 399,692 $ 77,528 19.40% $ 212,311 $ 35,265 16.61% $ 146,515 $ 21,549 14.71%
Consumer credit cards(1) 0 0 0.00 0 0 0.00 384,697 23,457 6.10
Other loans 23,067 979 4.25 17,450 2,188 12.54 15,724 1,858 11.82
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total receivables 422,759 78,507 18.57 229,761 37,453 16.30 546,936 46,864 8.57
Federal funds sold 218,387 13,896 6.36 272,330 13,535 4.97 203,485 10,933 5.37
Restricted
interest-bearing
deposits 26,121 1,762 6.75 27,586 1,416 5.13 106,732 4,402 4.12
Trading investments 0 0 0.00 110,565 6,752 6.11 172,084 10,374 6.03
Tax-free securities(2) 3,786 348 9.19 3,857 319 8.27 4,992 407 8.15
Taxable investments 656,868 41,964 6.39 798,633 44,842 5.61 673,239 37,850 5.62
Interest earning assets of
discontinued operations 1,457,218 179,957 12.35 1,565,773 142,632 9.11 1,462,658 135,598 9.27
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest-earning
assets(3) $2,785,139 $316,434 11.36% $3,008,505 $246,949 8.21% $3,170,126 $246,428 7.77%
========== ======== ====== ========== ======== ====== ========== ======== ======
Interest-bearing
liabilities:
Deposits:
Savings $ 182,112 $ 10,206 5.60% $ 262,501 $ 13,120 5.00% $ 202,943 $ 10,916 5.38%
Time deposits under
$100,000 1,227,550 79,810 6.50 1,063,354 60,271 5.67 909,132 54,941 6.04
Time deposits of
$100,000 or more 441,856 28,755 6.51 500,268 27,995 5.60 329,001 20,078 6.10
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total deposits 1,851,518 118,771 6.41 1,826,123 101,386 5.55 1,441,076 85,935 5.96
Debt 747,182 61,030 8.17 893,720 58,441 6.53 1,337,508 87,204 6.52
Other borrowings 137,024 8,792 6.42 54,008 3,225 5.92 102,372 7,067 6.90
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest-bearing
liabilities 2,735,724 188,593 6.89 2,773,851 163,052 5.87 2,880,956 180,206 6.26
Net noninterest-bearing
liabilities 49,415 234,654 289,170
---------- ---------- ----------
Sources to fund
interest-earning assets(4) $2,785,139 $188,593 6.77% $3,008,505 $163,052 5.42% $3,170,126 $180,206 5.68%
========== ======== ====== ========== ======== ====== ========== ======== ======
Net interest spread 4.47% 2.34% 1.51%
====== ====== ======
Net interest margin 4.59% 2.79% 2.09%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Interest and average rate for tax-free securities are computed on a tax
equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and nonaccrual loans.
(4) Includes funding of assets for both continuing and discontinued operations.
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INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
2000 VS. 1999 1999 VS. 1998
($ IN THOUSANDS) ------------------------------ -------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------ -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------------
Interest income from:
Receivables:
Business credit cards $ 35,506 $ 6,757 $42,263 $ 10,652 $ 3,064 $ 13,716
Consumer credit cards(1) 0 0 0 (23,457) 0 (23,457)
Other loans 551 (1,760) (1,209) 212 118 330
Federal funds sold (2,989) 3,350 361 3,467 (865) 2,602
Restricted interest-bearing deposits (79) 425 346 (3,864) 878 (2,986)
Trading investments (6,752) 0 (6,752) (3,758) 136 (3,622)
Tax-free securities (6) 35 29 (94) 6 (88)
Taxable investments (8,600) 5,722 (2,878) 7,059 (67) 6,992
Interest earning assets of
discontinued operations (10,463) 47,788 37,325 9,410 (2,376) 7,034
-------- ------- ------- -------- ------- --------
Total interest income(2) $ 7,168 $62,317 $69,485 $ (373) $ 894 $ 521
-------- ------- ------- -------- ------- --------
Interest expense on:
Deposits:
Savings $ (4,357) $ 1,443 $(2,914) $ 3,019 $ (815) $ 2,204
Time deposits under $100,000 10,030 9,509 19,539 8,859 (3,529) 5,330
Time deposits of $100,000 or more (3,489) 4,249 760 9,682 (1,765) 7,917
Debt (10,556) 13,145 2,589 (28,897) 134 (28,763)
Other borrowings 5,277 290 5,567 (2,954) (888) (3,842)
-------- ------- ------- -------- ------- --------
Total interest expense $ (3,095) $28,636 $25,541 $(10,291) $(6,863) $(17,154)
-------- ------- ------- -------- ------- --------
Net interest income $ 10,263 $33,681 $43,944 $ 9,918 $ 7,757 $ 17,675
- --------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998.
(2) Includes income from assets held and available for sale.
GAIN ON TRANSFER OF CONSUMER CREDIT CARD BUSINESS
In 1998 we recognized a gain of $541.3 million which represented the excess of
liabilities transferred to Fleet Credit Card LLC ("Fleet LLC") over the net
basis of the assets transferred and our retained minority membership interest in
Fleet LLC. At the closing date of the Consumer Credit Card Transaction, the
minority interest was a 4.99% ownership interest in Fleet LLC valued at $20
million. See Note 11 to the consolidated financial statements.
OTHER REVENUES
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------
Business credit card interchange income $61,668 $33,786 $ 20,741
Investment securities gains (losses), net 5,473 30,132 (40,142)
Consumer credit card interchange income 0 0 11,881
Consumer credit card overlimit fees 0 0 16,233
Insurance revenues, net and other 1,833 6,445 10,235
- --------------------------------------------------------------------------------------------
Total other revenues, net $68,974 $70,363 $ 18,948
- --------------------------------------------------------------------------------------------
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Business credit card interchange income increased by $27.9 million for the
year ended December 31, 2000 as compared to the year ended December 31, 1999 and
increased by $13.0 million for the year ended December 31, 1999 as compared to
the year ended December 31, 1998. The increase in both periods was due to higher
purchase volume related to the increase in average managed business credit card
accounts and receivables. In addition, an increase in interchange rates
contributed to the increase for the year ended December 31, 1999. The average
interchange rate was 2.1% in 2000 and 1999 and 2.0% in 1998.
Investment securities gains (losses) include changes in the fair value and
realized gains (losses) on venture capital investments. Investment securities
gains (losses) for the year ended December 31, 2000 include $11.4 million in
gains on the sale of venture capital investments, ($3.7) million of net decrease
in valuations of venture capital investments, and ($2.2) million of realized
losses on other investments. Investment securities gains (losses) for the year
ended December 31, 1999 include a $28.1 million gain on a venture capital
investment. Most of the loss in the year ended December 31, 1998 relates to
venture capital investments not publicly traded for which we decided to expedite
a disposal plan.
Insurance revenues, net and other for the year ended December 31, 2000
includes a charge of approximately $3 million relating to the settlement of a
large policy claim. We have been notified by Progressive Casualty Insurance
Company that it does not intend to renew the strategic alliance with Advanta
Insurance when the original five-year term for the alliance expires during 2001.
The agreement governing the relationship between Advanta Insurance and
Progressive requires that upon termination, we transfer our interest in the
assets and liabilities of the strategic alliance to Progressive and that
Progressive make certain payments to us, subject to adjustments. Advanta
Insurance and Progressive are currently pursuing alternative termination
structures for the strategic alliance that would allow for early termination and
financial settlement.
The decline in consumer credit card interchange income, consumer credit
card overlimit fees, insurance revenues and certain other revenues for the year
ended December 31, 1999 as compared to the year ended December 31, 1998 was
attributable to the transfer of the consumer credit card portfolio in the
Consumer Credit Card Transaction in February 1998.
OPERATING EXPENSES
($ IN THOUSANDS) 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits $ 42,499 $35,300 $ 47,723
Amortization of credit card deferred origination costs, net 23,961 5,863 22,271
Professional/consulting fees 18,451 12,160 6,530
External processing 13,236 8,507 14,387
Marketing expense 11,492 2,397 4,066
Occupancy expense 9,221 9,854 6,822
Equipment expense 9,001 5,528 9,981
Other 22,431 15,897 25,055
- ---------------------------------------------------------------------------------------------
Total operating expenses $150,292 $95,506 $136,835
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits, amortization of credit card deferred
origination costs, net, external processing expense, marketing expense and
equipment expense have increased for the year ended December 31, 2000 as
compared to the year ended December 31, 1999 due primarily to increased
marketing and account origination activities in Advanta Business Cards as well
as the resulting growth in managed business credit card receivables. Business
credit card new account originations increased by 113% for the year ended
December 31, 2000 as compared to 1999, and average managed business credit card
receivables grew by 54% in the same period. The increase in equipment expense
for the year ended December 31, 2000 as compared to 1999 also includes an
increase in depreciation expense associated with information technology upgrades
placed in service during 1999. The increase in other expenses for the year ended
December 31, 2000 as compared to 1999 was primarily due to an increase in
litigation reserves of $7.0 million in 2000.
The decreases in salaries and employee benefits, amortization of credit
card deferred origination costs, net, external processing expense, marketing
expense, equipment expense, and other expenses for the year
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ended December 31, 1999 as compared to 1998 were due to consumer credit card
expenses incurred through February 1998 that are included in the 1998 amounts,
as well as to cost reduction measures implemented in the first quarter of 1999.
Professional fees increased by $6.3 million for the year ended December 31,
2000 as compared to the year ended December 31, 1999 and increased by $5.6
million for the year ended December 31, 1999 as compared to the year ended
December 31, 1998. The increase in 2000 was due to increased legal activity and
consulting costs, including consulting costs associated with the implementation
of the regulatory agreements. The increase in 1999 was due, in part, to
increased legal activity, as well as consulting and outsourcing costs associated
with our strategic management of capacity and resources.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established as losses are estimated to have
occurred through a provision for credit losses charged to earnings. The
allowance for credit losses is evaluated on a regular basis by management and is
based upon management's periodic review of the collectibility in light of
historical experience by loan type, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay and
prevailing economic conditions. Since our loan portfolio is comprised of large
groups of smaller balance homogeneous loans, we evaluate each group collectively
for impairment. The allowance is determined primarily based on a migration
analysis of delinquent and current accounts and certain qualitative factors
consistent with applicable bank regulatory guidelines. As part of our
evaluation, we compare actual credit loss performance to previously estimated
credit losses, and make modifications to estimates as needed. This allowance for
credit loss evaluation is inherently subjective, as it requires estimates that
are susceptible to significant revision as more information becomes available.
The allowance for credit losses is maintained for on-balance sheet
receivables and is intended to cover all credit losses inherent in the owned
loan portfolio. Anticipated losses on securitized assets are reflected in the
calculations of securitization income and retained interests in securitizations.
See Note 1 to the consolidated financial statements. Such loss estimates are
intended to cover all probable credit losses over the life of the securitized
receivables. Management continually evaluates both its on-balance sheet and
off-balance sheet estimates and, as appropriate, effects changes to these
amounts.
Nonperforming assets include loans past due 90 days or more, and bankrupt,
decedent and fraudulent business credit card accounts. We charge losses on
business credit card accounts against the allowance at 180 days contractually
delinquent. Business credit card accounts suspected of being fraudulent are
charged-off after a 90-day investigative period, unless our investigation shows
no evidence of fraud. Effective October 1, 2000, bankrupt business credit cards
are charged off within a 60-day investigative period after receipt of
notification. The previous policy provided a 90-day investigative period.
Loans are put on nonaccrual status when they become 90 days past due. Gross
interest income that would have been recorded for owned nonperforming assets,
had interest been accrued throughout the year in accordance with the assets'
original terms, was $1.3 million in 2000.
At December 31, 2000, the allowance for credit losses on a consolidated
basis was $33.4 million, or 9.3% of owned receivables, compared to $14.9
million, or 4.9%, at December 31, 1999. The allowance for credit losses on
business credit card receivables was $33.2 million, or 9.9% of owned
receivables, at December 31, 2000, as compared to $14.7 million, or 5.3%, at
December 31, 1999. As of September 30, 2000, we modified our estimate of the
allowance for credit losses on business credit card receivables. The revised
estimate for the overall portfolio was developed based on discussions with our
banking regulators, changes in the economic environment and the use of more
conservative loss estimates for certain segments of the loan portfolio. Those
segments included accounts with lower credit scores, accounts held by businesses
in operation less than twelve months, and accounts in which cash borrowings
comprise a significant portion of the outstanding balance. As a result of these
changes in estimate, we increased our allowance for credit losses by
approximately $8 million, which decreased net income by approximately $8 million
or $0.32 per diluted combined share. The remainder of the increase in allowance
for credit losses on business credit card receivables is due to the maturing and
growth of the portfolio. The maturing of the portfolio was reflected in the
delinquency rates. Total owned
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business credit card receivables 30 days or more delinquent increased from 3.8%
at December 31, 1999 to 5.5% at December 31, 2000. The charge-off rate on owned
business credit card receivables for the year ended December 31, 2000 of 4.5%
was slightly less than the rate for the year ended December 31, 1999 of 4.8%;
however, we did experience a trend of increasing charge-off rates in the second
half of 2000 due to the maturing of the portfolio. Charge-off rates on owned
business credit card receivables by quarter were 4.1% for the first quarter of
2000, 3.7% for the second quarter of 2000, 4.9% for the third quarter of 2000
and 5.1% for the fourth quarter of 2000. The fourth quarter charge-off rate
includes a 0.5% acceleration of charge-offs to adopt the 60 day charge-off
policy for bankrupt accounts. See discussion above.
The allowance on other loans was $202 thousand at both December 31, 2000
and 1999 and was relatively consistent as a percentage of other loans at 0.8% on
December 31, 2000 as compared to 0.7% at December 31, 1999. There were no
significant changes or trends in credit quality statistics of other loans in
1998 through 2000.
For the year ended December 31, 2000, the provision for credit losses
increased by $13.8 million as compared to 1999. The increase in the provision
was primarily due to a change in estimate of the allowance for credit losses for
business credit cards and the maturing and growth of the business credit card
portfolio in 2000 as discussed above. Average on-balance sheet business credit
card receivables increased 88% in 2000 as compared with 1999. For the year ended
December 31, 1999, the provision for credit losses decreased by $15.8 million as
compared to the year ended December 31, 1998. This decrease was comprised of a
$28.3 million decrease in the provision on consumer credit cards due to the
Consumer Credit Card Transaction in 1998, a $7.9 million increase in the
provision on business credit cards, and a $4.6 million increase in the provision
on other loans. The increase in the provision on business credit cards was due
to the expansion of the business credit card customer base during 1999. Average
on-balance sheet business credit card receivables increased 45% in 1999 as
compared with 1998. The provision for credit losses on other loans in 1999
included a $3.7 million provision related to our exit from the auto finance
business.
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CREDIT QUALITY
The following table provides a summary of allowances for credit losses,
nonperforming assets, delinquencies and charge-offs for the past five years.
Consolidated data includes business credit cards, consumer credit cards through
February 1998, and other loans.
DECEMBER 31,
------------------------------------------------------
($ IN THOUSANDS) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED -- MANAGED
Nonperforming assets $45,160 $24,118 $ 25,469 $118,815 $ 91,776
Accruing loans past due 90 days or more 0 0 0 203,069 228,822
Total loans 30 days or more delinquent 83,798 39,681 36,578 623,919 641,377
As a percentage of gross receivables:
Nonperforming assets
New methodology(1) 2.7%
Prior methodology 2.8 2.3% 3.1% 1.0% 0.7%
Accruing loans past due 90 days or more 0.0 0.0 0.0 1.7 1.8
Total loans 30 days or more delinquent
New methodology(1) 5.0
Prior methodology 5.1 3.7 4.4 5.2 4.9
Net charge-offs:
Amount $64,638 $46,707 $173,687 $814,859 $455,444
As a percentage of average gross receivables
New methodology(1) 4.6%
Prior methodology 4.5 5.1% 6.7% 6.8% 3.7%
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED -- OWNED
Allowance for credit losses $33,367 $14,865 $ 10,650 $129,053 $ 78,801
Nonperforming assets 10,700 7,028 7,719 25,906 15,481
Accruing loans past due 90 days or more 0 0 0 49,410 40,574
Total loans 30 days or more delinquent 19,395 11,591 7,885 149,094 109,189
As a percentage of gross receivables:
Allowance for credit losses 9.3% 4.9% 6.3% 4.7% 3.7%
Nonperforming assets
New methodology(1) 3.0
Prior methodology 3.1 2.3 4.6 0.9 0.7
Accruing loans past due 90 days or more 0.0 0.0 0.0 1.8 1.9
Total loans 30 days or more delinquent
New methodology(1) 5.4
Prior methodology 5.5 3.8 4.7 5.4 5.1
Net charge-offs:
Amount $17,807 $12,500 $ 38,312 $143,218 $ 66,684
As a percentage of average gross receivables
New methodology(1) 4.2%
Prior methodology 4.1 5.4% 7.0% 7.4% 2.5%
- --------------------------------------------------------------------------------------------------------------
BUSINESS CREDIT CARDS -- MANAGED
Nonperforming assets $44,600 $23,498 $ 25,231 $ 17,362 $ 2,712
Total loans 30 days or more delinquent 82,915 38,437 35,900 29,340 8,952
As a percentage of gross receivables:
Nonperforming assets
New methodology(1) 2.7%
Prior methodology 2.8 2.3% 3.1% 2.6% 0.9%
Total loans 30 days or more delinquent
New methodology(1) 5.0
Prior methodology 5.1 3.7 4.4 4.4 3.0
Net charge-offs:
Amount $64,636 $44,309 $ 43,732 $ 18,928 $ 4,210
As a percentage of average gross receivables
New methodology(1) 4.7%
Prior methodology 4.5 5.0% 5.9% 3.7% 2.6%
- --------------------------------------------------------------------------------------------------------------
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DECEMBER 31,
------------------------------------------------------
($ IN THOUSANDS) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
BUSINESS CREDIT CARDS-OWNED
Allowance for credit losses $33,165 $14,663 $ 6,916 $ 6,899 $ 2,643
Nonperforming assets 10,140 6,408 7,481 4,696 1,591
Total loans 30 days or more delinquent 18,512 10,347 7,207 7,918 1,584
As a percentage of gross receivables:
Allowance for credit losses 9.9% 5.3% 4.6% 4.9% 3.7%
Nonperforming assets
New methodology(1) 3.0
Prior methodology 3.2 2.3 5.0 3.3 2.2
Total loans 30 days or more delinquent
New methodology(1) 5.5
Prior methodology 5.7 3.8 4.8 5.6 2.2
Net charge-offs:
Amount $17,805 $10,103 $ 10,033 $ 6,198 $ 2,169
As a percentage of average gross receivables
New methodology(1) 4.5%
Prior methodology 4.3 4.8% 6.9% 3.3% 2.5%
- --------------------------------------------------------------------------------------------------------------
(1) Effective October 1, 2000, business credit card charge-off and delinquency
statistics reflect the adoption of a new charge-off policy for bankruptcies.
Bankrupt business credit cards are charged off within a 60-day investigative
period after receipt of notification. The previous policy provided a 90-day
investigative period.
UNUSUAL CHARGES
In connection with the Consumer Credit Card Transaction in the first quarter of
1998, we made major organizational changes to reduce corporate expenses incurred
in the past: (a) to support the business contributed to Fleet LLC in the
Consumer Credit Card Transaction, and (b) associated with the business and
products no longer being offered or not directly associated with our mortgage,
business credit card and leasing units. In addition, in 1999, we implemented a
plan to exit the auto finance business and to implement cost reduction
initiatives throughout the organization including the consolidation of support
functions. Unusual charges associated with these restructuring activities
included employee costs, other expenses associated with exited
businesses/products, and asset impairments.
These restructuring activities had no significant impact on operations
while they were ongoing. As a result of the restructuring activities, we
realized lower personnel expenses in the 12 months following the charges, and
expect to realize lower depreciation and amortization expense over the next 5-7
years. These decreases were due to the termination of employees and the
write-off or write-down of assets previously deployed in connection with exited
businesses. We also expected and realized the elimination of the costs of the
contractual commitments associated with exited business products from future
operating results over the estimated timeframe of the contracts.
Employee costs associated with staff reductions
In the first quarter of 1999, in connection with cost reduction initiatives and
the consolidation of support functions, we recorded a $3.3 million charge for
costs associated with staff reductions. These expenses included severance and
outplacement costs. There were 121 employees severed who were entitled to
benefits. This staff reduction was substantially complete by June 30, 1999. The
final payment outstanding related to these employee costs was paid in the three
months ended March 31, 2000.
Employee costs associated with Consumer Credit Card Transaction/Tender Offer
In connection with the organizational changes in 1998, we incurred approximately
$26.8 million of severance and related costs classified as employee costs
associated with the Consumer Credit Card Transaction/Tender Offer. These
expenses included severance and outplacement costs associated with the workforce
reduction, option exercise and re-measurement costs, and other employee costs
directly attributable to the Consumer Credit Card Transaction/Tender Offer.
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In connection with these organizational changes, 255 employees who ceased
to be employed by us were entitled to benefits, of which 190 employees were
directly associated with the business contributed to Fleet LLC and 65 employees
were associated with the workforce reduction.
Additionally, during the first quarter of 1998, we incurred approximately
$35.5 million of other compensation charges. This amount includes $21.3 million
attributable to payments under change of control plans and $14.2 million
associated with the execution of the Tender Offer.
The final payment outstanding related to these employee costs was paid in
the three months ended March 31, 2000.
Expenses associated with exited businesses/products
In the first quarter of 1999, we implemented a plan to cease the origination of
auto loans and recorded a $3.4 million charge for costs associated with exited
businesses/products. The charges included severance and outplacement costs for
22 employees in the auto origination group, and professional fees associated
with exited businesses/products not directly associated with our mortgage,
business credit card and leasing units. We completed the closing of the auto
loan origination center and termination of related employees during the second
quarter of 1999. We expect to complete the payment of the remaining professional
fees during the first half of 2001.
During the first quarter of 1998, we implemented a plan to exit certain
businesses and product offerings not directly associated with our mortgage,
business credit card and leasing units. In connection with this plan,
contractual vendor commitments of approximately $10.0 million associated with
discontinued development and other activities were accrued. We have
substantially completed the settlement of these contractual commitments.
We also have contractual commitments to certain customers, and non-related
financial institutions that are providing benefits to those customers, under a
product that is no longer offered and for which no future revenues or benefits
will be received. In 1998, we recorded a charge of $22.8 million associated with
these commitments, and an $8.3 million charge associated with the write-off of
assets associated with this program that became unrealizable when the product
was exited. In 1999, an additional charge of $10.0 million was recorded based on
a change in the estimate of total expected costs for the contractual commitments
related to the exited product. Updated information regarding future benefits to
be provided in connection with these contractual commitments indicated a higher
level of benefits than originally estimated. The actions required to complete
this plan include the settlement of contractual commitments and the payment of
customer benefits. The liabilities associated with these commitments were
assumed by a third party in the first quarter of 2001.
In connection with the Consumer Credit Card Transaction/Tender Offer and
the other exited business and product offerings, we also incurred $11.5 million
of related professional fees and $1.5 million of other expenses related to these
plans.
Asset Impairments
In connection with Advanta's plans to reduce corporate expenses and exit certain
business and product offerings, certain assets previously deployed in connection
with these exited business or product offerings were identified and the carrying
costs thereof were written off or written down to estimated realizable value in
1998 resulting in a charge of $8.7 million. This charge included $6.0 million
from the write-off of certain leasehold improvements and furniture and fixtures
due to the refit of corporate headquarters. In addition, this charge included a
$2.7 million write-down to estimated fair value of capitalized software costs.
The write-down to fair value of software was determined based on an estimate of
costs associated with the additional functionality of the software, which would
not be of use subsequent to the exit of certain business and product offerings.
INCOME TAXES
As a result of the carrying value adjustments in the three months ended June 30,
2000, described in Note 3 to the consolidated financial statements, we reported
a pretax loss for the year ended December 31, 2000. A
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valuation allowance has been provided against the resulting deferred tax asset
given our pre-existing net operating loss carryforwards and the uncertainty of
the realizability of the incremental deferred tax asset. In establishing the
valuation allowance, management considered (1) the level of expected future
taxable income, (2) existing and projected book/tax differences, (3) tax
planning strategies available, and (4) the general and industry specific
economic outlook. Based on this analysis, management believes the net deferred
tax asset will be realized.
The gain on the Consumer Credit Card Transaction in 1998 was not subject to
income tax and no tax provision was recorded. The Consumer Credit Card
Transaction also resulted in additional book/tax differences, which were
quantified during 1999 in connection with the filing of the 1998 tax return.
These book/tax differences, when combined with certain less significant
recurring differences, resulted in net operating loss carryforwards of
approximately $521 million at December 31, 1999. This amount is net of $96
million carried back to prior years, and includes $500 million that pertains to
losses incurred on the consumer credit card portfolio after the date of the
Consumer Credit Card Transaction. A deferred tax asset of $50 million, net of
valuation allowance, resulting from the net operating loss carryforwards was
recorded as an income tax benefit in the fourth quarter of 1999.
In 2000, we utilized net operating loss carryforwards of $85 million.
Additionally, $29 million was carried back to prior years. At December 31, 2000,
remaining net operating loss carryforwards were $406 million, of which $390
million expire in 2018 and $16 million expire in 2019.
In 1998, we recorded a consolidated income tax benefit of approximately
$9.0 million, as a result of the federal tax treatment of the contribution of
assets associated with the Consumer Credit Card Transaction.
ASSET/LIABILITY MANAGEMENT
We manage our financial condition with a focus on maintaining high credit
quality standards, disciplined management of market risks and prudent levels of
leverage and liquidity.
MARKET RISK SENSITIVITY
Market risk is the potential for loss or diminished financial performance
arising from adverse changes in market forces including interest rates and
market prices. Market risk sensitivity is the degree to which a financial
instrument, or a company that owns financial instruments, is exposed to market
forces. We regularly evaluate our market risk profile and attempt to minimize
the impact of market risks on net interest income and net income.
Our exposure to equity price risk is immaterial relative to expected
overall financial performance. Fluctuations in interest rates, changes in
economic conditions, shifts in customer behavior, and other factors can,
however, affect our financial performance. Changes in economic conditions and
shifts in customer behavior are difficult to predict, and our financial
performance generally cannot be insulated from these forces.
Financial performance variability as a result of fluctuations in interest
rates is commonly called interest rate risk. Interest rate risk generally
results from mismatches in the timing of asset and liability repricing (gap
risk) and from differences between the repricing indices of assets and
liabilities (basis risk).
We attempt to analyze the impact of interest rate risk by regularly
evaluating the perceived risks inherent in our asset and liability structure,
including securitized instruments and off-balance sheet instruments. Risk
exposure levels vary continuously, as changes occur in our asset/liability mix,
market interest rates and other factors affecting the timing and magnitude of
cash flows. Computer simulations are used to generate expected financial
performance in a variety of interest rate environments. Those results are
analyzed to determine if actions need to be taken to mitigate our interest rate
risk.
In managing interest rate risk exposure, we periodically securitize
receivables, sell and purchase assets, alter the mix and term structure of our
funding base, change our investment portfolio and use derivative financial
instruments. Derivative instruments, by Company policy, are not used for
speculative purposes. See discussion in Note 26 to the consolidated financial
statements.
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We measure our interest rate risk using a rising rate scenario and a
declining rate scenario. Net interest income is estimated using a third party
software model that uses standard income modeling techniques. We estimate that
at December 31, 2000, our net interest income over a twelve-month period would
increase by approximately 13% if interest rates were to rise by 200 basis
points, and that our net interest income over a twelve-month period would
decrease by approximately 2% if interest rates were to fall by 200 basis points.
We also measure the effect of interest rate risk on our managed interest income,
which includes net interest income on owned loans and net interest income on
securitized loans. We estimate that at December 31, 2000, our managed net
interest income over a twelve-month period would increase by approximately 4% if
interest rates were to rise by 200 basis points, and that our managed net
interest income over a twelve-month period would increase by approximately 13%
if interest rates were to fall by 200 basis points. Our business credit card
receivables include interest rate floors that cause our managed net interest
income to rise in the declining rate scenario. Both increasing and decreasing
rate scenarios assume an instantaneous shift in rates and measure the
corresponding change in expected net interest income over one year.
The above estimates of net interest income sensitivity alone do not provide
a comprehensive view of our exposure to interest rate risk. The quantitative
risk information is limited by the parameters and assumptions utilized in
generating the results. These analyses are useful only when viewed within the
context of the parameters and assumptions used. The above rate scenarios in no
way reflect management's expectation regarding the future direction of interest
rates, and they depict only two possibilities out of a large set of possible
scenarios.
DERIVATIVES ACTIVITIES
We have a number of mechanisms in place that enable us to monitor and control
both market and credit risk from our derivatives activities. All derivatives
strategies are managed under a hedging policy approved by the Board of Directors
that details the use of derivatives and the individuals authorized to execute
derivatives transactions. Our senior management must approve all derivatives
strategies. As part of this approval process, we complete a market risk analysis
to determine the potential impact that would result from severe negative (i.e.,
stressed) movements in market rates. By policy, derivatives transactions may
only be used to manage our exposure to interest rate risk or for cost reduction
and may not be used for speculative purposes. The impact of any derivatives
transaction is calculated using our asset/liability model to determine its
suitability.
For each counterparty, the total credit exposure amount is calculated by
aggregating credit exposure from all derivatives and other capital market
transactions with that counterparty. The amount of exposure that we are willing
to accept from any single counterparty is based on that counterparty's credit
rating and is determined as a percentage of our equity. To manage counterparty
exposure, we also use negotiated agreements that establish threshold exposure
amounts for each counterparty above which we have the right to call for and
receive collateral for the amount of the excess, thereby limiting our exposure
to the threshold amount. The threshold levels can be fixed or may change as the
credit rating of the counterparty changes, and in all cases, the threshold
levels are well below the maximum allowable exposure amounts described above.
Similarly, under the terms of the negotiated agreements, counterparties have the
right to call for and receive collateral from us for the amount of the excess of
their credit exposure to us over applicable threshold levels. To date,
substantially all agreements with counterparties have included bilateral
collateral agreements.
We have a treasury department that is independent of the trading function,
which measures, monitors, and reports on credit, market, and liquidity risk
exposures from capital markets, hedging and derivative product activities. The
department is responsible for ensuring compliance with our hedging policy,
including the counterparty transaction limits, transaction terms and trader
authorizations. In addition, this department marks each derivatives position to
market on a weekly basis using both internal and external models. These models
have been benchmarked against a sample of derivatives dealers' valuation models
for accuracy. Position and counterparty exposure reports are generated and used
to manage collateral requirements of the counterparty and Advanta.
33
35
All of these procedures and processes are designed to provide reasonable
assurance that, before and after the execution of any derivatives strategy,
market, credit and liquidity risks are fully analyzed and incorporated into
Advanta's asset/liability and risk measurement models.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, cannot be applied retroactively and will be adopted as required
January 1, 2001. We have determined that the adoption of SFAS No. 133 will not
have a material effect on our financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our goal is to maintain an adequate level of liquidity, for both long-term and
short-term needs, through active management of both assets and liabilities.
During the year ended December 31, 2000, we securitized or sold approximately
$543 million of business credit card receivables. We temporarily invested cash
generated from these transactions in short-term, high quality investments at
money market rates pending redeployment to pay down borrowings and to fund
future receivable growth. At December 31, 2000, we had $108 million of federal
funds sold, $154 million of loans held for sale, and $605 million of
investments, which could be sold to generate additional liquidity. Equity,
including capital securities, was $541 million at December 31, 2000.
At December 31, 2000, we had a $280 million committed commercial paper
conduit facility secured by business credit card receivables, of which $150
million was unused at December 31, 2000. We also had an uncommitted securities
repurchase agreement facility secured by business credit card receivables of
$200 million, all of which was unused at December 31, 2000.
At December 31, 2000, after paying down $194 million in medium-term notes
in the year ended December 31, 2000, we had over $180 million of unrestricted
cash, cash equivalents and marketable securities at the parent company and
nonbank subsidiaries. The sale of the mortgage business in the first quarter of
2001 further strengthened our liquidity. Under the purchase and sale agreement,
we received in excess of $1 billion in cash. We will use part of the proceeds
from the sale of mortgage assets to pay off our outstanding medium-term notes
via a tender offer to repurchase the outstanding notes at par value plus accrued
interest. We also intend to use the proceeds to significantly reduce our
outstanding retail notes, and to provide working capital for our remaining
businesses. In addition, as a result of the liquidity resulting from the sale of
the mortgage business in the first quarter of 2001, Advanta Corp. is temporarily
not originating or renewing retail notes and Advanta National Bank has suspended
originations of deposit accounts.
Components of funding were as follows at December 31:
2000 1999 1998
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
- ------------------------------------------------------------------------------------------------------------
Off-balance sheet business credit card receivables $1,324,137 33% $ 765,019 19% $ 664,712 16%
Deposits 1,346,976 34 1,512,359 37 1,749,790 43
Debt and other borrowings 759,473 19 1,121,674 27 1,047,931 25
Equity, including capital securities 540,902 14 689,631 17 660,304 16
- ------------------------------------------------------------------------------------------------------------
Total $3,971,488 100% $4,088,683 100% $4,122,737 100%
- ------------------------------------------------------------------------------------------------------------
During 2000, we completed our first two public business credit card
securitizations, which enabled us to grow off-balance sheet business credit card
receivables as a component of our funding. There were no other significant
changes in the components of funding during 1999 or 2000. See discussion above
regarding intended use of proceeds from the first quarter sale of our mortgage
business in 2001.
At December 31, 2000, Advanta National Bank's combined total capital ratio
(combined Tier I and Tier II capital) was 15.08%, and Advanta Bank Corp.'s
combined total capital ratio was 14.60%. At
34
36
December 31, 1999, Advanta National Bank's combined total capital ratio
(combined Tier I and Tier II capital) was 14.86% and Advanta Bank Corp.'s
combined total capital ratio was 13.28%. In each case, Advanta National Bank and
Advanta Bank Corp. had capital at levels a bank is required to maintain to be
classified as "well-capitalized" under the regulatory framework for prompt
corrective action. However, Advanta National Bank does not meet the definition
of "well-capitalized" because of the existence of our agreement with the Office
of the Comptroller of the Currency, even though we have achieved the higher
imposed capital ratios required by the agreement. Our regulatory agreement with
the Office of the Comptroller of the Currency required that Advanta National
Bank achieve by September 30, 2000 and thereafter maintain a ratio of 14% of
Tier 1 capital to risk-weighted assets and a ratio of 17% of Tier 1 capital to
adjusted total assets. We achieved these ratios, as defined within the
agreement, through a combination of decreasing the assets and deposits at
Advanta National Bank and making aggregate capital contributions and other
investments in Advanta National Bank of approximately $70 million.
In connection with the sale of our mortgage business discussed in Note 2 to
the consolidated financial statements, Advanta National Bank sought approval of
the OCC for a return of capital to Advanta Corp. in the amount of $261 million.
On February 28, 2001, the OCC approved the amount requested and, at the same
time, Advanta National Bank entered into an agreement with the OCC regarding
restrictions on new business activities and product lines at Advanta National
Bank after the sale of the mortgage business and the resolution of outstanding
Advanta National Bank liabilities. The agreement also reduces the existing
capital requirements for Advanta National Bank to 12.7% for Tier 1 and Total
capital to risk-weighted assets, and to 5% for Tier 1 capital to adjusted total
assets as defined in the agreement. In addition, the agreement provides for
prior OCC approval of any future dividends. Advanta Bank Corp. is unaffected by
the agreement with the OCC.
Recently, guidelines were issued jointly by the federal bank regulatory
agencies regarding additional requirements for subprime lenders, including
additional capital requirements. Under the guidelines, regulatory capital
required to be held for certain loan classes included in Advanta Bank Corp.'s
portfolio could be increased.
In addition, in a draft proposal recently issued jointly by the federal
bank regulatory agencies, capital requirements associated with certain residual
interests would be amended to require capital equal to the residual retained,
regardless of retained recourse levels. Further, the proposal requires residuals
in excess of 25% of Tier 1 capital to be treated as a deduction of Tier 1
capital for purposes of risk based and leverage capital calculations. In another
draft proposal recently issued jointly by the federal bank regulatory agencies,
the agencies would use credit ratings and certain alternative approaches to
match the risk based capital requirement more closely to a banking
organization's relative risk of loss in asset securitizations. The proposal also
requires the sponsor of a revolving credit securitization that involves an early
amortization feature to hold capital against the amount of assets under
management (the off-balance sheet securitized receivables). The proposal treats
recourse obligations and direct credit substitutes more consistently than under
the agencies' current risk based capital standards. The ultimate resolution of
these proposals and their impact on financial results is uncertain at this time.
Advanta National Bank and Advanta Bank Corp. are prevented by regulatory
restrictions from lending to Advanta Corp. and its affiliates unless these
extensions of credit are secured by U.S. Government obligations or other
specified collateral. Further, secured extensions of credit are limited in
amount: (a) as to Advanta Corp. or any affiliate, to 10% of each bank's capital
and surplus, and (b) as to Advanta Corp. and all affiliates in the aggregate, to
20% of each bank's capital and surplus. See "Part I -- Government Regulation."
Advanta National Bank is also subject to various legal limitations on the
amount of dividends that can be paid to its parent, Advanta Corp. Advanta
National Bank is eligible to declare a dividend provided that it is not greater
than the current year's net profits plus net profits of the preceding two years.
See "Part I -- Government Regulation." However, our regulatory agreements with
the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation prohibit the payment of dividends by Advanta National Bank or
Advanta Bank Corp. without prior regulatory approval.
35
37
Our insurance subsidiaries are also subject to certain capital, deposit and
dividend rules and regulations as prescribed by state jurisdictions in which
they are authorized to operate.
Total stockholders' equity of our banking and insurance affiliates was $572
million at December 31, 2000, of which $566 million was restricted. At January
1, 2001, $5.4 million of stockholders' equity of our banking and insurance
affiliates was available for payment of dividends under applicable regulatory
guidelines without prior regulatory approval.
In addition to dividend restrictions at banking subsidiaries, certain
non-bank subsidiaries are subject to minimum equity requirements as part of
securitization agreements or financing facility agreements. The total minimum
equity requirement of non-bank subsidiaries was $40 million at December 31,
2000. Management believes that these restrictions, for both bank and non-bank
subsidiaries, will not have an adverse effect on the Advanta Corp.'s ability to
meet its cash obligations due to the current levels of liquidity, diversity of
funding sources and the proceeds received from the sale of our mortgage business
in the first quarter of 2001.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the past five
years.
COMPOSITION OF DEPOSIT BASE
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
Demand deposits $ 4.6 0% $ 5.8 0% $ 4.3 0% $ 41.6 1% $ 28.3 1%
Money market savings 64.0 5 242.4 16 181.5 10 506.8 17 329.7 18
Time deposits of $100,000 or
less 916.9 68 1,046.6 69 1,445.8 83 2,163.0 72 978.6 53
Time deposits of more than
$100,000 361.5 27 217.6 15 118.2 7 306.2 10 523.5 28
- ----------------------------------------------------------------------------------------------------------------
Total deposits $1,347.0 100% $1,512.4 100% $1,749.8 100% $3,017.6 100% $1,860.1 100%
- ----------------------------------------------------------------------------------------------------------------
COMPOSITION OF DEBT AND OTHER BORROWINGS
($ IN MILLIONS) AS OF DECEMBER 31,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------------------------
Subordinated notes and
certificates $ 0.7 0% $ 1.0 0% $ 1.5 0% $ 55.5 2% $ 71.1 3%
Senior notes and certificates 404.2 53 234.4 21 145.6 14 151.0 7 208.3 8
Short-term bank notes 0.0 0 0.0 0 0.0 0 242.0 11 309.3 13
Medium-term bank notes 3.4 1 7.3 0 7.3 1 669.5 29 835.6 34
Medium-term notes 343.6 45 538.0 48 866.5 83 1,099.5 48 880.8 36
Value notes 3.3 0 7.8 1 9.3 1 30.7 1 0.0 0
Term fed funds, fed funds
purchased and FHLB advances 0.0 0 220.0 20 0.0 0 0.0 0 10.0 0
Securities sold under
agreements to repurchase 0.0 0 104.2 9 0.0 0 0.0 0 0.0 0
Lines of credit and term
funding arrangements 0.0 0 0.0 0 0.0 0 0.0 0 40.0 0
Other borrowings 4.3 1 9.0 1 17.8 1 48.9 2 107.0 6
- ---------------------------------------------------------------------------------------------------------------
Total long-term debt and
other borrowings $759.5 100% $1,121.7 100% $1,048.0 100% $2,297.1 100% $2,462.1 100%
- ---------------------------------------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations -- ASSET/LIABILITY MANAGEMENT."
36
38
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
($ IN THOUSANDS) ------------------------
2000 1999
- --------------------------------------------------------------------------------------
ASSETS
Cash $ 1,716 $ 5,784
Federal funds sold 107,584 144,938
Restricted interest-bearing deposits 36,254 49,354
Investments available for sale 758,792 748,881
Loans, net:
Held for sale 154,265 156,895
Other 186,026 141,753
------------------------
Total loans, net 340,291 298,648
Retained interests in securitizations 53,052 24,936
Premises and equipment (at cost, less accumulated
depreciation of $21,983 in 2000 and $21,391 in 1999) 26,185 55,811
Other assets 318,268 319,063
Net assets of discontinued operations 1,201,330 1,891,145
- --------------------------------------------------------------------------------------
TOTAL ASSETS $2,843,472 $3,538,560
- --------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 4,546 $ 5,768
Interest-bearing 1,342,430 1,506,591
------------------------
Total deposits 1,346,976 1,512,359
Long-term debt 755,184 788,508
Other borrowings 4,289 333,166
Other liabilities 196,121 214,896
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,302,570 2,848,929
- --------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
debentures of Advanta Corp. 100,000 100,000
STOCKHOLDERS' EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding -- 1,010 shares in 2000
and 1999 1,010 1,010
Class A voting common stock, $.01 par value;
Authorized -- 214,500,000 shares; Issued -- 10,040,230
shares in 2000 and 10,465,883 shares in 1999 100 105
Class B non-voting common stock, $.01 par value;
Authorized -- 230,000,000 shares; Issued -- 17,613,166
shares in 2000 and 18,256,029 shares in 1999 176 182
Additional paid-in capital 220,371 232,585
Deferred compensation (7,336) (16,597)
Unearned ESOP shares (11,714) (12,132)
Accumulated other comprehensive loss (1,302) (10,794)
Retained earnings 257,562 421,741
Less: Treasury stock at cost, 527,168 Class B common
shares in 2000 and 405,000 Class A and 972,768 Class B
common shares in 1999 (17,965) (26,469)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 440,902 589,631
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,843,472 $3,538,560
- --------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
37
39
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
REVENUES:
Interest income $ 136,100 $104,584 $111,502
Securitization income 70,797 21,188 18,244
Servicing revenues 17,310 13,819 38,420
Consumer credit card securitization income 0 0 64,796
Gain on transfer of consumer credit card business 0 0 541,288
Other revenues, net 68,974 70,363 18,948
---------------------------------
Total revenues 293,181 209,954 793,198
---------------------------------
EXPENSES:
Operating expenses 150,292 95,506 136,835
Interest expense 86,508 80,800 101,226
Provision for credit losses 36,309 22,506 38,329
Minority interest in income of consolidated subsidiary 8,880 8,880 8,880
Unusual charges 0 16,713 125,072
---------------------------------
Total expenses 281,989 224,405 410,342
---------------------------------
Income (loss) before income taxes 11,192 (14,451) 382,856
Income tax (benefit) 0 (55,785) (25,748)
---------------------------------
Income from continuing operations 11,192 41,334 408,604
Income (loss) from discontinued operations, net of tax (163,578) 8,484 39,276
Loss on discontinuance of leasing business, net of tax (4,298) 0 0
---------------------------------
Net income (loss) $(156,684) $ 49,818 $447,880
- ---------------------------------------------------------------------------------------------
Basic income from continuing operations per common share
Class A $ 0.39 $ 1.59 $ 15.14
Class B 0.47 1.66 15.21
Combined 0.44 1.63 15.18
- ---------------------------------------------------------------------------------------------
Diluted income from continuing operations per common share
Class A $ 0.39 $ 1.58 $ 14.32
Class B 0.46 1.65 14.35
Combined 0.44 1.62 14.33
- ---------------------------------------------------------------------------------------------
Basic net income (loss) per common share
Class A $ (6.28) $ 1.95 $ 16.62
Class B (6.21) 2.02 16.68
Combined (6.24) 1.99 16.65
- ---------------------------------------------------------------------------------------------
Diluted net income (loss) per common share
Class A $ (6.23) $ 1.94 $ 15.69
Class B (6.16) 2.00 15.73
Combined (6.19) 1.98 15.71
- ---------------------------------------------------------------------------------------------
Basic weighted average common shares outstanding
Class A 9,110 9,057 11,174
Class B 16,033 14,515 15,500
Combined 25,143 23,572 26,674
- ---------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding
Class A 9,149 9,078 11,182
Class B 16,202 14,680 17,313
Combined 25,351 23,758 28,495
- ---------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
38
40
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
----------------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B ADDITIONAL
COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON PAID-IN
INCOME (LOSS) STOCK STOCK STOCK STOCK CAPITAL
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1997 $1,010 $0 $182 $ 266 $ 379,543
Net income (loss) $ 447,880
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of $109 (202)
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($33) 61
---------
Comprehensive income (loss) $ 447,739
=========
Tender Offer (79) (113) (160,861)
Preferred and common cash
dividends declared
Exercise of stock options 1 2 3,102
Issuance of stock --
Dividend reinvestment 89
Benefit plans 13 22,647
Amortization of deferred
compensation
Termination benefit --
Benefit plans (5) (15,214)
Stock buyback
ESOP stock purchase
ESOP shares committed to be
released (2)
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $1,010 $0 $104 $ 163 $ 229,304
Net income (loss) $ 49,818
Other comprehensive income (loss):
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
$5,763 (10,703)
---------
Comprehensive income (loss) $ 39,115
=========
Conversion of Class B Preferred
Stock 14 (14)
Preferred and common cash
dividends declared
Exercise of stock options 20
Issuance of stock --
Benefit plans 1 9 10,579
Amortization of deferred
compensation
Termination benefit --
Benefit plans (4) (7,421)
Stock buyback
ESOP shares committed to be
released 117
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1999 $1,010 $0 $105 $ 182 $ 232,585
Net income (loss) $(156,684)
Other comprehensive income (loss):
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
$(5,111) 9,492
---------
Comprehensive income (loss) $(147,192)
=========
Preferred and common cash
dividends declared
Exercise of stock options 155
Issuance of stock --
Benefit plans 2 2,545
Amortization of deferred
compensation
Termination benefit --
Benefit plans (1) (4) (6,455)
Retirement of treasury stock (4) (4) (8,496)
ESOP shares committed to be
released 37
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2000 $1,010 $0 $100 $ 176 $ 220,371
- ----------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY
- ---------------------------------- -------------------------------------------------------------------
Balance at Dec. 31, 1997 $(25,353) $ 50 $ 585,659 $(14,407) $ 926,950
Net income (loss) 447,880 447,880
Other comprehensive income (loss):
Foreign currency translation
adjustment net of tax benefit
(expense) of $109 (202) (202)
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
($33) 61 61
Comprehensive income (loss)
Tender Offer (640,553) (801,606)
Preferred and common cash
dividends declared (10,894) (10,894)
Exercise of stock options 3,105
Issuance of stock --
Dividend reinvestment 89
Benefit plans (20,605) 2,055
Amortization of deferred
compensation 8,193 8,193
Termination benefit --
Benefit plans 20,551 (3,558) 1,774
Stock buyback (4,549) (4,549)
ESOP stock purchase (12,569) (12,569)
ESOP shares committed to be
released 19 17
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1998 $(29,764) $ (91) $ 382,092 $(22,514) $ 560,304
Net income (loss) 49,818 49,818
Other comprehensive income (loss):
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
$5,763 (10,703) (10,703)
Comprehensive income (loss)
Conversion of Class B Preferred
Stock 0
Preferred and common cash
dividends declared (10,169) (10,169)
Exercise of stock options 20
Issuance of stock --
Benefit plans (10,589) 0
Amortization of deferred
compensation 3,781 3,781
Termination benefit --
Benefit plans 7,425 0
Stock buyback (3,955) (3,955)
ESOP shares committed to be
released 418 535
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 1999 $(28,729) $(10,794) $ 421,741 $(26,469) $ 589,631
Net income (loss) (156,684) (156,684)
Other comprehensive income (loss):
Change in unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of
$(5,111) 9,492 9,492
Comprehensive income (loss)
Preferred and common cash
dividends declared (7,495) (7,495)
Exercise of stock options 155
Issuance of stock --
Benefit plans (2,547) 0
Amortization of deferred
compensation 5,348 5,348
Termination benefit --
Benefit plans 6,460 0
Retirement of treasury stock 8,504 0
ESOP shares committed to be
released 418 455
- ----------------------------------------------------------------------------------------------------------
Balance at Dec. 31, 2000 $(19,050) $ (1,302) $ 257,562 $(17,965) $ 440,902
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
39
41
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES -- CONTINUING OPERATIONS
Net income (loss) $ (156,684) $ 49,818 $ 447,880
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
(Income) loss from discontinued operations, net of tax 163,578 (8,484) (39,276)
Loss on discontinuance of leasing business, net of tax 4,298 0 0
Investment securities (gains) losses (5,473) (30,132) 40,142
Depreciation and amortization 11,471 7,794 10,871
Provision for credit losses 36,309 22,506 38,329
Gain on transfer of consumer credit card business 0 0 (541,288)
Noncash expense associated with unusual charges 0 0 25,539
Proceeds from sale of trading investments 0 185,042 293,413
Change in loans held for sale (509,989) (450,920) (522,238)
Proceeds from sale of loans held for sale 512,619 318,692 742,283
Change in other assets and other liabilities (17,427) (100,164) (196,255)
Change in retained interests in securitizations (28,116) 854 (9,676)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 10,586 (4,994) 289,724
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES -- CONTINUING OPERATIONS
Change in federal funds sold and interest-bearing
deposits 50,454 115,953 (12,120)
Purchase of investments available for sale (1,826,620) (12,872,622) (44,610,758)
Proceeds from sales of investments available for sale 937,617 812,562 1,709,026
Proceeds from maturing investments available for sale 899,286 12,171,704 43,591,658
Change in loans not held for sale, excluding
sales/transfers (80,582) (17,162) (103,871)
Purchases of premises and equipment, net (18,273) (8,203) (45,690)
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (38,118) 202,232 528,245
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES -- CONTINUING OPERATIONS
Change in demand and savings deposits (179,542) 62,329 70,415
Proceeds from sales of time deposits 1,325,125 600,747 1,762,747
Payments for maturing time deposits (1,310,966) (900,507) (500,447)
Change in repurchase agreements, term fed funds and FHLB
advances (324,191) 324,191 38,195
Proceeds from issuance of long-term debt 256,098 123,537 29,857
Payments on redemption of long-term debt (289,422) (365,176) (781,051)
Change in other borrowings (4,686) (8,809) (31,133)
Tender Offer 0 0 (801,606)
Stock buyback 0 (3,955) (4,549)
ESOP stock purchase 0 0 (12,569)
Proceeds from issuance of stock 155 20 5,249
Cash dividends paid (7,495) (10,169) (10,894)
- ---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (534,924) (177,792) (235,786)
- ---------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Net cash provided by (used in) operating activities 312,668 241,938 (304,961)
Net cash provided by (used in) investing activities 322,155 (325,616) (335,341)
Net cash (used in) provided by financing activities (76,435) 57,918 14,660
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations 558,388 (25,760) (625,642)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash (4,068) (6,314) (43,459)
Cash at beginning of period 5,784 12,098 55,557
- ---------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,716 $ 5,784 $ 12,098
- ---------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
40
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED)
In these notes to consolidated financial statements, "Advanta", "we", "us", and
"our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise
requires.
Advanta is a highly focused financial services company. We have been
providing innovative financial products and solutions since 1951. Over the past
five years, we have become one of the nation's largest issuers of Mastercard(R)*
business credit cards to small businesses. During the year ended December 31,
2000, our lending and leasing business units consisted of Advanta Business
Cards, Advanta Mortgage and Advanta Leasing. In addition to our lending and
leasing businesses, we have an insurance business and venture capital
investments. We own two depository institutions, or banks, Advanta National Bank
and Advanta Bank Corp. Our banks offer a variety of deposit products, such as
retail and large denomination certificates of deposit, that are insured by the
Federal Deposit Insurance Corporation. During the year ended December 31, 2000,
we primarily funded and operated our mortgage, business credit card and leasing
businesses through our banks. At December 31, 2000, we serviced approximately
900,000 customers and managed receivables of approximately $10.4 billion. We
also serviced mortgage loans for third parties. In the first quarter of 2001, we
discontinued our mortgage and equipment leasing businesses. See Note 2. The
mortgage and equipment leasing businesses represented 26% of our customers and
84% of our managed receivables at December 31, 2000. Prior to February 20, 1998,
we issued consumer credit cards.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Advanta
Corp. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform to the current year's presentation.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Estimates are used when accounting for securitization income, retained interests
in securitizations, the fair value of certain financial instruments, the
allowance for credit losses, litigation and income taxes, among others. Actual
results could differ from those estimates.
INVESTMENTS
Investments available for sale include securities that we sell from time to time
to provide liquidity and in response to changes in the market. Debt and equity
securities classified as available for sale are reported at market value and
unrealized gains and losses on these securities are reported in other
comprehensive income, net of income taxes.
Investments of our venture capital unit are included in investments
available for sale and carried at estimated fair value following the specialized
industry accounting principles of this unit. Management makes fair value
determinations based on quoted market prices, when available, and considers the
investees' financial results, conditions and prospects when market prices are
not available. In accordance with the specialized industry accounting principles
of venture capital investment companies, the unrealized and realized gains and
losses on these investments are included in other revenues rather than other
comprehensive income and the equity method of accounting for investments is not
applied.
- ---------------
* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.
41
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trading investments are securities that are bought and held principally for
the purpose of selling them in the near term. Trading investments are reported
at fair value, with unrealized gains and losses included in earnings.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Gains and losses on the sale
of securities are recorded on the trade date and are determined using the
specific identification method.
LOANS HELD FOR SALE
Loans held for sale represent receivables currently on the balance sheet that we
intend to sell or securitize within the next six months. These assets are
reported at the lower of aggregate cost or fair market value by loan type. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established as losses are estimated to have
occurred through a provision for credit losses charged to earnings. The
allowance for credit losses is evaluated on a regular basis by management and is
based upon management's periodic review of the collectibility in light of
historical experience by loan type, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay and
prevailing economic conditions. This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision as more
information becomes available. Since our loan portfolio is comprised of large
groups of smaller balance homogeneous loans, we evaluate each group collectively
for impairment. Accordingly, we do not separately identify individual loans for
impairment disclosures.
Credit losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance. Our charge-off policy for business credit
card accounts is to charge-off an unpaid receivable at 180 days contractually
delinquent. Business credit card accounts suspected of being fraudulent are
charged-off after a 90-day investigative period, unless our investigation shows
no evidence of fraud. Effective October 1, 2000, bankrupt business credit cards
are charged off within a 60-day investigative period after receipt of
notification. The previous policy provided a 90-day investigative period.
INTEREST INCOME ON LOANS AND ORIGINATION COSTS AND FEES
Interest income is accrued on the unpaid principal balance of loans. The accrual
of interest is discontinued when the related receivable becomes 90 days past
due. Interest income is subsequently recognized only to the extent cash payments
are received.
We engage third parties to solicit and originate business credit card
account relationships. Amounts paid to third parties to acquire business credit
card accounts and certain other origination costs are deferred and netted
against any related business credit card fee, and the net amount is amortized on
a straight-line basis over the privilege period of one year.
SECURITIZATION ACTIVITIES
Through our subsidiaries, we sell receivables through securitizations with
servicing retained. The transfer of financial assets in which we surrender
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. Liabilities and derivatives incurred or obtained as part
of a transfer of financial assets are initially measured at fair value, if
practicable. We allocate the previous carrying amount of the receivables
securitized between the assets sold and the retained interests, including the
servicing relationship, interests in the receivables, and an interest-only
strip, based on their relative estimated fair values at the date of sale.
Securitization income is recognized at the
42
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time of the sale, equal to the excess of the fair value of the assets obtained
(principally cash) over the allocated cost of the assets sold and transaction
costs. The retained interest-only strip represents the estimated fair value of
the remaining interest to be collected from the borrowers on the underlying
loans after the payment of interest to the certificate holders and the payment
of a servicing fee to us in our role as servicer reduced by the estimated fair
value of our obligation for anticipated charge-offs.
During the revolving period of each business credit card securitization
trust, securitization income is recorded representing estimated gains on the
sale of new receivables to the trusts on a continuous basis to replenish the
investors' interest in trust receivables that have been repaid by the business
credit card holders. These estimates require certain assumptions of payment,
default and interest rates and cost of funds. To the extent actual results are
different than those estimates, the effect is included as part of securitization
income.
RETAINED INTERESTS IN SECURITIZATIONS
Retained interests in securitizations include the retained interest-only ("IO")
strip and subordinated trust assets related to securitizations. Restricted cash
reserve accounts related to securitizations are classified as restricted
interest-bearing deposits. Retained interest-only strips are measured in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). We account for the retained interest-only strips from
securitizations as trading securities. These assets are recorded at estimated
fair value and the resulting unrealized gain or loss from the valuation of the
receivable is included in securitization income.
We estimate the fair value of retained interest-only strips based on a
discounted cash flow analysis. The cash flows are estimated as the excess of the
weighted average yield on each pool of the receivables sold over the sum of the
interest rate paid to the certificate holder plus the servicing fee, credit
enhancement costs and an estimate of future credit losses over the life of the
receivables. Cash flows are discounted from the date the cash is expected to
become available to us (the "cash-out" method). These cash flows are projected
over the life of the receivables using payment, default, and interest rate
assumptions that management believes would be used by market participants for
similar financial instruments subject to prepayment, credit and interest rate
risk. The cash flows are discounted using an interest rate that management
believes a purchaser unrelated to the seller of the financial instrument would
demand. As all estimates used are influenced by factors outside our control,
there is uncertainty inherent in these estimates, making it reasonably possible
that they could change in the near term. Interest income is recognized over the
life of the retained interest-only strip using the discount rate used in the
valuation.
Subordinated trust assets, together with the related retained interest-only
strip, serve as a form of credit enhancement for the transactions, and excess
losses, if any, on the collateral would be absorbed by these amounts. These
assets are classified as trading securities and are carried at estimated fair
value.
SERVICING RIGHTS
Servicing assets associated with business credit card securitization
transactions are not material as the benefits of servicing are not expected to
be more or less than adequate compensation to us for performing the servicing.
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.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase are accounted for as secured
borrowings because we maintain effective control over the transferred assets.
Securities sold under agreements to repurchase are reflected at the
43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of cash received in connection with the transaction. We may be required
to provide additional collateral based on the fair value of the underlying
securities.
DERIVATIVE FINANCIAL INSTRUMENTS
We use various derivative financial instruments, including interest rate swaps,
interest rate caps, options and forward contracts, as part of our risk
management strategy to reduce interest rate risk. Derivatives are not used for
trading or speculative activities. Derivatives are classified as hedges or
synthetic alterations of specific on-balance sheet items or anticipated
transactions. In order for derivatives to qualify for hedge accounting
treatment, the following conditions must be met:
1) the underlying item being hedged must expose us to interest rate risk;
2) the derivative used serves to reduce our sensitivity to interest rate
risk; and
3) the derivative used is designated and deemed effective in hedging our
exposure to interest rate risk.
In addition to meeting these conditions, anticipatory hedges must demonstrate
that the anticipated transaction being hedged is probable to occur and the
expected terms of the transaction are identifiable.
Gains or losses on derivatives designated as hedges of balance sheet items
not carried at fair value are deferred and are ultimately recognized in income
as part of the carrying amount of the related balance sheet item exposing us to
interest rate risk. Accrual accounting is applied for derivatives designated as
synthetic alterations with income and expense recorded in the same category as
the related underlying on-balance sheet or off-balance sheet item synthetically
altered. Gains or losses resulting from early terminations of derivatives are
deferred and amortized over the shorter of the remaining term of the underlying
balance sheet item or the remaining term of the derivative. If the underlying
balance sheet item is sold, matures or is extinguished, or the anticipated
transaction is no longer likely to occur, any unrecognized gain or loss on the
derivative is recognized currently in earnings.
For derivatives designated as hedges of balance sheet items where changes
in fair value are recognized currently in earnings, the related derivative is
included in the balance sheet at fair value, and changes in the fair value of
the derivative are also recognized currently in earnings.
Derivatives not qualifying for hedge or synthetic accounting treatment
would be carried at market value with realized and unrealized gains and losses
included in operating results. During 2000, 1999 and 1998, all of our
derivatives qualified as hedges or synthetic alterations. For purposes of
reporting cash flows, cash flows from derivatives accounted for as hedges or
synthetic alterations are classified in the same category as the item being
hedged.
INSURANCE
Insurance premiums are earned ratably over the period of insurance coverage
provided. Reinsurance premiums, net of commissions, on credit life, disability
and unemployment policies, are earned monthly based upon the outstanding balance
of the underlying receivables. The cost of acquiring new reinsurance is deferred
and amortized over the period the related premiums are earned in order to match
the expense with the anticipated revenue.
Insurance loss reserves are based on estimated settlement amounts for both
reported losses, incurred but not reported losses and loss adjustment expenses.
STOCK-BASED COMPENSATION
We have elected to account for stock-based compensation following Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" as
permitted by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"). We have adopted the disclosure-only provisions of SFAS 123.
44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various assets and liabilities and gives
current recognition to changes in tax rates and laws.
EARNINGS PER SHARE
Basic earnings per common share is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Income available to common stockholders is computed by
deducting Class A and Class B Preferred Stock dividends from net income. Diluted
earnings per common share is computed by dividing income available to common
stockholders, increased by dividends on dilutive Class B Preferred Stock for the
period, by the sum of average common shares outstanding plus dilutive common
shares for the period. Potentially dilutive common shares include stock options,
restricted stock issued under incentive plans and, through September 15, 1999,
Class B Preferred Stock. Since the cash dividends declared on our Class B Common
Stock were higher than the dividends declared on the Class A Common Stock, basic
and diluted earnings per common share have been calculated using the "two-class"
method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock according to dividends
declared and participation rights in undistributed earnings. We have also
presented combined earnings per common share, which represents a weighted
average of Class A and Class B earnings per common share.
CASH FLOW REPORTING
Cash paid for interest was $182.4 million during 2000, $161.0 million during
1999, and $218.3 million during 1998. Cash paid for taxes was $4.1 million
during 2000, $8.9 million during 1999, and $28.2 million during 1998. See Note
11 for discussion of noncash transfer of assets and liabilities in the Consumer
Credit Card Transaction in 1998. Noncash transactions in 1998 also included the
retention of $795 million of trust certificates at the time of receivable
securitization. These securities were classified as trading investments. In
1999, $315 million of these securities were reclassified from trading to
available-for-sale securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, cannot be applied retroactively and will be adopted as required
January 1, 2001. We have determined that the adoption of SFAS No. 133 will not
have a material effect on our financial position or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without amendment. SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. We
have adopted the disclosure provisions of SFAS 140 for the year ended December
31, 2000. We anticipate that the adoption of the accounting provisions of SFAS
No. 140 will not have a material effect on our financial position or results of
operations.
45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. DISCONTINUED OPERATIONS
On January 8, 2001, we signed an agreement with Chase Manhattan Mortgage
Corporation, a subsidiary of J.P. Morgan Chase & Co., to sell our mortgage
business, Advanta Mortgage. Advanta Mortgage made nonconforming home equity
loans directly to consumers and through brokers. This business unit originated
and serviced first and second lien mortgage loans, including home equity lines
of credit, through subsidiaries of Advanta. In addition to servicing and
managing the loans it originated, Advanta Mortgage contracted with third parties
to service their nonconforming home equity loans on a subservicing basis.
Effective February 28, 2001, we completed the sale of our mortgage business
to Chase Manhattan Mortgage Corporation. Following the transaction, we no longer
operate a mortgage business. The purchase and sale agreement provided for the
sale, transfer and assignment of substantially all of the assets and operating
liabilities associated with our mortgage business, as well as specified
contingent liabilities arising from our operation of the mortgage business prior
to closing that were identified in the purchase and sale agreement. We retained
contingent liabilities, primarily relating to litigation, arising from our
operation of the mortgage business before closing that were not specifically
assumed by the buyer. The proceeds from the sale exceeded $1 billion, subject to
closing adjustments, resulting in an estimated gain of approximately $59.7
million before transaction expenses, severance expenses and other costs.
Transaction expenses, severance expenses and other costs associated with the
sale are expected to be significant. The gain will also be reduced by a charge
of approximately $19.7 million associated with certain equipment, facilities and
derivative instruments related to hedging activities not purchased by the buyer.
We will use part of the proceeds from the sale of mortgage assets to pay off our
outstanding medium-term notes via a tender offer to repurchase the outstanding
notes at par value plus accrued interest. We also intend to use the proceeds to
significantly reduce our outstanding retail notes, and to provide working
capital for our remaining businesses. Although the transaction resulted in a
gain for financial reporting purposes, due to book/tax differences we expect
that we will not be required to pay any material federal income tax as a result
of the sale. We also expect to record a restructuring charge in the first
quarter of 2001 as we restructure corporate functions to a size commensurate
with the ongoing business after closing.
On January 23, 2001, we announced that after a thorough review of strategic
alternatives available for our leasing business, Advanta Leasing Services, we
decided to cease originating leases. Advanta Leasing Services offered flexible
lease financing programs on small-ticket equipment to small businesses. The
primary products financed included office machinery, security systems and
computers. The commercial equipment leasing business was generated primarily
through third-party referrals from manufacturers or distributors of equipment,
as well as independent brokers, direct mail marketing and telemarketing. We will
continue to service the existing portfolio rather than sell the business or the
portfolio. In connection with the discontinuance of the leasing business, we
recorded a $4.3 million pretax loss effective December 31, 2000.
The sale of the mortgage business and discontinuance of the leasing
business represent the disposal of business segments following Accounting
Principles Board ("APB") Opinion No. 30. Accordingly, results of these
operations are classified as discontinued in all periods presented.
46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues and expenses from discontinued operations were as follows for the
years ended December 31:
ADVANTA MORTGAGE ADVANTA LEASING SERVICES
------------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Interest revenue $ 164,142 $131,496 $123,550 $ 15,632 $10,146 $10,288
Noninterest revenues 37,679 179,957 240,366 9,459 40,970 36,618
Interest expense 93,845 78,461 75,296 12,777 8,415 7,753
Operating expenses 221,496 211,391 205,031 31,572 30,164 37,898
Income tax expense (benefit) 0 1,926 17,314 0 3,587 (610)
Income (loss) from discontinued
operations (137,028) 2,944 40,698 (26,550) 5,540 (1,422)
Loss on discontinuance of
leasing business, net of tax
of $0 0 0 0 (4,298) 0 0
- -----------------------------------------------------------------------------------------------
Per share data was as follows for the years ended December 31:
ADVANTA MORTGAGE ADVANTA LEASING SERVICES
------------------------ -------------------------
2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Basic income (loss) from discontinued
operations per common share
Class A $(5.45) $0.12 $1.53 $(1.06) $0.24 $(0.05)
Class B (5.45) 0.12 1.53 (1.06) 0.24 (0.05)
Combined (5.45) 0.12 1.53 (1.06) 0.24 (0.05)
Diluted income (loss) from discontinued
operations per common share
Class A $(5.41) $0.12 $1.43 $(1.05) $0.23 $(0.05)
Class B (5.41) 0.12 1.43 (1.05) 0.23 (0.05)
Combined (5.41) 0.12 1.43 (1.05) 0.23 (0.05)
Basic loss on discontinuance of leasing
business per common share
Class A $ 0 $ 0 $ 0 $(0.17) $ 0 $ 0
Class B 0 0 0 (0.17) 0 0
Combined 0 0 0 (0.17) 0 0
Diluted loss on discontinuance of
leasing business per common share
Class A $ 0 $ 0 $ 0 $(0.17) $ 0 $ 0
Class B 0 0 0 (0.17) 0 0
Combined 0 0 0 (0.17) 0 0
- -----------------------------------------------------------------------------------------------
Net assets of discontinued operations were as follows at December 31:
ADVANTA MORTGAGE ADVANTA LEASING SERVICES
------------------------ ------------------------
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------
Loans, net $ 270,902 $1,026,341 $ 99,780 $124,635
Other assets 780,690 815,306 106,478 75,965
Liabilities 41,662 129,645 14,858 21,457
Net assets of discontinued operations 1,009,930 1,712,002 191,400 179,143
- ---------------------------------------------------------------------------------------------------
We allocated interest expense to the discontinued operations based on the
ratio of net assets of discontinued operations to the total net assets of the
consolidated company. The loss on discontinuance of the leasing business
includes estimated interest expense of $12.5 million for the period from
December 31, 2000 through the remaining life of the lease portfolio.
47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed above, we will continue to service the existing lease
portfolio. At December 31, 2000, there were $658 million of securitized leases
outstanding, and we had retained interests in leasing securitizations, including
restricted cash reserves, of $78 million. At December 31, 1999, there were $663
million of securitized leases outstanding, and we had retained interests in
leasing securitizations, including restricted cash reserves, of $51 million. The
retained interests in leasing securitizations are included in net assets of
discontinued operations on the consolidated balance sheet. At December 31, 2000,
the fair value of the retained interests in leasing securitizations was
estimated using a 9% discount rate, a 4% loss rate and a weighted average life
of 1.4 years. Actual results may vary from our estimates, and the impact of any
differences will be recognized in income when determined.
NOTE 3. REGULATORY DEVELOPMENTS
In June 2000, we announced that our banking subsidiaries, Advanta National Bank
and Advanta Bank Corp., reached agreements with their respective bank regulatory
agencies, primarily relating to the banks' subprime lending operations. The
agreements outlined a series of steps to modify processes and formalize and
document certain practices and procedures for the banks' subprime lending
operations. The agreements also established temporary asset growth limits at
Advanta National Bank and deposit growth limits at Advanta Bank Corp., imposed
restrictions on taking brokered deposits at Advanta National Bank, and required
that by September 30, 2000 Advanta National Bank's capital ratios be maintained
at approximately the levels at March 31, 2000. We achieved these ratios through
a combination of decreasing the assets at Advanta National Bank and making
aggregate capital contributions and other investments in Advanta National Bank
of approximately $70 million. The agreements also required us to change our
charge-off policy for delinquent mortgages to 180 days and to modify our
accounting processes and estimate of our allowance for credit losses and
valuation of residual assets.
In July 2000, we announced that Advanta National Bank signed an agreement
with the Office of the Comptroller of the Currency (the "OCC") regarding the
carrying value of Advanta National Bank's retained interests in mortgage
securitizations and allowance for mortgage credit losses. For Advanta National
Bank's June 30, 2000 Call Report, in accordance with the provisions of the
agreement, we calculated the valuation of the retained interests based on an 18%
discount rate on the interest-only strip and subordinated trust assets, a 15%
discount rate on the contractual mortgage servicing rights, a prepayment rate
that represents the average prepayment experience for the six months ended
February 29, 2000 and cumulative loss rates as a percentage of original
principal balance of 6% on closed end mortgage loans and 8% for HELOC (open end)
mortgage loans. The agreement required that, based on these assumptions, the
carrying value of Advanta National Bank's contractual mortgage servicing rights
be reduced by $13 million and the carrying value of Advanta National Bank's
subordinated trust assets and retained interest-only strip be reduced by a total
amount of $201 million. The agreement further required that Advanta National
Bank's allowance for credit losses be increased by $22 million. The agreement
contains provisions regarding the use of similar discount rate and credit loss
assumptions for the calculation of the carrying value of the residual assets in
future periods. These valuation adjustments and provisions for credit losses are
included in the results of Advanta Mortgage in discontinued operations. See Note
2 for discussion of discontinued operations.
Management believes that we are in compliance with our regulatory
agreements at December 31, 2000.
In connection with the sale of our mortgage business discussed in Note 2,
Advanta National Bank sought approval of the OCC for a return of capital to
Advanta Corp, in the amount of $261 million. On February 28, 2001, the OCC
approved the amount requested and, at the same time, Advanta National Bank
entered into an agreement with the OCC regarding restrictions on new business
activities and product lines at Advanta National Bank after the sale of the
mortgage business and the resolution of outstanding Advanta National Bank
liabilities. The agreement also reduces the existing capital requirements for
Advanta National Bank and provides for prior OCC approval of any future
dividends. Advanta Bank Corp. is unaffected by the agreement with the OCC.
48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INVESTMENTS
Investments available for sale consisted of the following:
DECEMBER 31,
-----------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
U.S. Treasury & other
U.S. Government
securities $401,168 $ 831 $ (774) $401,225 $145,112 $0 $ (4,668) $140,444
State and municipal
securities 4,280 192 (36) 4,436 3,473 0 (85) 3,388
Collateralized mortgage
obligations 165,689 119 (2,911) 162,897 456,288 0 (8,220) 448,068
Mortgage-backed
securities 91,520 764 (311) 91,973 98,190 0 (3,634) 94,556
Equity securities(1) 72,403 0 0 72,403 60,892 0 0 60,892
Other 25,735 124 (1) 25,858 1,531 2 0 1,533
- -------------------------------------------------------------------------------------------------------------------------
Total investments
available for sale $760,795 $2,030 $(4,033) $758,792 $765,486 $2 $(16,607) $748,881
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------
1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
U.S. Treasury & other
U.S. Government
securities $435,953 $178 $ (33) $436,098
State and municipal
securities 4,636 182 0 4,818
Collateralized mortgage
obligations 12,278 0 (18) 12,260
Mortgage-backed
securities 4,265 0 (203) 4,062
Equity securities(1) 61,006 0 (250) 60,756
Other 3,411 5 0 3,416
- ---------------------------------------------------------------------------------
Total investments
available for sale $521,549 $365 $(504) $521,410
- -------------------------------------------------------------------------------------------
(1) Includes venture capital investments of $45.3 million at December 31, 2000
and $36.4 million at December 31, 1999. The amount shown as amortized cost
represents fair value for these investments. See Note 1.
Maturities of investments available for sale at December 31, 2000 were as
follows:
AMORTIZED MARKET
COST VALUE
- -----------------------------------------------------------------------------------
Due in 1 year $277,515 $277,562
Due after 1 but within 5 years 150,077 150,226
Due after 5 but within 10 years 1,120 1,234
Due after 10 years 2,471 2,497
- -----------------------------------------------------------------------------------
Subtotal 431,183 431,519
Collateralized mortgage obligations 165,689 162,897
Mortgage-backed securities 91,520 91,973
Equity securities 72,403 72,403
- -----------------------------------------------------------------------------------
Total investments available for sale $760,795 $758,792
- -----------------------------------------------------------------------------------
Net realized gains on the sale of investments are included in other
revenues in the consolidated income statements. Realized gains and losses on
sales of investments available for sale were as follows for the years ended
December 31:
2000 1999 1998
- ------------------------------------------------------------------------------------------
Gross realized gains $11,728 $30,697 $7,457
Gross realized losses (2,564) (64) (176)
- ------------------------------------------------------------------------------------------
Net realized gains $ 9,164 $30,633 $7,281
- ------------------------------------------------------------------------------------------
Investment securities deposited with insurance regulatory authorities to
meet statutory requirements or held by a trustee for the benefit of primary
insurance carriers were $6.5 million at December 31, 2000 and $7.3 million at
December 31, 1999. The carrying value of securities pledged to secure repurchase
agreements was $0 at December 31, 2000 and $111.3 million at December 31, 1999.
The carrying value of securities pledged to secure Federal Home Loan Bank
("FHLB") advances was $0 at December 31, 2000 and $276.2 million at December 31,
1999. The carrying amount of other pledged securities was $2.7 million at
December 31, 2000 and $0 at December 31, 1999.
49
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no investments classified as trading at December 31, 2000 or
December 31, 1999. Net realized and unrealized gains on trading investments were
$1,471 thousand in 1998, and were included in other revenues.
NOTE 5. LOANS
Loans on the balance sheet, including those held for sale, consisted of the
following:
DECEMBER 31,
- ----------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------
Business credit card receivables $335,087 $275,095
Other loans 24,203 30,302
- ----------------------------------------------------------------------------------
Gross loans 359,290 305,397
- ----------------------------------------------------------------------------------
Add: Deferred origination costs, net of deferred fees 14,368 8,116
Less: Allowance for credit losses
Business credit cards (33,165) (14,663)
Other loans (202) (202)
- ----------------------------------------------------------------------------------
Total allowance (33,367) (14,865)
- ----------------------------------------------------------------------------------
Loans, net $340,291 $298,648
- ----------------------------------------------------------------------------------
Gross managed receivables (owned receivables and securitized receivables)
and managed credit quality data were as follows:
DECEMBER 31,
------------------------
- --------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------
Owned business credit card receivables $ 335,087 $ 275,095
Owned other loans 24,203 30,302
Securitized business credit card receivables 1,324,137 765,019
Total managed receivables 1,683,427 1,070,416
Nonperforming assets -- managed 45,160 24,118
Loans 30 days or more delinquent -- managed 83,798 39,681
Net charge-offs for the year ended December 31 -- managed 64,638 46,708
- --------------------------------------------------------------------------------------
The geographic concentration of managed receivables was as follows:
DECEMBER 31,
- ----------------------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------
California $ 215,537 13% $ 136,139 13%
Florida 130,250 8 72,840 7
Texas 115,823 7 62,707 5
New York 108,266 6 71,135 7
Illinois 74,542 4 48,250 5
All other 1,039,009 62 679,345 63
- ----------------------------------------------------------------------------------------------
Total managed receivables $1,683,427 100% $1,070,416 100%
- ----------------------------------------------------------------------------------------------
In the normal course of business, we make commitments to extend credit to
our business credit card customers. Commitments to extend credit are agreements
to lend to a customer subject to certain conditions established in the contract.
We do not require collateral to support business credit card commitments. We had
commitments to extend credit outstanding for which there was potential credit
risk of $5.9 billion at December 31, 2000 and $3.6 billion at December 31, 1999.
We believe that our customers' utilization of these lines of credit will
continue to be substantially less than the amount of the commitments, as has
been our
50
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
experience to date. Of these total commitments, $4.2 billion were unused at
December 31, 2000 and $2.5 billion were unused at December 31, 1999.
NOTE 6. ALLOWANCE FOR CREDIT LOSSES
The following table displays five years of allowance history:
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Balance at January 1 $ 14,865 $ 10,650 $ 129,053 $ 78,801 $ 49,156
Provision for credit losses 36,309 22,506 38,329 199,509 93,329
Transfer from recourse reserves 0 0 0 0 3,000
Allowance on receivables sold,
purchased or transferred 0 (5,791) (118,420) (6,039) 0
Gross charge-offs: 0
Business credit cards (20,174) (11,341) (11,126) (6,403) (2,230)
Other loans (2) (2,404) 0 (4) (13)
Consumer credit cards 0 0 (30,999) (155,528) (73,466)
- ----------------------------------------------------------------------------------------------
Total gross charge-offs (20,176) (13,745) (42,125) (161,935) (75,709)
Recoveries:
Business credit cards 2,369 1,238 1,093 205 61
Other loans 0 7 1 1 19
Consumer credit cards 0 0 2,719 18,511 8,945
- ----------------------------------------------------------------------------------------------
Total recoveries 2,369 1,245 3,813 18,717 9,025
- ----------------------------------------------------------------------------------------------
Net charge-offs (17,807) (12,500) (38,312) (143,218) (66,684)
Balance at December 31 $ 33,367 $ 14,865 $ 10,650 $ 129,053 $ 78,801
- ----------------------------------------------------------------------------------------------
As of September 30, 2000, we modified our estimate of the allowance for
credit losses on business credit card receivables. The revised estimate for the
overall portfolio was developed based on discussions with our banking
regulators, changes in the economic environment and the use of more conservative
loss estimates for certain segments of the loan portfolio. Those segments
included accounts with lower credit scores, accounts held by businesses in
operation less than twelve months, and accounts in which cash borrowings
comprise a significant portion of the outstanding balance. As a result of these
changes in estimate, we increased our allowance for credit losses by
approximately $8 million, which decreased net income from continuing operations
by approximately $8 million or $0.32 per diluted combined share.
NOTE 7. SECURITIZATION ACTIVITIES
The following represents business credit card securitization data by quarter for
the year 2000 and the key assumptions used in measuring the fair value of
retained interests at the time of each new securitization or replenishment
during those periods.
51
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED YEAR-TO-DATE
- -------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
2000 2000 2000 2000 2000
- -------------------------------------------------------------------------------------------------------
Securitization income $ 13,244 $ 17,994 $ 19,195 $ 20,364 $ 70,797
Servicing revenues 3,840 4,546 3,525 5,399 17,310
Proceeds from new securitizations 146,713 0 138,538 227,368 512,619
Proceeds from collections reinvested in
revolving-period securitizations 405,346 514,691 448,543 643,153 2,011,733
Cash flows received on retained interests 18,485 24,440 20,639 27,953 91,517
KEY ASSUMPTIONS:
Discount rate 12.0% 12.0% 12.0% 12.0%
Monthly payment rate 18.8% 19.7% 19.5% 19.0%
Loss rate 7.2% 7.2% 7.8% 7.8%
Net interest margin 10.4% 10.4% 10.8% 10.8%
- -------------------------------------------------------------------------------------------------------
There were no purchases of delinquent accounts during 2000.
Retained interests in securitizations and restricted cash reserves serve as
credit enhancements for securitization transactions. Retained interests in
business credit card securitization transactions were $53.1 million at December
31, 2000 and $24.9 million at December 31, 1999. The restricted cash reserves
are included in restricted interest-bearing deposits on the consolidated balance
sheet and were $19.9 million at December 31, 2000 and $14.4 million at December
31, 1999. The following assumptions were used in measuring the fair value of
retained interests in securitizations and restricted cash reserves at December
31, 2000. The assumptions listed represent weighted averages of assumptions used
for each securitization.
Discount rate 12.0%
Monthly payment rate 19.0
Loss rate 7.8
Net interest margin 10.8
We have prepared sensitivity analyses of the valuations of retained
interests in securitizations and restricted cash reserves. The sensitivity
analyses show the hypothetical effect on the fair value of those assets of two
unfavorable variations from the expected levels for each key assumption,
independently from any change in another key assumption. The following are the
results of those sensitivity analyses on the valuation at December 31, 2000.
Fair value at December 31, 2000 $72,908
Effect on fair value of the following hypothetical changes
in key assumptions:
Discount rate increased by 2% $ (691)
Discount rate increased by 4% (1,374)
Monthly payment rate at 110% of base assumption (138)
Monthly payment rate at 120% of base assumption (138)
Loss rate at 110% of base assumption (2,855)
Loss rate at 120% of base assumption (5,711)
Net interest margin decreased by 1% (3,684)
Net interest margin decreased by 2% (7,369)
The objective of these hypothetical analyses is to measure the sensitivity
of the fair value of the retained interests to changes in assumptions. The
methodology used to calculate the fair value in the analyses is a discounted
cash flow analysis, the same methodology used to estimate fair value as
described in Note 1. These estimates do not factor in the impact of simultaneous
changes in other key assumptions. The above scenarios
52
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
do not reflect management's expectation regarding the future direction of these
rates, and they depict only certain possibilities out of a large set of possible
scenarios.
NOTE 8. SELECTED BALANCE SHEET INFORMATION
Other assets consisted of the following:
DECEMBER 31,
- ----------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------
Current and deferred federal and state income taxes, net $ 87,794 $ 89,788
Cash surrender value of insurance contracts 20,432 26,289
Other 210,042 202,986
- ----------------------------------------------------------------------------------
Total other assets $318,268 $319,063
- ----------------------------------------------------------------------------------
Other liabilities consisted of the following:
DECEMBER 31,
- ----------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 70,041 $ 75,783
Accrued interest payable 31,048 32,968
Other 95,032 106,145
- ----------------------------------------------------------------------------------
Total other liabilities $196,121 $214,896
- ----------------------------------------------------------------------------------
NOTE 9. LONG-TERM DEBT
Long-term debt consists of borrowings having an original maturity of over one
year. The composition of long-term debt at December 31, 2000 and 1999, was as
follows:
DECEMBER 31,
- ----------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------
SENIOR DEBT
12 month senior notes, fixed (9.08%-11.11%) $152,553 $ 86,647
18 month senior notes, fixed (8.62%-10.97%) 9,229 8,344
24 month senior notes, fixed (8.62%-11.33%) 86,109 50,571
30 month senior notes, fixed (7.51%-11.38%) 14,684 13,852
48 month senior notes, fixed (6.39%-11.20%) 8,384 8,427
60 month senior notes, fixed (6.02%-11.47%) 34,849 28,863
Value notes, fixed (7.25%-7.85%) 3,271 7,779
Medium-term notes, fixed (6.81%-7.47%) 313,100 490,650
Medium-term notes, floating 30,500 47,400
Medium-term bank notes, fixed (6.82%-7.12%) 3,404 7,347
Other senior notes, fixed (7.33%-11.11%) 98,387 37,670
- ----------------------------------------------------------------------------------
Total senior debt 754,470 787,550
Subordinated notes, fixed (9.08%-10.44%) 714 958
- ----------------------------------------------------------------------------------
Total long-term debt $755,184 $788,508
- ----------------------------------------------------------------------------------
We have priced our floating rate medium-term notes based on a spread over
LIBOR. At December 31, 2000, the rates on these notes varied from 7.19% to
7.30%. At December 31, 2000 and 1999, we used
53
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
derivative financial instruments to effectively convert certain fixed rate debt
to a LIBOR-based variable rate. See Note 26.
The annual contractual maturities of long-term debt at December 31, 2000
for the years ending December 31 are as follows: $592.0 million in 2001; $131.6
million in 2002; $10.5 million in 2003; $13.3 million in 2004; and $7.8 million
in 2005. The average interest cost of our long-term debt was 8.17% during 2000,
6.53% during 1999, and 6.52% during 1998. We will use part of the proceeds from
the sale of our mortgage business in the first quarter of 2001 to pay off our
outstanding medium-term notes and to significantly reduce our other outstanding
long-term debt. See discussion in Note 2.
NOTE 10. OTHER BORROWINGS
The composition of other borrowings was as follows:
DECEMBER 31,
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Securities sold under repurchase agreements $ 0 $104,191
FHLB advances 0 220,000
Other borrowings 4,289 8,975
- --------------------------------------------------------------------------------
Total $4,289 $333,166
- --------------------------------------------------------------------------------
At December 31, 2000, we had commercial paper conduit and securities
repurchase agreement facilities secured by business credit card receivables
totaling $480.3 million. Of the total, $280.3 million was committed. These
commitments can be withdrawn under certain conditions, including a failure to
make payments under the terms of the agreements. We pay a monthly facility fee
on the unused commitments of up to 15 basis points. These facilities provide for
on-balance sheet and off-balance sheet funding. At December 31, 2000, we had
$350 million available under these facilities, as there were $130.3 million of
business credit card receivables funded through these facilities, none of which
were accounted for as secured borrowings. At December 31, 1999, there were
$730.3 million of business credit card receivables funded through these
facilities, none of which were accounted for as secured borrowings. These
facilities are generally renewable annually. Upon the expiration of these
facilities, management expects to obtain the appropriate levels of replacement
funding under similar terms and conditions.
The following table displays information related to selected types of
short-term borrowings:
2000 1999 1998
- -----------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -----------------------------------------------------------------------------------------------
At year end:
Securities sold under repurchase
agreements $ 0 0% $104,191 5.78% $ 0 0%
FHLB advances 0 0 220,000 5.53 0 0
- -----------------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase
agreements $ 36,960 6.14% $ 24,647 5.39% $ 69,916 6.05%
Term fed funds, fed funds purchased and
FHLB advances 62,435 6.14 11,432 5.57 272 5.61
- -----------------------------------------------------------------------------------------------
Total $ 99,395 6.14% $ 36,079 5.43% $ 70,188 6.05%
- -----------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under repurchase
agreements $149,628 $104,191 $259,643
Term fed funds, fed funds purchased and
FHLB advances 210,000 220,000 1,700
- -----------------------------------------------------------------------------------------------
54
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average interest rates were calculated by dividing the
interest expense for the period by the average amount of short-term borrowings
outstanding during the period, calculated as an average of daily amounts.
NOTE 11. DISPOSITION OF CONSUMER CREDIT CARD ASSETS
In accordance with the terms of the contribution agreement, dated as of October
28, 1997, as amended February 20, 1998, by and between Advanta Corp. and Fleet
Financial Group, Inc. ("Fleet"), Advanta Corp. and certain of its subsidiaries
and Fleet and certain of its subsidiaries each contributed certain assets and
liabilities of their respective consumer credit card businesses to Fleet Credit
Card LLC ("Fleet LLC") in exchange for an ownership interest in Fleet LLC.
Subsequent to February 20, 1998, Fleet Credit Card Services LP became the
successor in interest to Fleet LLC. References to Fleet LLC include its
successor in interest, Fleet Credit Card Services LP.
We recognized a gain on the transfer of the consumer credit card business
(the "Consumer Credit Card Transaction") representing the excess of liabilities
transferred to Fleet LLC over the net basis of the assets transferred. The gain
also included our ownership interest in Fleet LLC. The gain on the transfer was
not subject to income tax and no tax provision was recorded. The contribution
agreement provides for the parties to make a final determination of the
transferred assets and liabilities. As further described in Note 12, Advanta and
Fleet are parties to a lawsuit concerning disputes regarding the final
determination of the transferred assets and liabilities. It is possible that the
outcome of the litigation will result in an increase or decrease to the gain
recorded.
We retained certain immaterial assets of our consumer credit card business,
which are not required in the operation of that business, and certain
liabilities related to our consumer credit card business. These retained assets
and liabilities include among others, all reserves relating to our credit
insurance business and any liability or obligation relating to certain consumer
credit card accounts generated in specific programs which comprised a very small
portion of our consumer credit card receivables as of February 20, 1998. The
assets and liabilities retained have been classified in other assets and other
liabilities.
The contribution was accounted for as: (1) the transfer of financial assets
(cash, loans, and other receivables) and an extinguishment of financial
liabilities (deposits, debt, other borrowings and other liabilities) following
SFAS 125; and (2) the sale of non-financial assets and liabilities (principally
property and equipment, prepaid assets, deferred costs and certain contractual
obligations). The financial assets, non-financial assets and liabilities of our
consumer credit card business that were contributed were removed from the
balance sheet. We were legally released as primary obligor under all of the
financial liabilities contributed and, accordingly, they were removed from the
balance sheet.
Concurrently with the Consumer Credit Card Transaction, we purchased
7,882,750 shares of our Class A Common Stock and 12,482,850 shares of our Class
B Common Stock, each at $40 per share net, and 1,078,930 of our depositary
shares, each representing one one-hundredth interest in a share of 6 3/4%
Convertible Class B Preferred Stock, Series 1995 Stock Appreciated Income Linked
Securities, at $32.80 per share net, through an issuer tender offer (the "Tender
Offer") which was completed on February 20, 1998. The Office of the Comptroller
of the Currency approved the payment of a special dividend/return of capital
from Advanta National Bank to Advanta Corp., its parent company, to effect the
purchase of the shares.
NOTE 12. COMMITMENTS AND CONTINGENCIES
On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against
Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court.
Fleet's allegations, which we deny, center around Fleet's assertions that we
failed to complete certain post-closing adjustments to the value of the assets
and liabilities we contributed to Fleet LLC in connection with the Consumer
Credit Card Transaction. Fleet seeks damages of approximately $141 million. We
have filed an answer to the complaint denying the material allegations of the
complaint, but acknowledging that we contributed $1.8 million in excess
liabilities in the post-closing
55
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustment process, after taking into account the liabilities we have already
assumed. We also have filed a countercomplaint against Fleet for approximately
$101 million in damages we believe have been caused by certain actions of Fleet
following the closing of the Consumer Credit Card Transaction. Formal discovery
has begun and is ongoing. The court has scheduled trial in this matter to begin
in July 2001. Management expects that the ultimate resolution of this litigation
will not have a material adverse effect on our financial position or future
operating results.
On December 5, 2000, a former executive of Advanta obtained a jury verdict
against Advanta in the amount of $3.9 million, in connection with various claims
against Advanta related to the executive's termination of employment. Both
parties filed post-trial motions. The former executive has filed a motion for a
new trial with respect to his claims that were dismissed. The former executive
is seeking, among other things, an award of approximately $6 million based upon
the jury verdict and additional amounts, including attorney's fees and costs. We
will vigorously pursue our post-trial motions, and if necessary, an appeal to
the United States Court of Appeals for the Third Circuit and will continue to
contest the former executive's positions. Management expects that the ultimate
resolution of this litigation will not have a material adverse effect on our
financial position or future operating results.
On December 21, 2000, Banc One Financial Services, Inc. and Bank One, N.A
(together "Banc One") filed a complaint that alleges, among other things, that
Advanta breached two mortgage loan servicing agreements by wrongfully
withholding as termination fees an amount in excess of $23 million, from amounts
that we had collected under the loan servicing agreements, and by failing to
perform under those agreements in certain respects. We dispute these claims and
allegations. An answer to the complaint was filed February 23, 2001 denying
liability and raising affirmative defenses. Management expects that the ultimate
resolution of this litigation will not have a material adverse effect on our
financial position or future operating results.
On February 1, 2001, Fleet and certain of its affiliates filed a complaint
in an attempt to block the sale of our mortgage business to Chase Manhattan
Mortgage Corp. The complaint alleged that the terms of the proposed sale breach
a provision of Fleet's 1998 agreement to acquire our consumer credit card
business, as amended (the "Contribution Agreement"), that essentially requires a
buyer of "substantially all" of our assets to assume any of our remaining
obligations under the Contribution Agreement at the time of the sale of
"substantially all" of our assets. In February 2001, we announced that we had
reached an agreement with Fleet, with regard to Fleet's attempt to block the
sale. As part of the agreement, Fleet dismissed its injunction claim and agreed
that it would raise no future issue with respect to the sale of the mortgage
business. Under the agreement, $70 million of our reserves in connection with
our long-standing litigation with Fleet were funded in an escrow account. The
court presiding over the claims will order the funds paid to Advanta or to Fleet
depending upon the outcome of that litigation. The amount escrowed, $70 million,
represents our maximum exposure to Fleet in the litigation, assuming a court
were to rule in favor of Fleet on every claim involved in the litigation.
We have been notified by Progressive Casualty Insurance Company that it
does not intend to renew the strategic alliance with Advanta Insurance when the
original five-year term for the alliance expires during 2001. The agreement
governing the relationship between Advanta Insurance and Progressive requires
that upon termination, we transfer our interest in the assets and liabilities of
the strategic alliance to Progressive and that Progressive make certain payments
to us, subject to adjustments. Advanta Insurance and Progressive are currently
pursuing alternative termination structures for the strategic alliance that
would allow for early termination and financial settlement.
Advanta Corp. and its subsidiaries are involved in other legal proceedings,
claims and litigation, including those arising in the ordinary course of
business. Management believes that the aggregate liabilities, if any, resulting
from those actions will not have a material adverse effect on the consolidated
financial position or results of our operations. However, as the ultimate
resolution of these proceedings is influenced by factors
56
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outside of our control, it is reasonably possible that our estimated liability
under these proceedings may change.
We lease office space in several states under leases accounted for as
operating leases. Total rent expense related to continuing operations was $5.6
million in 2000, $5.3 million in 1999 and $4.1 million in 1998. The future
minimum lease payments of non-cancelable operating leases related to continuing
operations are as follows:
Year Ended December 31,
2001 4,317
2002 3,815
2003 3,383
2004 3,162
2005 2,631
Thereafter 388
NOTE 13. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1996, a newly formed statutory business trust established and
wholly-owned by Advanta Corp., issued $100 million of capital securities,
representing preferred beneficial interests in the assets of the trust. We used
the proceeds from the sale for general corporate purposes. The assets of the
trust consist of $100 million of 8.99% junior subordinated debentures issued by
Advanta Corp. due December 17, 2026. The capital securities will be subject to
mandatory redemption under certain circumstances. These circumstances include
the optional prepayment by Advanta Corp. of the junior subordinated debentures
at any time on or after December 17, 2006 at an amount per capital security
equal to 104.495% of the principal amount plus accrued and unpaid distributions.
This amount declines ratably on each December 17 thereafter to 100% on December
17, 2016. Our obligations, in the aggregate, provide a full and unconditional
guarantee of payments of distributions and other amounts due on the capital
securities. Dividends on the capital securities are cumulative, payable
semi-annually in arrears, and are deferrable at our option for up to ten
consecutive semi-annual periods. We cannot pay dividends on our preferred or
common stocks during deferments. Dividends on the capital securities have been
classified as minority interest in income of consolidated subsidiary in the
consolidated income statements. The trust has no operations or assets separate
from its investment in the junior subordinated debentures. Separate financial
statements of the trust are not presented because management has determined that
they would not be meaningful to investors.
NOTE 14. CAPITAL STOCK
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. The redemption price of the Class A Preferred Stock is
equivalent to its par value.
On February 20, 1998, we purchased 7,882,750 shares of our Class A Common
Stock and 12,482,850 shares of our Class B Common Stock at $40 per share net,
and 1,078,930 of our depositary shares, each representing one one-hundredth
interest in a share of Stock Appreciation Income Linked Securities ("SAILS"), at
$32.80 per share net, through the Tender Offer. The SAILS constituted a series
of our Class B Preferred Stock, designated as 6 3/4% Convertible Class B
Preferred Stock, Series 1995.
In 1998, the Board of Directors authorized the repurchase of up to 2.5
million shares of our Class A and Class B Common Stock and the formation of an
Employee Stock Ownership Plan ("ESOP"). In 1998 and 1999, we purchased 1,405,000
shares of Class A Common Stock and 445,600 shares of Class B Common Stock at a
total cost of $21.1 million. Of the total shares purchased, 1,000,000 shares of
Class A Common Stock were purchased for our ESOP.
57
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 15, 1999, all of the 1.4 million outstanding depositary
shares, each representing one one-hundredth interest in a share of SAILS,
mandatorily converted into 1.4 million shares of Class B Common Stock.
In 2000, we retired 405,000 shares of Class A Treasury stock and 445,600
shares of Class B Treasury stock.
NOTE 15. BENEFIT PLANS
RESTRICTED STOCK AWARDS
We have adopted management incentive plans designed to provide incentives to
participating employees to remain in our employ and devote themselves to the
company's success. Under these plans, eligible employees were given the
opportunity to elect to take portions of their anticipated or target bonus
payments for future years in the form of restricted shares of common stock (with
each plan covering three performance years). To the extent that these elections
were made, or were required by the terms of the plans for executive officers,
restricted shares were issued to employees. The number of shares granted to
employees is determined by dividing the amount of future bonus payments that the
employee had elected to receive in stock by the market price as determined under
the incentive plans. The restricted shares are subject to forfeiture prior to
vesting should the employee terminate employment with us. Restricted shares vest
10 years from the date of grant. Vesting was and may continue to be accelerated
annually with respect to up to one-third of the shares granted under the plan
covering the particular performance year, based on the extent to which the
employee and Advanta met or meet their respective performance goals for that
plan performance year. When newly eligible employees elect to participate in a
plan, the number of shares issued to them with respect to their target bonus
payments for the relevant plan performance years is determined based on the
average market price of the stock for the 90 days prior to eligibility.
Compensation expense on restricted shares is recognized over the vesting period
of the shares. Compensation expense recognized in connection with restricted
shares was $5.3 million in 2000, $3.8 million in 1999 and $8.2 million in 1998.
The following table summarizes restricted shares outstanding and shares issued.
Substantially all restricted shares outstanding at December 31, 2000 and 1999
were Class B common stock.
2000 1999
------------------- ----------------------------
(SHARES IN THOUSANDS) --------- WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF PRICE AT DATE OF NUMBER OF PRICE AT DATE OF
SHARES ISSUANCE SHARES ISSUANCE
- ----------------------------------------------------------------------------------------------------------
Restricted shares outstanding at December 31 984 $17 1,750 $15
Restricted shares issued in the year ended
December 31 201 $13 1,002 $11
- ----------------------------------------------------------------------------------------------------------
We have also granted shares of phantom stock to an officer in lieu of
restricted shares. There were no shares of phantom stock granted in 2000. In
1999, there were 27,413 shares of phantom stock granted at a price of $10.625.
In 1998, there were 50,632 phantom stock shares granted at a price of $10.625.
Shares of phantom stock outstanding totaled 78,045 at December 31, 2000 and
1999. There were no phantom shares granted before 1998. Compensation expense
(benefit) related to the appreciation (depreciation) on shares of phantom stock
was ($268) thousand in 2000, $246 thousand in 1999 and $22 thousand in 1998.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Our incentive plan authorizes an aggregate of 20.0 million shares of Class B
Common Stock for the grant of options, awards of shares of stock or awards of
stock appreciation rights to employees and directors. Previous plans granted
options to purchase Class A Common Stock; however, substantially all of the
options outstanding at December 31, 2000 were options to purchase Class B Common
Stock. Options generally vest over a four-year period and expire 10 years after
the date of grant. Shares available for future grant were 11.6
58
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million at December 31, 2000 and 2.7 million at December 31, 1999. Transactions
under the plans for the three years ended December 31, 2000, were as follows:
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
(SHARES IN THOUSANDS)
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------------------------------------------------------------------
Outstanding at
beginning of year 2,728 $15 2,988 $22 3,934 $27
Granted 1,128 9 1,358 10 1,186 18
Exercised (20) 8 (8) 2 (1,471) 24
Terminated (787) 14 (1,610) 23 (661) 21
- -----------------------------------------------------------------------------------------------------------------
Outstanding at end of
year 3,049 $13 2,728 $15 2,988 $22
- -----------------------------------------------------------------------------------------------------------------
Options exercisable
at year-end 1,156 722 1,353
- -----------------------------------------------------------------------------------------------------------------
Weighted average fair
value of options
granted during the
year $ 4.25 $ 4.60 $ 8.05
- -----------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2000.
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/00 EXERCISE PRICE
------------------------------------------------- ------------------------------
$ 1.00 to $10.00 1,238 8.7 years $ 7 223 $ 9
$10.01 to $20.00 1,310 8.1 15 475 17
$20.01 to $30.00 471 5.4 22 429 22
$30.01 to $40.00 27 4.9 38 27 38
$40.01 to $46.00 3 5.2 46 2 46
- ----------------------------------------------------------------------------------------------------
Total 3,049 1,156
- ----------------------------------------------------------------------------------------------------
We account for our stock option plans following Accounting Principles Board
Opinion No. 25, under which no compensation expense has been recognized.
Had compensation cost for these plans been determined consistent with SFAS
123, our net income (loss) and net income (loss) per common share would have
changed to the following pro forma amounts:
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Net income (loss)
As reported $(156,684) $49,818 $447,880
Pro forma (163,393) $41,810 436,960
- ---------------------------------------------------------------------------------------------
Basic net income (loss) per common share
As reported
Class A $ (6.28) $ 1.95 $ 16.62
Class B (6.21) 2.02 16.68
Combined (6.24) 1.99 16.65
59
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Pro forma
Class A $ (6.55) $ 1.62 $ 16.21
Class B (6.48) 1.68 16.27
Combined (6.50) 1.65 16.24
- ---------------------------------------------------------------------------------------------
Diluted net income (loss) per common share
As reported
Class A $ (6.23) $ 1.94 $ 15.69
Class B (6.16) 2.00 15.73
Combined (6.19) 1.98 15.71
Pro forma
Class A $ (6.50) $ 1.60 $ 15.31
Class B (6.42) 1.67 15.34
Combined (6.45) 1.64 15.33
- ---------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31:
2000 1999 1998
--------------------
Dividend yield 4% 3% 3%
Expected life (in years) 10 10 10
Expected volatility 56% 51% 48%
Risk-free interest rate 5.8% 5.4% 5.7%
Because SFAS 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that to be expected in future years.
During 1998, we changed the exercise price of certain options granted
during 1996 and 1997 to the market price on the date of the modification. These
modifications did not result in additional compensation expense under the
accounting prescribed by SFAS 123. Also in 1998, we amended the terms of options
granted to employees who became employees of Fleet LLC or whose employment was
otherwise terminated in connection with the Consumer Credit Card Transaction to
extend the post-employment exercise period. In 1998, we accelerated vesting of
43.15% of outstanding options that were not vested at the time of the Consumer
Credit Card Transaction. See discussion in Note 22 of charges to earnings
relating to these modifications.
During 2000, 1999 and 1998, we issued stock appreciation rights to certain
directors in exchange for or in lieu of stock options. At December 31, 2000,
1,230 rights were outstanding with a strike price of $4.75, 100,000 rights were
outstanding with a strike price of $8.50, 27,000 rights were outstanding with a
strike price of $10.75, 163,074 rights were outstanding with a strike price of
$12.33, 100,000 rights were outstanding with a strike price of $14.50 and
233,675 rights were outstanding with a strike price between $19.00 and $22.13.
At December 31, 1999, 1,230 rights were outstanding with a strike price of
$4.75, 127,000 rights were outstanding with a strike price of $10.75, 163,074
rights were outstanding with a strike price of $12.33 and 233,675 rights were
outstanding with a strike price between $19.00 and $22.13. Compensation expense
(benefit) related to stock appreciation rights was ($512) thousand in 2000, $502
thousand in 1999, and $10 thousand in 1998.
EMPLOYEE STOCK PURCHASE PLAN
We have an Employee Stock Purchase Plan, which allows employees and directors to
purchase Class B Common Stock at a 15% discount from the market price without
paying brokerage fees. We report this 15% discount as compensation expense and
incurred expense of $163 thousand in 2000, $162 thousand in 1999, and
60
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$200 thousand in 1998. Shares issued under the plan are issued at the average
market price on the day of purchase.
EMPLOYEE SAVINGS PLAN
We have a tax-deferred employee savings plan, which provides employees with
savings and investment opportunities, including the ability to invest in Advanta
Corp. Class B Common Stock. The employee savings plan provides for discretionary
employer 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,
2000, 1999 and 1998, our contributions equaled 100% of the first 5% of
participating employees' compensation contributed to the plan. The expense for
this plan totaled $3.1 million in 2000, $2.7 million in 1999, and $2.4 million
in 1998. All shares of Advanta Corp. Class B Common Stock purchased by the plan
in the three years ended December 31, 2000, 1999 and 1998 were acquired from
Advanta Corp. at the market price on each purchase date or were purchased on the
open market.
DEFERRED COMPENSATION PLAN
We offer an elective, nonqualified deferred compensation plan to qualified
executives and non-employee directors, which allows them to defer a portion of
their cash compensation on a pretax basis. The plan contains provisions related
to minimum contribution levels and deferral periods with respect to any
individual's participation. The plan participant makes irrevocable elections at
the date of deferral as to deferral period and date of distribution. Interest is
credited to the participant's account at the rate of 125% of the 10-year rolling
average interest rate on 10-Year U.S. Treasury Notes. Distribution from the plan
may be either at retirement or at an earlier date, and can be either in a lump
sum or in installment payments. We have purchased life insurance contracts with
a face value of $46 million to fund this plan.
EMPLOYEE STOCK OWNERSHIP PLAN
On September 10, 1998, our Board of Directors authorized the formation of an
Employee Stock Ownership Plan (the "ESOP"), covering all of our employees who
have reached age 21 with one year of service. During 1998, the ESOP borrowed
approximately $12.6 million from Advanta Corp. and used the proceeds to purchase
approximately 1,000,000 shares of Class A Common Stock. The ESOP loan is
repayable with an interest rate of 8% over 30 years. We make annual
contributions to the ESOP equal to the ESOP's debt service less dividends
received on unallocated shares by the ESOP. As the ESOP loan is repaid, shares
are allocated to active employees, based on the proportion of debt service paid
in the year. We account for the ESOP in accordance with AICPA Statement of
Position 93-6, "Employer's Accounting for Employee Stock Ownership Plans."
Accordingly, unallocated shares are reported as unearned ESOP shares in the
balance sheet. As shares of common stock acquired by the ESOP are committed to
be released to each employee, we report compensation expense equal to the
current market price of the shares, and the shares become outstanding for
earnings per share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
used to fund debt service of the ESOP. ESOP compensation expense was $455
thousand for the year ended December 31, 2000, $535 thousand for the year ended
December 31, 1999 and $17 thousand for the year ended December 31, 1998. At
December 31, 2000, there were 931,945 unearned and unallocated ESOP shares with
a fair value of $8.2 million. At December 31, 1999, there were 965,229 unearned
and unallocated ESOP shares with a fair value of $17.6 million.
NOTE 16. CAPITAL RATIOS
Advanta National Bank and Advanta Bank Corp. are wholly owned subsidiaries of
Advanta Corp. Advanta National Bank and Advanta Bank Corp. are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory -- and possibly additional discretionary -- actions by regulators
that, if undertaken, could have a direct material
61
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effect on the institutions' and our financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
institutions must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The institutions' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the institutions to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).
As set forth in the table below, as of December 31, 2000 and 1999, Advanta
National Bank and Advanta Bank Corp. had capital at levels a bank is required to
maintain to be classified as "well-capitalized" under the regulatory framework
for prompt corrective action. However, Advanta National Bank does not meet the
definition of "well-capitalized" because of the existence of our agreement with
the Office of the Comptroller of the Currency, even though we have achieved the
higher imposed capital ratios required by the agreement. Our regulatory
agreement with the Office of the Comptroller of the Currency required that
Advanta National Bank achieve by September 30, 2000 and thereafter maintain a
ratio of 14% of Tier 1 capital to risk-weighted assets and a ratio of 17% of
Tier 1 capital to adjusted total assets. We achieved these ratios, as defined
within the agreement, through a combination of decreasing the assets and
deposits at Advanta National Bank and making aggregate capital contributions and
other investments in Advanta National Bank of approximately $70 million.
In connection with the sale of our mortgage business discussed in Note 2,
Advanta National Bank sought approval of the OCC for a return of capital to
Advanta Corp, in the amount of $261 million. On February 28, 2001, the OCC
approved the amount requested and, at the same time, Advanta National Bank
entered into an agreement with the OCC regarding restrictions on new business
activities and product lines at Advanta National Bank after the sale of the
mortgage business and the resolution of outstanding Advanta National Bank
liabilities. The agreement also reduces the existing capital requirements for
Advanta National Bank to 12.7% for Tier 1 and Total capital to risk-weighted
assets, and to 5% for Tier 1 capital to adjusted total assets as defined in the
agreement. In addition, the agreement provides for prior OCC approval of any
future dividends. Advanta Bank Corp. is unaffected by the agreement with the
OCC.
Recently, guidelines were issued jointly by the federal bank regulatory
agencies regarding additional requirements for subprime lenders, including
additional capital requirements. Under the guidelines, regulatory capital
required to be held for certain loan classes included in Advanta Bank Corp.'s
portfolio could be increased.
In addition, in a draft proposal recently issued jointly by the federal
bank regulatory agencies, capital requirements associated with certain residual
interests would be amended to require capital equal to the residual retained,
regardless of retained recourse levels. Further, the proposal requires residuals
in excess of 25% of Tier 1 capital to be treated as a deduction of Tier 1
capital for purposes of risk based and leverage capital calculations. In another
draft proposal recently issued jointly by the federal back regulatory agencies,
the agencies would use credit ratings and certain alternative approaches to
match the risk based capital requirement more closely to a banking
organization's relative risk of loss in asset securitizations. The proposal also
requires the sponsor of a revolving credit securitization that involves an early
amortization feature to hold capital against the amount of assets under
management (the off-balance sheet securitized receivables). The proposal treats
recourse obligations and direct credit substitutes more consistently than under
the agencies' current risk based capital standards. The ultimate resolution of
these proposals and their impact on financial results is uncertain at this time.
62
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TO BE WELL-
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- --------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------
PERCENTAGE PERCENTAGE
IS IS GREATER
GREATER THAN OR
THAN OR EQUAL TO
EQUAL TO
AS OF DECEMBER 31, 2000
Total Capital (to Risk Weighted
Assets) Advanta National Bank $315,482 15.08% $167,370 8.0% $209,213 10.0%
Advanta Bank Corp. 216,237 14.60 118,449 8.0 148,062 10.0
Tier I Capital (to Risk Weighted
Assets) Advanta National Bank $296,947 14.19% $ 83,685 4.0% $125,528 6.0%
Advanta Bank Corp. 194,411 13.13 59,225 4.0 88,837 6.0
Tier I Capital (to Average Assets)
Advanta National Bank $296,947 20.52% $ 57,878 4.0% $ 72,347 5.0%
Advanta Bank Corp. 194,411 21.08 36,894 4.0 46,117 5.0
AS OF DECEMBER 31, 1999
Total Capital (to Risk Weighted
Assets)
Advanta National Bank $427,409 14.86% $230,061 8.0% $287,576 10.0%
Advanta Bank Corp. 143,151 13.28 86,204 8.0 107,755 10.0
Tier I Capital (to Risk Weighted
Assets) Advanta National Bank $414,359 14.41% $115,030 4.0% $172,546 6.0%
Advanta Bank Corp. 128,193 11.90 43,102 4.0 64,653 6.0
Tier I Capital (to Average Assets)
Advanta National Bank $414,359 18.18% $ 91,193 4.0% $113,991 5.0%
Advanta Bank Corp. 128,193 27.86 18,406 4.0 23,008 5.0
NOTE 17. DIVIDEND AND LOAN RESTRICTIONS
In the normal course of business, Advanta Corp. and its subsidiaries enter into
agreements, or are subject to regulatory requirements, that result in dividend
and loan restrictions.
FDIC-insured banks are subject to certain provisions of the Federal Reserve
Act which impose various legal limitations on the extent to which banks may
finance or otherwise supply funds to certain of their affiliates. In particular,
Advanta National Bank and Advanta Bank Corp. are subject to certain restrictions
on any extensions of credit to, or other covered transactions, such as certain
purchases of assets, with Advanta Corp. or its affiliates. Advanta National Bank
and Advanta Bank Corp. are prevented by these restrictions from lending to
Advanta Corp. and its affiliates unless these extensions of credit are secured
by U.S. Government obligations or other specified collateral. Further, secured
extensions of credit are limited in amount: (a) as to Advanta Corp. or any
affiliate, to 10 percent of each bank's capital and surplus, and (b) as to
Advanta Corp. and all affiliates in the aggregate, to 20 percent of each bank's
capital and surplus.
Under grandfathering provisions of the Competitive Equality Banking Act of
1987, we are not required to register as a bank holding company under the Bank
Holding Company Act of 1956, as amended, so long as Advanta Corp. and Advanta
National Bank continue to comply with certain restrictions on their activities.
These restrictions include limiting the scope of Advanta National Bank's
activities to those in which it was engaged prior to March 5, 1987. Since
Advanta National Bank was not making commercial loans at that time, it must
continue to refrain from making commercial loans -- which would include any
loans to Advanta Corp. or any of its subsidiaries -- in order for Advanta Corp.
to maintain its grandfathered exemption under the Bank Holding Company Act. We
have no present plans to register as a bank holding company under the Bank
Holding Company Act.
64
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advanta National Bank is also subject to various legal limitations on the
amount of dividends that can be paid to its parent, Advanta Corp. Advanta
National Bank is eligible to declare a dividend provided that it is not greater
than the current year's net profits plus net profits of the preceding two years.
However, our regulatory agreements with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation prohibit the payment of
dividends by Advanta National Bank or Advanta Bank Corp. without prior
regulatory approval. In connection with the mortgage business sale in the first
quarter of 2001, we sought and received regulatory approval for a return of
capital of $261 million from Advanta National Bank. Advanta National Bank paid
no dividends to Advanta Corp. during 2000 or 1999. During 1998, the Office of
the Comptroller of the Currency approved the payment of a special
dividend/return of capital of $1.3 billion from Advanta National Bank to Advanta
Corp. to effect the Tender Offer described in Note 11. There were no dividends
from Advanta Bank Corp. to Advanta Corp. during 2000, 1999, or 1998.
Our insurance subsidiaries are also subject to certain capital, deposit and
dividend rules and regulations as prescribed by state jurisdictions in which
they are authorized to operate. At December 31, 2000, the insurance subsidiaries
were in compliance with these rules and regulations. Insurance subsidiaries paid
dividends to Advanta Corp. of $1.2 million in 1999. Dividends paid to Advanta
Corp. in 1998 by insurance subsidiaries were $39 million, including an
extraordinary dividend of $35 million that was approved in advance by the
applicable state regulators. There were no dividends paid to Advanta Corp. by
insurance subsidiaries in 2000.
Total stockholders' equity of our banking and insurance affiliates was $572
million at December 31, 2000, and $584 million at December 31, 1999. Of our
total equity in these affiliates, $566 million was restricted at December 31,
2000 and $524 million was restricted at December 31, 1999. At January 1, 2001,
$5.4 million of stockholders' equity of our banking and insurance affiliates was
available for payment of dividends under applicable regulatory guidelines
without prior regulatory approval.
In addition to restrictions at banking subsidiaries, certain non-bank
subsidiaries are subject to minimum equity requirements as part of
securitization agreements or financing facility agreements. The total minimum
equity requirement of non-bank subsidiaries was $40 million at December 31,
2000. At December 31, 2000, the non-bank subsidiaries were in compliance with
these minimum equity requirements.
NOTE 18. SEGMENT INFORMATION
Our only reportable segment as of December 31, 2000 was Advanta Business Cards.
We evaluate segment performance based largely on the pretax income of the
business unit. The Advanta Mortgage and Advanta Leasing Services segments were
discontinued in the first quarter of 2001 and their results are classified as
discontinued operations in the consolidated income statements. See Note 2. Prior
to February 20, 1998, we also had an additional reportable segment, Advanta
Personal Payment Services. See Note 11.
Advanta Business Cards offers MasterCard business credit cards to small
businesses using targeted direct mail and the Internet as well as telemarketing
solicitation of potential cardholders. This product provides approved customers
with access, through merchants, banks, checks and ATMs, to an instant unsecured
revolving business credit line.
Prior to the Consumer Credit Card Transaction, we offered consumer credit
cards through Advanta Personal Payment Services. This business segment issued
consumer credit cards nationwide using direct marketing techniques. As of
February 20, 1998, this segment had no operations, and the activity below
reflects operations through that date.
The accounting policies of the segments are the same as those followed by
Advanta. Centrally incurred operating expenses are allocated to the segments
based on consumption, where practical, or based on average managed assets.
Centrally incurred interest expense is charged to the segments using a funds
transfer pricing methodology primarily based on average net assets. During the
first quarter of 2000, we made changes to the methods used to allocate centrally
incurred interest and operating expenses to the reportable segments in order to
better reflect the use of the related assets or personnel by the segments. These
changes included the
64
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocation of certain expenses based on consumption rather than based on average
managed assets, and a change in the classification of certain employee groups.
Prior period segment results have been restated to reflect the current
allocation methods.
ADVANTA
BUSINESS
CARDS OTHER(1) TOTAL
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
Noninterest revenues $ 155,500 $ 1,581 $ 157,081
Interest income 78,424 57,676 136,100
Interest expense 32,487 54,021 86,508
Pretax income (loss) from continuing operations 71,188 (59,996) 11,192
Average managed receivables 1,372,717 23,067 1,395,784
Total assets 462,317 2,381,155 2,843,472
Capital expenditures 3,949 9,545 13,494
Depreciation and amortization 1,385 10,086 11,471
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
Noninterest revenues $ 84,252 $ 21,118 $ 105,370
Interest income 35,613 68,971 104,584
Interest expense 13,749 67,051 80,800
Unusual charges(2) 0 16,713 16,713
Pretax income (loss) from continuing operations 34,248 (48,699) (14,451)
Average managed receivables 892,862 17,450 910,312
Total assets 352,028 3,186,532 3,538,560
Capital expenditures 1,000 4,568 5,568
Depreciation and amortization 923 6,871 7,794
- --------------------------------------------------------------------------------------------------
ADVANTA
ADVANTA PERSONAL
BUSINESS PAYMENT
CARDS SERVICES OTHER(1) TOTAL
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Noninterest revenues $ 53,334 $ 83,823 $ 3,251 $ 140,408
Interest income 21,730 23,465 66,307 111,502
Interest expense 8,994 33,352 58,880 101,226
Gain on transfer of consumer credit card business 0 541,288 0 541,288
Unusual charges(3) 0 125,072 0 125,072
Pretax income (loss) from continuing operations 15,224 388,311 (20,679) 382,856
Average managed receivables 744,192 1,846,109 15,724 2,606,025
Total assets 194,021 0 3,468,041 3,662,062
Capital expenditures 620 2,469 29,093 32,182
Depreciation and amortization 1,105 5,600 4,166 10,871
- ---------------------------------------------------------------------------------------------------------
(1) Other includes insurance operations and assets, investment and other
activities not attributable to Advanta Business Cards. It also includes net
assets of discontinued operations, and corporate overhead previously
allocated to the mortgage and leasing business units while they were
operating segments. Corporate overhead allocations were removed from the
results of the discontinued segments as a result of the restatement for
discontinued operations.
(2) Unusual charges in 1999 represent charges associated with cost reduction
initiatives in the first quarter and additional costs associated with
products exited in the first quarter of 1998.
(3) Unusual charges in 1998 represent severance and outplacement costs
associated with workforce reduction, option exercise and other employee
costs associated with the Consumer Credit Card Transaction/Tender Offer;
expense associated with exited businesses/products; and asset impairment.
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------
Business credit card interchange income $61,668 $33,786 $ 20,741
Investment securities gains (losses), net(1) 5,473 30,132 (40,142)
Consumer credit card interchange income 0 0 11,881
Consumer credit card overlimit fees 0 0 16,233
Insurance revenues, net and other 1,833 6,445 10,235
- --------------------------------------------------------------------------------------------
Total other revenues, net $68,974 $70,363 $ 18,948
- --------------------------------------------------------------------------------------------
(1) Investment securities gains (losses), net include changes in the fair value
and realized gains on venture capital investments.
OPERATING EXPENSES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits $ 42,499 $35,300 $ 47,723
Amortization of credit card deferred origination costs, net 23,961 5,863 22,271
Professional/consulting fees 18,451 12,160 6,530
External processing 13,236 8,507 14,387
Marketing expense 11,492 2,397 4,066
Occupancy expense 9,221 9,854 6,822
Equipment expense 9,001 5,528 9,981
Other 22,431 15,897 25,055
- ---------------------------------------------------------------------------------------------
Total operating expenses $150,292 $95,506 $136,835
- ---------------------------------------------------------------------------------------------
NOTE 20. NET INTEREST INCOME
The following table presents the components of net interest income:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Interest income:
Loans $ 78,506 $ 37,718 $ 46,864
Trading investments 0 6,752 10,374
Investments available for sale 57,594 60,114 54,264
- ---------------------------------------------------------------------------------------------
Total interest income 136,100 104,584 111,502
Interest expense:
Deposits 118,771 101,386 85,935
Debt 65,567 61,940 87,900
Other borrowings 8,792 4,350 10,440
Less: Interest allocated to discontinued operations (106,622) (86,876) (83,049)
- ---------------------------------------------------------------------------------------------
Total interest expense 86,508 80,800 101,226
Net interest income 49,592 23,784 10,276
Less: Provision for credit losses (36,309) (22,506) (38,329)
- ---------------------------------------------------------------------------------------------
Net interest after provision for credit losses $ 13,283 $ 1,278 $(28,053)
- ---------------------------------------------------------------------------------------------
66
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21. INCOME TAXES
Income tax (benefit) was as follows:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Income tax expense (benefit) attributable to:
Continuing operations $ 0 $(55,785) $(25,748)
Discontinued operations 0 5,513 16,704
Loss on discontinuance of leasing business 0 0 0
- ---------------------------------------------------------------------------------------------
Total income tax (benefit) $ 0 $(50,272) $ (9,044)
- ---------------------------------------------------------------------------------------------
Income tax (benefit) on income from continuing operations consisted of the
following components:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Current:
Federal $ 6,636 $ 15,500 $ 20,254
State 4,753 (4,083) 8,470
- ---------------------------------------------------------------------------------------------
Total current 11,389 11,417 28,724
- ---------------------------------------------------------------------------------------------
Deferred:
Federal (6,994) (69,509) (55,480)
State (4,395) 2,307 1,008
- ---------------------------------------------------------------------------------------------
Total deferred (11,389) (67,202) (54,472)
- ---------------------------------------------------------------------------------------------
Total income tax (benefit) $ 0 $(55,785) $(25,748)
- ---------------------------------------------------------------------------------------------
The reconciliation of the statutory federal income tax to income tax
(benefit) on income from continuing operations is as follows:
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Statutory federal income tax $ 3,917 $ (5,058) $ 134,000
State income taxes, net of federal income tax benefit 232 (1,090) 6,160
Net operating losses (4,755) (49,973) 0
Insurance program income 242 98 27,755
Tax credits 0 0 (691)
Compensation limitation 140 175 4,725
Transfer of consumer credit card business (see Note 11) 0 0 (200,494)
Other 224 63 2,797
- ---------------------------------------------------------------------------------------------
Income tax (benefit) $ 0 $(55,785) $ (25,748)
- ---------------------------------------------------------------------------------------------
Deferred taxes are provided to reflect the estimated future tax effects of
the differences between the financial statement and tax bases of assets and
liabilities and enacted tax laws. The net deferred tax asset is comprised of the
following:
DECEMBER 31,
- -----------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------
Deferred tax liabilities $(95,677) $(102,248)
Deferred tax assets 194,300 194,593
- -----------------------------------------------------------------------------------
Net deferred tax asset $ 98,623 $ 92,345
- -----------------------------------------------------------------------------------
67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of deferred tax assets and liabilities follows:
DECEMBER 31,
- -----------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------
Deferred loan fees and costs $ (4,331) $ (6,149)
Allowance for credit losses 21,280 22,273
Net operating loss carryforwards 142,248 182,437
Securitization income 50,368 (60,556)
Deferred compensation 7,863 9,054
Noncash unusual charges 6,835 18,321
Other 12,268 9,965
Valuation allowance (137,908) (83,000)
- -----------------------------------------------------------------------------------
Net deferred tax asset $ 98,623 $ 92,345
- -----------------------------------------------------------------------------------
As a result of the carrying value adjustments discussed in Note 3, we
reported a pretax loss for the year ended December 31, 2000. A valuation
allowance has been provided against the resulting deferred tax asset given our
pre-existing net operating loss carryforwards and the uncertainty of the
realizability of the incremental deferred tax asset. In establishing the
valuation allowance, management considered (1) the level of expected future
taxable income, (2) existing and projected book/tax differences, (3) tax
planning strategies available, and (4) the general and industry specific
economic outlook. Based on this analysis, management believes the net deferred
tax asset will be realized.
The gain on the Consumer Credit Card Transaction in 1998 was not subject to
income tax and no tax provision was recorded. The Consumer Credit Card
Transaction also resulted in additional book/tax differences, which were
quantified during 1999 in connection with the filing of the 1998 tax return.
Such book/tax differences, when combined with certain less significant recurring
differences, resulted in net operating loss carryforwards of approximately $521
million at December 31, 1999. This amount is net of $96 million carried back to
prior years, and includes $500 million that pertains to losses incurred on the
consumer credit card portfolio after the date of the transaction. A deferred tax
asset of $50 million, net of valuation allowance, resulting from the net
operating loss carryforwards was recorded as an income tax benefit in the fourth
quarter of 1999.
In 2000, we utilized net operating loss carryforwards of $85 million.
Additionally, $29 million was carried back to prior years. At December 31, 2000,
remaining net operating loss carryforwards were $406 million, of which $390
million expire in 2018 and $16 million expire in 2019.
The net deferred federal tax asset is presented net with current federal
income taxes receivable (payable) for financial reporting purposes, and is
included in other assets.
NOTE 22. UNUSUAL CHARGES
In connection with the Consumer Credit Card Transaction more fully discussed in
Note 11, we made major organizational changes during the first quarter of 1998
to reduce corporate expenses incurred in the past: (a) to support the business
contributed to Fleet LLC in the Consumer Credit Card Transaction, and (b)
associated with the business and products no longer being offered or not
directly associated with our mortgage, business credit card and leasing units.
In addition, in 1999, we implemented a plan to exit the auto
68
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
finance business and to implement cost reduction initiatives throughout the
organization including the consolidation of support functions. Costs associated
with these restructuring activities included:
CHARGED TO 12/31/98 CHARGED TO 12/31/99 CHARGED TO 12/31/00
ACCRUED ACCRUAL ACCRUAL ACCRUED ACCRUAL ACCRUAL ACCRUAL ACCRUAL
IN 1998 IN 1998 BALANCE IN 1999 IN 1999 BALANCE IN 2000 BALANCE
- --------------------------------------------------------------------------------------------------------------------------
Employee costs associated with
staff reductions $ 0 $ 0 $ 0 $ 3,350 $ 2,528 $ 822 $ 822 $ 0
Employee costs associated with
Consumer Credit Card
Transaction/Tender Offer 62,257 58,966 3,291 0 283 3,008 3,008 0
Expenses associated with
exited businesses/products 54,115 39,349 14,766 13,363 7,481 20,648 7,601 13,047
Asset impairments 8,700 8,133 567 0 567 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total $125,072 $106,448 $18,624 $16,713 $10,859 $24,478 $11,431 $13,047
- --------------------------------------------------------------------------------------------------------------------------
EMPLOYEE COSTS ASSOCIATED WITH STAFF REDUCTIONS
In the first quarter of 1999, in connection with cost reduction initiatives and
the consolidation of support functions, we recorded a $3.3 million charge for
costs associated with staff reductions. These expenses included severance and
outplacement costs. There were 121 employees severed who were entitled to
benefits. This staff reduction was substantially complete by June 30, 1999. The
final payment outstanding related to these employee costs was paid in the three
months ended March 31, 2000.
EMPLOYEE COSTS ASSOCIATED WITH CONSUMER CREDIT CARD TRANSACTION/TENDER OFFER
In connection with the organizational changes in 1998, we incurred approximately
$26.8 million of severance and related costs classified as employee costs
associated with the Consumer Credit Card Transaction/Tender Offer. These
expenses included severance and outplacement costs associated with the workforce
reduction, option exercise and re-measurement costs, and other employee costs
directly attributable to the Consumer Credit Card Transaction/Tender Offer.
In connection with these organizational changes, 255 employees who ceased
to be employed by us were entitled to benefits, of which 190 employees were
directly associated with the business contributed to Fleet LLC and 65 employees
were associated with the workforce reduction.
Additionally, during the first quarter of 1998, we incurred approximately
$35.5 million of other compensation charges. This amount includes $21.3 million
attributable to payments under change of control plans and $14.2 million
associated with the execution of the Tender Offer.
The final payment outstanding related to these employee costs was paid in
the three months ended March 31, 2000.
EXPENSES ASSOCIATED WITH EXITED BUSINESSES/PRODUCTS
In the first quarter of 1999, we implemented a plan to cease the origination of
auto loans and recorded a $3.4 million charge for costs associated with exited
businesses/products. The charges included severance and outplacement costs for
22 employees in the auto origination group, and professional fees associated
with exited businesses/products not directly associated with our mortgage,
business credit card and leasing units. We completed the closing of the auto
loan origination center and termination of related employees during the second
quarter of 1999. We expect to complete the payment of the remaining professional
fees during the first half of 2001.
During the first quarter of 1998, we implemented a plan to exit certain
businesses and product offerings not directly associated with our mortgage,
business credit card and leasing units. In connection with this plan,
contractual vendor commitments of approximately $10.0 million associated with
discontinued development and other activities were accrued. We have
substantially completed the settlement of these contractual commitments.
69
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We also have contractual commitments to certain customers, and non-related
financial institutions that are providing benefits to those customers, under a
product that is no longer offered and for which no future revenues or benefits
will be received. In 1998, we recorded a charge of $22.8 million associated with
these commitments, and an $8.3 million charge associated with the write-off of
assets associated with this program that became unrealizable when the product
was exited. In 1999, an additional charge of $10.0 million was recorded based on
a change in the estimate of total expected costs for the contractual commitments
related to the exited product. Updated information regarding future benefits to
be provided in connection with these contractual commitments indicated a higher
level of benefits than originally estimated. The actions required to complete
this plan include the settlement of contractual commitments and the payment of
customer benefits. The liabilities associated with these commitments were
assumed by a third party in the first quarter of 2001.
In connection with the Consumer Credit Card Transaction/Tender Offer and
the other exited business and product offerings, we also incurred $11.5 million
of related professional fees and $1.5 million of other expenses related to these
plans.
ASSET IMPAIRMENTS
In connection with Advanta's plans to reduce corporate expenses and exit certain
business and product offerings, certain assets previously deployed in connection
with these exited business or product offerings were identified and the carrying
costs thereof were written off or written down to estimated realizable value in
1998 resulting in a charge of $8.7 million. This charge included $6.0 million
from the write-off of certain leasehold improvements and furniture and fixtures
due to the refit of corporate headquarters. In addition, this charge included a
$2.7 million write-down to estimated fair value of capitalized software costs.
The write-down to fair value of software was determined based on an estimate of
costs associated with the additional functionality of the software, which would
not be of use subsequent to the exit of certain business and product offerings.
70
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of basic earnings per common share and
diluted earnings per common share for the years ended December 31:
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Income from continuing operations $ 11,192 $41,334 $408,604
Less: Preferred A dividends (141) (141) (141)
Less: Preferred B dividends 0 (2,661) (3,549)
- ---------------------------------------------------------------------------------------------
Income from continuing operations available to common
shareholders 11,051 38,532 404,914
Income (loss) from discontinued operations, net of tax (163,578) 8,484 39,276
Loss on discontinuance of leasing business, net of tax (4,298) 0 0
- ---------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders (156,825) 47,016 444,190
Less: Class A dividends declared (2,236) (2,471) (2,615)
Less: Class B dividends declared (5,118) (4,896) (4,589)
- ---------------------------------------------------------------------------------------------
Undistributed net income (loss) $(164,179) $39,649 $436,986
- ---------------------------------------------------------------------------------------------
Basic income from continuing operations per common share
Class A $ 0.39 $ 1.59 $ 15.14
Class B 0.47 1.66 15.21
Combined(1) 0.44 1.63 15.18
Diluted income from continuing operations per common share
Class A $ 0.39 $ 1.58 $ 14.32
Class B 0.46 1.65 14.35
Combined(1) 0.44 1.62 14.33
Basic net income (loss) per common share
Class A $ (6.28) $ 1.95 $ 16.62
Class B (6.21) 2.02 16.68
Combined(1) (6.24) 1.99 16.65
Diluted net income (loss) per common share
Class A $ (6.23) $ 1.94 $ 15.69
Class B (6.16) 2.00 15.73
Combined(1) (6.19) 1.98 15.71
- ---------------------------------------------------------------------------------------------
Basic shares
Class A 9,110 9,057 11,174
Class B 16,033 14,515 15,500
Combined 25,143 23,572 26,674
Options A 0 1 8
Options B 95 107 103
Restricted shares Class A 39 20 0
Restricted shares Class B 74 58 138
Preferred B(2) 0 0 1,572
Diluted shares
Class A 9,149 9,078 11,182
Class B 16,202 14,680 17,313
Combined 25,351 23,758 28,495
Antidilutive shares
Preferred Class B(2) 0 14 0
Options Class A 0 0 0
Options Class B 2,097 1,550 2,700
Restricted shares Class A 46 47 0
Restricted shares Class B 1,059 1,222 1,130
- ---------------------------------------------------------------------------------------------
(1) Combined represents a weighted average of Class A and Class B earnings per
common share.
(2) Each share of Class B convertible preferred stock was mandatorily converted
into one share of Class B Common Stock effective September 15, 1999.
71
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 24. PARENT COMPANY FINANCIAL STATEMENTS
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
- --------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------
ASSETS
Cash $ 135,374 $ 4,292
Commercial paper equivalent(1) 24,629 375,000
Investments 19,491 7,820
Investments in and advances to bank subsidiaries 511,400 543,276
Investments in and advances to non-bank subsidiaries 498,531 479,020
Other assets 141,420 165,019
- --------------------------------------------------------------------------------------
Total assets $1,330,845 $1,574,427
- --------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses and other liabilities $ 35,070 $ 100,542
Long-term debt 854,873 884,254
- --------------------------------------------------------------------------------------
Total liabilities 889,943 984,796
- --------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 1,010 1,010
Common stock 276 287
Other stockholders' equity 439,616 588,334
- --------------------------------------------------------------------------------------
Total stockholders' equity 440,902 589,631
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,330,845 $1,574,427
- --------------------------------------------------------------------------------------
(1) Commercial paper equivalent refers to unsecured loans made to Advanta
National Bank and Advanta Bank Corp. for terms less than 35 days in maturity
which are not automatically renewable, consistent with commercial paper
issuance.
The parent company guarantees certain warehouse financing facilities and
lease agreements of its subsidiaries. At December 31, 2000, there were $21.1
million of lease obligations guaranteed by the parent and $56.4 million of
parent guarantees associated with warehouse financing facilities.
72
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
INCOME:
Dividends from bank subsidiaries(1) $ 0 $ 0 $ 553,715
Dividends from non-bank subsidiaries(1) 278 2,225 6,300
Interest 40,481 44,369 78,210
Gain on transfer of credit card business 0 0 48,944
Other, net 37,912 52,510 44,623
- ---------------------------------------------------------------------------------------------
Total income 78,671 99,104 731,792
- ---------------------------------------------------------------------------------------------
EXPENSES:
General and administrative 73,099 45,638 44,289
Interest 69,482 67,102 86,557
Unusual charges 0 4,561 59,707
- ---------------------------------------------------------------------------------------------
Total expenses 142,581 117,301 190,553
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in
undistributed net profit (loss) of subsidiaries (63,910) (18,197) 541,239
- ---------------------------------------------------------------------------------------------
Income tax benefit 30,317 22,327 8,566
- ---------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net profit
(loss) in subsidiaries (33,593) 4,130 549,805
- ---------------------------------------------------------------------------------------------
Equity in undistributed net profit (loss) of subsidiaries (123,091) 45,688 (101,925)
- ---------------------------------------------------------------------------------------------
Net income (loss) $(156,684) $ 49,818 $ 447,880
- ---------------------------------------------------------------------------------------------
(1) Dividends from subsidiaries include only dividends from current year net
income of subsidiaries. See Parent Company Only Condensed Statements of Cash
Flows for total dividends received from subsidiaries.
The Parent Company Only Statements of Changes in Stockholders' Equity is
the same as the Consolidated Statements of Changes in Stockholder's Equity.
73
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $(156,684) $ 49,818 $ 447,880
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Equity in net loss (profit) of subsidiaries 122,813 (47,913) (458,090)
Dividends received from subsidiaries 278 2,225 903,831
Equity securities gains 0 (1,709) 0
Depreciation and amortization 2,523 2,066 6,880
Gain on transfer of consumer credit card business 0 0 (48,944)
Noncash unusual charges 0 0 11,974
Change in other assets, interest-bearing deposits,
accrued expenses and other liabilities (39,225) (30,987) (101,208)
- ---------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (70,295) (26,500) 762,323
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in premises & equipment (6,941) (2,199) 4,793
Net change in commercial paper equivalents 350,371 65,900 (440,900)
Investments in subsidiaries (119,226) (23,540) (124,500)
Return of investment from subsidiaries 22,453 39,731 470,000
Purchase of investments available for sale (156,661) (851,132) (471,582)
Proceeds from sales of investments available for sale 72 2,702 143,770
Proceeds from maturing investments available for sale 152,482 850,000 327,200
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 242,550 81,462 (91,219)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 256,091 123,529 29,858
Payments on redemption of long-term debt (285,472) (365,177) (294,026)
(Increase) decrease in affiliate borrowings (4,452) 187,806 339,822
Issuance of stock 155 20 5,249
Tender Offer 0 0 (801,606)
Stock buyback 0 (3,955) (4,549)
ESOP stock purchase 0 0 (12,569)
Cash dividends paid (7,495) (10,169) (10,894)
- ---------------------------------------------------------------------------------------------
Net cash used in financing activities (41,173) (67,946) (748,715)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash 131,082 (12,984) (77,611)
Cash at beginning of period 4,292 17,276 94,887
- ---------------------------------------------------------------------------------------------
Cash at end of period $ 135,374 $ 4,292 $ 17,276
- ---------------------------------------------------------------------------------------------
There were no significant noncash transactions of the Parent Company in
2000. In 1999, noncash transactions of the Parent Company included a $4.5
million assumption of liabilities of subsidiaries and a $43.3 million return of
investment by subsidiaries through forgiveness of advances. In 1998, the noncash
transaction represented capital contributions to subsidiaries through the
forgiveness of advances of $143.5 million.
74
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 25. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments are as follows at
December 31:
2000 1999
- ------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
Financial assets:
Cash $ 1,716 $ 1,716 $ 5,784 $ 5,784
Federal funds sold 107,584 107,584 144,938 144,938
Restricted interest-bearing deposits 36,254 36,254 49,354 49,354
Investments available for sale 758,792 758,792 748,881 748,881
Loans, net 340,291 341,264 298,648 328,401
Retained interests in securitizations 53,052 53,052 24,936 24,936
Financial liabilities:
Demand and savings deposits $ 68,568 $ 68,568 $ 248,111 $ 248,111
Time deposits 1,278,408 1,288,742 1,264,248 1,260,121
Long-term debt 755,184 752,112 788,508 771,560
Other borrowings 4,289 4,289 333,166 333,166
Off-balance sheet financial instruments:
Interest rate swaps $ 0 $ 379 $ 0 $ (1,345)
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for our various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
We used the following methods and assumptions in estimating fair value
disclosures for financial instruments:
CASH, FEDERAL FUNDS SOLD AND RESTRICTED INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable estimate
of the fair value.
INVESTMENTS
The fair values of investments available for sale are based on quoted market
prices, dealer quotes or estimates using quoted market prices for similar
securities. For investments that are not publicly traded, management has made
estimates of fair value that consider several factors including the investees'
financial results, conditions and prospects, and the values of comparable public
companies.
LOANS, NET
The fair values of loans are estimated using a discounted cash flow analysis
that incorporates estimates of the excess of the weighted average yield over the
aggregate cost of funds, servicing costs and an estimate of future credit losses
over the life of the receivables.
75
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RETAINED INTERESTS IN SECURITIZATIONS
The fair values of retained interests in securitizations are estimated based on
discounted cash flow analyses as described in Note 1. See Note 7 for the
assumptions used in the estimation of fair values of the retained interests in
securitizations.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. This fair value does not
include any benefit that may result from the low cost of funding provided by
these deposits compared to the cost of borrowing funds in the market.
TIME DEPOSITS
The fair value of fixed-maturity certificates of deposit is estimated using
discounted cash flow analyses based on the rates currently offered for deposits
of similar remaining maturities.
LONG-TERM DEBT
The fair value of our long-term borrowings is estimated using discounted cash
flow analyses based on our current incremental borrowing rates for similar types
of borrowing arrangements.
OTHER BORROWINGS
The carrying amounts of borrowings under repurchase agreements and other
short-term borrowings maturing within ninety days approximate their fair values.
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
The fair value of interest rate swaps is the estimated amount that we would pay
or receive to terminate the agreement at the reporting date, taking into account
current interest rates and the current creditworthiness of the counterparty.
COMMITMENTS TO EXTEND CREDIT
There is no market value associated with our unused commitments to extend
credit, since any fees charged are consistent with the fees charged by other
companies at the reporting date to enter into similar agreements. Unused
commitments to extend credit were $4.2 billion at December 31, 2000 and $2.5
billion at December 31, 1999.
NOTE 26. DERIVATIVE FINANCIAL INSTRUMENTS
In managing our interest rate risk, we may use derivative financial instruments.
These instruments are used for the express purpose of managing interest rate
exposures and are not used for any trading or speculative activities.
76
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes by notional amounts our derivative
instruments used in continuing and discontinued operations at December 31:
2000 1999
- --------------------------------------------------------------------------------------
Interest rate swaps $1,742,034 $2,975,086
Interest rate caps written 300,121 409,278
Interest rate caps purchased 300,121 409,278
Put options purchased 228,000 156,000
Forward contracts 154,000 565,000
- --------------------------------------------------------------------------------------
Total $2,724,276 $4,514,642
- --------------------------------------------------------------------------------------
The notional amounts of derivatives do not represent amounts exchanged by
the counterparties and, thus, are not a measure of our exposure through use of
derivatives. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the derivatives contracts.
Credit risk associated with derivatives arises from the potential for a
counterparty to default on its obligations. We limit credit risk by only
transacting with highly creditworthy counterparties, requiring International
Swaps and Derivatives Association agreements for all interest rate swap and
interest rate option contracts, and maintaining collateral agreements with
substantially all counterparties. All derivative counterparties are associated
with organizations having securities rated as investment grade by independent
rating agencies. The Investment Committee, a management committee, controls the
list of eligible counterparties, setting of counterparty limits, and monitoring
of credit exposure. Our credit exposure to derivatives, with the exception of
caps written, is represented by contracts with a positive fair value without
giving consideration to the value of any collateral exchanged. For caps written,
credit exposure does not exist since the counterparty has performed its
obligation to pay us a premium payment.
INTEREST RATE SWAPS
Interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments without the exchange of the underlying notional
amount on which the interest payments are calculated. We use interest rate swaps
to more effectively manage the impact of fluctuating interest rates on our
noninterest revenues and cost of funds. In 2000, 1999 and 1998, we used interest
rate swaps to effectively convert fixed rate debt and deposits to a LIBOR-based
variable rate and to effectively convert certain off-balance sheet variable
securitizations to a fixed rate.
77
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes by notional amounts our interest rate swap
activity in both continuing and discontinued operations by major category for
the periods presented:
RECEIVE PAY
FIXED RATE FIXED RATE TOTAL
- -----------------------------------------------------------------------------------------------
Balance at 12/31/97 $1,045,000 $1,066,711 $2,111,711
Additions 0 1,948,046 1,948,046
Net amortization (4,000) (380,533) (384,533)
Maturities (249,000) 0 (249,000)
Terminations (54,790) (211,812) (266,602)
Contributed to Fleet Credit Card LLC (161,710) 0 (161,710)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/98 $ 575,500 $2,422,412 $2,997,912
Additions 200,000 702,446 902,446
Net amortization 0 (658,666) (658,666)
Maturities (141,000) (66,324) (207,324)
Terminations (15,000) (44,282) (59,282)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/99 $ 619,500 $2,355,586 $2,975,086
Additions 0 388,000 388,000
Net amortization 0 (698,316) (698,316)
Maturities (425,000) (497,736) (922,736)
- -----------------------------------------------------------------------------------------------
Balance at 12/31/00 $ 194,500 $1,547,534 $1,742,034
- -----------------------------------------------------------------------------------------------
The following table discloses our interest rate swaps used in continuing
and discontinued operations by major category, notional value, weighted average
interest rates, and annual maturities for the periods presented. Variable rates
in the table represent the current LIBOR-based rates.
BALANCES MATURING IN:
BALANCE AT ---------------------------------------------------------------
12/31/00 2001 2002 2003 2004 2005 2006
- ---------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable:
Notional Value $1,547,534 $ 8,931 $ 94,608 $220,731 $358,668 $328,003 $536,593
Weighted Average Pay Rate 5.99% 5.99% 5.91% 5.79% 6.37% 5.68% 6.01%
Weighted Average Receive Rate 6.62% 6.65% 6.55% 6.64% 6.62% 6.60% 6.65%
Receive Fixed/Pay Variable:
Notional Value $ 194,500 $154,500 $ 40,000 $ 0 $ 0 $ 0 $ 0
Weighted Average Receive Rate 6.63% 6.66% 6.51% 0.00% 0.00% 0.00% 0.00%
Weighted Average Pay Rate 6.73% 6.72% 6.76% 0.00% 0.00% 0.00% 0.00%
Total Notional Value $1,742,034 $163,431 $134,608 $220,731 $358,668 $328,003 $536,593
Total Weighted Average Rates on Swaps:
Pay Rate 6.07% 6.68% 6.16% 5.79% 6.37% 5.68% 6.01%
Receive Rate 6.62% 6.66% 6.54% 6.64% 6.62% 6.60% 6.65%
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE OPTIONS
Interest rate options, which include caps and floors, are contracts that
transfer, modify or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. In exchange for the premium payment,
these contracts require the seller (writer) to pay the purchaser at specified
future dates the amount by which a specified market interest rate exceeds the
cap rate or falls below the floor rate, multiplied against a notional amount.
We purchased interest rate caps as part of certain variable rate receivable
securitizations for credit enhancement purposes. In order to achieve our desired
interest rate sensitivity structure, we have synthetically altered the interest
rate structure on certain off-balance sheet receivable securitizations by
writing interest rate
78
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
caps to offset the purchased rate caps attached to them. The premiums received
or paid for writing or purchasing the cap contracts with third parties are
included in other assets and are amortized to noninterest revenues over the life
of the contract. Any obligations, which may arise under these contracts, are
recorded in noninterest revenues on an accrual basis.
PUT OPTIONS
Put options provide the holder the right, but not the obligation, to sell the
underlying financial instrument at a specified exercise or strike price at a
specific point in time. Put options, therefore, protect us from losses in a
rising interest rate environment, but allow for the full appreciation of
underlying assets should interest rates fall. We regularly securitize and sell
receivables. We may choose to hedge the changes in the market value of the index
on which the securitization is priced, relating to the warehouse and/or pipeline
of receivables anticipated to be securitized, by purchasing put options on the
underlying index. The maximum term of hedges of anticipated loan sales is seven
months; the average term is four months. Premiums paid and gains and losses on
put options are deferred as other liabilities and included in the measurement of
the dollar basis of the loans sold. Deferred gains were $23 thousand and
deferred premiums were $304 thousand at December 31, 2000. Deferred gains were
$849 thousand and deferred premiums were $986 thousand at December 31, 1999.
FORWARD CONTRACTS
Forward contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and may be settled in cash or
through delivery of the underlying financial instrument. We regularly securitize
and sell receivables. We may choose to hedge the changes in the market value of
our fixed rate loans and commitments designated for anticipated securitizations
by selling U.S. Treasury securities for forward settlement. The maximum term of
hedges of anticipated loan sales is seven months; the average term is four
months. Gains and losses from forward sales are deferred as other liabilities
and included in the measurement of the dollar basis of the loans sold. We had
deferred losses of $45 thousand at December 31, 2000 and deferred gains of $5.9
million at December 31, 1999.
79
81
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, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
March 27, 2001
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 consolidated financial
statements. These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and as such must, by necessity, include amounts based upon estimates and
judgments made by management. The other financial information 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 consolidated financial statements have been audited by Arthur Andersen
LLP, independent public accountants. Their audits were conducted in accordance
with auditing standards generally accepted in the United States and considered
Advanta's system of internal controls to the extent they deemed necessary to
determine the nature, timing and extent of their audit tests. Their report is
printed herewith.
/s/ Dennis Alter /s/ Philip M. Browne /s/ David B. Weinstock
- ---------------------------- ---------------------------- ----------------------------
Chairman of the Board and Senior Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Chief Accounting Officer
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82
SUPPLEMENTAL SCHEDULES (UNAUDITED)
QUARTERLY DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
Interest income $ 32,187 $39,449 $ 34,081 $30,383
Securitization income (loss) 20,364 19,195 17,994 13,244
Other revenues 15,752 20,021 22,594 27,917
-------------------------------------------------------
Total revenues 68,303 78,665 74,669 71,544
-------------------------------------------------------
Operating expenses 51,473 34,493 31,401 32,925
Interest expense 20,313 24,457 21,559 20,179
Provision for credit losses 6,833 16,806 5,050 7,620
Minority interest in income of consolidated
subsidiary 2,220 2,220 2,220 2,220
-------------------------------------------------------
Total expenses 80,839 77,976 60,230 62,944
-------------------------------------------------------
Income (loss) before income taxes (12,536) 689 14,439 8,600
Income (loss) from continuing operations (12,536) 689 17,749 5,290
Income (loss) from discontinued operations,
net of tax 20,032 15,055 (210,444) 11,779
Loss on discontinuance of leasing business,
net of tax (4,298) 0 0 0
-------------------------------------------------------
Net income (loss) $ 3,198 $15,744 $(192,695) $17,069
- ----------------------------------------------------------------------------------------------------
Basic income (loss) from continuing
operations per common share
Class A $ (.51) $ .02 $ .69 $ .19
Class B (.49) .03 .71 .22
Combined(1) (.50) .03 .70 .21
- ----------------------------------------------------------------------------------------------------
Diluted income (loss) from continuing
operations per common share
Class A $ (.51) $ .02 $ .69 $ .19
Class B (.49) .03 .70 .21
Combined(1) (.50) .03 .70 .20
- ----------------------------------------------------------------------------------------------------
Basic net income (loss) per common share
Class A $ .12 $ .61 $ (7.65) $ .67
Class B .13 .63 (7.63) .69
Combined(1) .13 .62 (7.64) .68
- ----------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share
Class A $ .12 $ .61 $ (7.60) $ .65
Class B .13 .63 (7.58) .67
Combined(1) .13 .62 (7.59) .67
- ----------------------------------------------------------------------------------------------------
Basic weighted average common shares
outstanding
Class A 9,143 9,109 9,097 9,088
Class B 16,150 16,150 16,135 15,697
Combined(1) 25,293 25,259 25,232 24,785
- ----------------------------------------------------------------------------------------------------
Diluted weighted average common shares
outstanding
Class A 9,143 9,158 9,151 9,143
Class B 16,150 16,168 16,253 16,241
Combined(1) 25,293 25,326 25,404 25,384
- ----------------------------------------------------------------------------------------------------
81
83
SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED
QUARTERLY DATA -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
Interest income $ 25,341 $30,314 $ 26,173 $22,756
Securitization income (loss) 12,372 7,206 7,758 (6,148)
Other revenues 16,218 15,604 23,160 29,200
------------------------------------------------------
Total revenues 53,931 53,124 57,091 45,808
------------------------------------------------------
Operating expenses 26,731 25,034 23,252 20,489
Interest expense 18,629 22,003 21,117 19,051
Provision for credit losses 6,107 5,500 4,135 6,764
Minority interest in income of consolidated
subsidiary 2,220 2,220 2,220 2,220
Unusual charges(2) 10,000 0 0 6,713
------------------------------------------------------
Total expenses 63,687 54,757 50,724 55,237
------------------------------------------------------
Income (loss) before income taxes (9,756) (1,633) 6,367 (9,429)
Income (loss) from continuing operations 44,097 (986) 4,046 (5,823)
Income (loss) from discontinued operations,
net of tax (27,542) 15,164 8,266 12,596
------------------------------------------------------
Net income (loss) $ 16,555(3) $14,178 $ 12,312 $ 6,773
- ----------------------------------------------------------------------------------------------------
Basic income (loss) from continuing
operations per common share
Class A $ 1.79 $ (.09) $ .13 $ (.31)
Class B 1.80 (.07) .14 (.29)
Combined(1) 1.79 (.08) .14 (.30)
- ----------------------------------------------------------------------------------------------------
Diluted income (loss) from continuing
operations per common share
Class A $ 1.75 $ (.09) $ .13 $ (.31)
Class B 1.76 (.07) .14 (.29)
Combined(1) 1.75 (.08) .14 (.30)
- ----------------------------------------------------------------------------------------------------
Basic net income (loss) per common share
Class A $ .67 $ .56 $ .48 $ .24
Class B .68 .57 .50 .26
Combined(1) .67 .57 .49 .25
- ----------------------------------------------------------------------------------------------------
Diluted net income (loss) per common share
Class A $ .65 $ .56 $ .48 $ .24
Class B .66 .57 .49 .26
Combined(1) .66 .57 .49 .25
- ----------------------------------------------------------------------------------------------------
Basic weighted average common shares
outstanding
Class A 8,992 8,984 8,976 9,280
Class B 15,619 14,429 14,187 13,807
Combined(1) 24,611 23,413 23,163 23,087
- ----------------------------------------------------------------------------------------------------
Diluted weighted average common shares
outstanding
Class A 9,042 8,984 9,009 9,280
Class B 16,097 14,429 14,364 13,807
Combined(1) 25,139 23,413 23,373 23,087
- ----------------------------------------------------------------------------------------------------
(1) Combined represents a weighted average of Class A and Class B (see Note 1 to
consolidated financial statements).
(2) Includes charges associated with cost reduction initiatives in the first
quarter and additional costs associated with products exited in the first
quarter of 1998.
(3) Net income in the fourth quarter of 1999 included a $50 million tax benefit
related to the former consumer credit card business.
82
84
SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
($ IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- -------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------------
Business credit cards $33,165 99% $14,663 99% $ 6,916 65% $ 6,899 5% $ 2,643 3%
Consumer credit cards 0 0 0 0 0 0 118,420 92 76,084 97
Other loans 202 1 202 1 3,734 35 3,734 3 74 0
- --------------------------------------------------------------------------------------------------------------------------
Total $33,367 100% $14,865 100% $10,650 100% $129,053 100% $78,801 100%
- --------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF GROSS RECEIVABLES
($ IN THOUSANDS) DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- -------------- -------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ---------------------------------------------------------------------------------------------------------------------------
Business credit cards $335,087 93% $275,095 90% $150,022 89% $ 140,399 5% $ 72,348 3%
Consumer credit cards 0 0 0 0 0 0 2,579,890 94 2,045,219 96
Other loans 24,203 7 30,302 10 17,862 11 40,978 1 20,835 1
- ---------------------------------------------------------------------------------------------------------------------------
Total $359,290 100% $305,397 100% $167,884 100% $2,761,267 100% $2,138,402 100%
- ---------------------------------------------------------------------------------------------------------------------------
YIELD AND MATURITY OF INVESTMENTS AT DECEMBER 31, 2000
($ IN THOUSANDS) MATURING
- ------------------------------------------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
----------------------- ----------------------- ----------------------- -----------------------
MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) MARKET VALUE YIELD(3) MARKET VALUE YIELD(3)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other
U.S. Government
securities $256,672 6.12% $144,553 5.71% $ 0 0.00% $ 0 0.00%
State and municipal
securities(1) 145 4.97 710 5.13 1,234 6.72 2,347 6.25
Other(2) 20,745 6.73 4,963 6.58 596 6.50 254,424 6.19
- ------------------------------------------------------------------------------------------------------------------------------
Total investments
available for sale $277,562 6.16% $150,226 5.74% $1,830 6.65% $256,771 6.19%
- ------------------------------------------------------------------------------------------------------------------------------
(1) Yield computed on a taxable equivalent basis using a statutory rate of 35%.
(2) Equity investments and other securities without a stated maturity are
excluded from this table.
(3) Yields are computed by dividing annualized interest by the amortized cost of
the respective investment securities.
83
85
SUPPLEMENTAL SCHEDULES (UNAUDITED) -- CONTINUED
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31,
($ IN THOUSANDS) 2000
- --------------------------------------------------------------------------
Maturity:
3 months or less $247,436
Over 3 months through 6 months 54,573
Over 6 months through 12 months 139,653
Over 12 months 46,624
- --------------------------------------------------------------------------
Total $488,286
- --------------------------------------------------------------------------
COMMON STOCK PRICE RANGES AND DIVIDENDS
Advanta's common stock is traded on the National Market tier of The Nasdaq Stock
Market under the symbols ADVNA (Class A voting common stock) and ADVNB (Class B
non-voting common stock). Following are the high, low and closing sale prices
and cash dividends declared for the last two years as they apply to each class
of stock:
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
Class A:
- ------------------------------------------------------------------------------------------------
March 1999 $15.19 $10.31 $11.06 $.063
June 1999 18.25 9.63 18.06 .063
September 1999 23.94 14.63 14.63 .063
December 1999 20.38 14.63 18.25 .063
March 2000 $21.88 $16.88 $20.31 $.063
June 2000 21.00 10.88 12.19 .063
September 2000 13.56 10.69 11.25 .063
December 2000 11.88 5.75 8.81 .063
- ------------------------------------------------------------------------------------------------
Class B:
- ------------------------------------------------------------------------------------------------
March 1999 $12.31 $ 7.75 $ 8.94 $.076
June 1999 14.75 7.59 13.56 .076
September 1999 19.13 11.38 11.75 .076
December 1999 15.88 10.44 14.06 .076
March 2000 $15.50 $11.50 $14.48 $.076
June 2000 15.13 7.75 8.50 .076
September 2000 10.19 7.50 8.14 .076
December 2000 8.38 4.13 7.19 .076
- ------------------------------------------------------------------------------------------------
At December 31, 2000, Advanta had approximately 295 holders of record of
Class A stock and 819 holders of record of Class B stock.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
84
86
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The text of the Proxy Statement under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" are hereby
incorporated by reference, as is the text in Part I of this Report under the
caption, "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The text of the Proxy Statement under the captions "Executive
Compensation," "Report on Executive Compensation" and "Election of Directors
"-- Committees, Meetings and Compensation of the Board of Directors,
- -- Compensation Committee Interlocks and Insider Participation and -- Other
Matters" are hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The text of the Proxy Statement under the captions "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" are hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The text of the Proxy Statement under the captions "Election of
Directors -- Compensation Committee Interlocks and Insider Participation in and
- -- Other Matters" are hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following Financial Statements, Schedules, and Other Information of the
Registrant and its subsidiaries are included in this Form 10-K:
(a)(1) Financial Statements.
1. Consolidated Balance Sheets at December 31, 2000 and 1999.
2. Consolidated Income Statements for each of the three years
in the period ended December 31, 2000.
3. Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December 31,
2000
4. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2000.
5. Notes to Consolidated Financial Statements.
(a)(2) 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.
85
87
(a)(3) Exhibits
2 Purchase and Sale Agreement, dated January 8, 2001, by and
between Advanta Corp. and Chase Manhattan Mortgage
Corporation (incorporated by reference to Annex I to Advanta
Corp.'s Definitive Proxy Statement filed January 25, 2001).
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994), as
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS))(incorporated
by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated August 15, 1995), as further
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to the Registrant's Registration Statement on Form
8-A, dated March 17, 1997).
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.1 the Registrant's Current Report on
Form 8-K dated March 17, 1997).
3-c Rights Agreement, dated as of March 14, 1997, by and between
the Registrant and the Rights Agent, which includes as
Exhibit B thereto the Form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A dated March 17, 1997).
4-a* Trust Indenture dated April 22, 1981 between Registrant and
Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as
Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of
Class B Common Stock Certificate (incorporated by reference
to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8
and Exhibit 1 to Registrant's Form 8-A, respectively, both
dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the
Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form
S-3 (No. 33-50883), filed November 2, 1993).
4-d Senior Trust Indenture, dated as of October 23, 1995,
between the Registrant and Mellon Bank, N.A., as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-3 (File No.
33-62601), filed September 13, 1995).
4-e Indenture dated as of December 17, 1996 between Advanta
Corp. and The Chase Manhattan Bank, as trustee relating to
the Junior Subordinated Debentures (incorporated by
reference to Exhibit 4-g to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
4-f Declaration of Trust dated as of December 5, 1996 of Advanta
Capital Trust I (incorporated by reference to Exhibit 4-h to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
4-g Amended and Restated Declaration of Trust dated as of
December 17, 1996 for Advanta Capital Trust I (incorporated
by reference to Exhibit 4-i to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
4-h Series A Capital Securities Guarantee Agreement dated as of
December 17, 1996. (incorporated by reference to Exhibit 4-j
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10-a Advanta Corp. 2000 Omnibus Stock Incentive Plan
(incorporated by reference to 4(f) to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-8 (File No. 333-04469).+
86
88
10-b* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National Bank USA
on March 25, 1983.
10-c* Application for membership in MasterCard(R) International,
Inc. and Card Member License Agreement executed by Colonial
National Bank USA on March 25, 1983.
10-d* Indenture of Trust dated May 11, 1984 between Linda Alter,
as settlor, and Dennis Alter, as trustee.
10-d(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 Alter, and Michael Stolper, which
Agreement modifies the Indenture (incorporated by reference
to Exhibit 10-g(i) to the Registrant's Registration
Statement on Form S-3 (File No. 33-58660), filed February
23, 1993).
10-e Advanta Corp. Executive Deferral Plan (incorporated by
reference to the Exhibit 10-j to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).+
10-f Advanta Corp. Non-Employee Directors Deferral Plan
(incorporated by reference to Exhibit 10-K to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).+
10-g Life Insurance Benefit for Certain Key Executives and
Directors (filed herewith).+
10-h Amended and Restated Agreement of Limited Partnership of
Advanta Partners LP, dated as of October 1, 1996
(incorporated by reference to Exhibit 10-o to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10-i Agreement of Limited Partnership of Advanta Growth Capital
Fund L.P., dated as of July 28, 2000 (filed herewith).
10-j Agreement dated as of January 15, 1996 between the
Registrant and William A. Rosoff (incorporated by reference
to Exhibit 10-u to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995).+
10-k Agreement dated May 11, 1998 between the Registrant and
Philip M. Browne (incorporated by reference to Exhibit 10-r
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998).+
10-l Contribution Agreement, dated as of October 28, 1997, by and
between Advanta Corp. and Fleet Financial Group
(incorporated by reference to Exhibit (c)(2) to the
Registrant's Schedule 13E-4, dated January 20, 1998), as
amended by the First Amendment to the Contribution
Agreement, dated as of February 10, 1998, by and among
Advanta Corp., Fleet Financial Group and Fleet Credit Card,
LLC (incorporated by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K, filed March 6,
1998).
10-n Commercial Lease, dated September 28, 1995, by and between
Draper Park North, L.C. and Advanta Financial Corp., as
amended January 31, 1996 and May 20, 1996 (incorporated by
reference to Exhibit 10-v to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999).
10-o Master Indenture, dated as of August 1, 2000, between
Wilmington Trust Company, as Owner Trustee of the Advanta
Business Card Master Trust and Bankers Trust Company, as
Indenture Trustee (incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K, filed August 20, 2000 by
Advanta Business Receivables Corp.).
10-p Series 2000-B Indenture Supplement, dated August 1, 2000,
between Advanta Business Card Master Trust and Bankers Trust
Company (incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K, filed August 20, 2000 by Advanta
Business Receivables Corp.).
10-q Transfer and Servicing Agreement, dated as of August 1,
2000, among Advanta Business Receivables Corp., Advanta Bank
Corp., as Servicer, and Advanta Business Card Master Trust
(incorporated by reference to Exhibit 4.3 to the Current
Report on Form 8-K, filed August 20, 2000 by Advanta
Business Receivables Corp.).
87
89
10-r Series 2000-C Indenture Supplement, dated as of November 1,
2000, between Advanta Business Card Master Trust and Bankers
Trust Company, as indenture trustee (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K,
filed November 21, 2000 by Advanta Business Receivables
Corp.).
12 Computation of Ratio Earnings to Fixed Charges (filed
herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Independent Public Accountants (filed herewith).
24 Powers of Attorney (included on the signature page hereof).
- ---------------
* 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 on Form 8-K was filed by the Company on October 10, 2000
announcing preliminary results for the third quarter and revising the Company's
outlook for the remainder of 2000. This Report on Form 8-K was amended by a
Report on Form 8-K/A filed by the Company on October11, 2000 to correct a
technical error in the original Report on Form 8-K.
2. A Report on Form 8-K was filed by the Company on October 24, 2000,
announcing that the Company had accepted a proposal to sell it mortgage business
to a major financial institution in a cash transaction for a price in excess of
book value and announcing final results for the third quarter.
3. A Report on Form 8-K was filed by the Company on November 27, 2000
announcing that the sale of the Company's mortgage business was proceeding on
track but that it would take longer than anticipated to execute a definitive
agreement.
4. A Report on Form 8-K was filed by the Company on December 29, 2000
announcing that Banc One Financial Services, Inc. and Bank One, N.A. had filed
suit against the Company and certain of its subsidiaries alleging, among other
things, that Advanta Mortgage Corp. USA had breached the terms of certain loan
servicing agreements.
88
90
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.
By: /s/ WILLIAM A. ROSOFF
-----------------------------------
William A. Rosoff, President and
Vice Chairman of the Board
Dated: March 30, 2001
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
constitute and appoint Dennis Alter, William A. Rosoff, Philip M. Browne, David
Weinstock and Elizabeth H. Mai, or any of them (with full power to each of them
to act alone), his or her true and lawful attorney in-fact and agent, with full
power of substitution, for him or her and on his or her behalf to sign, execute
and file an Annual Report on Form 10-K under the Securities Exchange Act of
1934, as amended, for the fiscal year ended December 31, 2000 relating to
Advanta Corp. and any or all amendments thereto, with all exhibits and any and
all documents required to be filed with respect thereto, with the Securities and
Exchange Commission or any regulatory authority, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises in order to effectuate the same as fully to all intents
and purposes as he or she might or could do if personally present, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the 30(th) day of March, 2001.
NAME TITLE
---- -----
/s/ DENNIS ALTER Chairman of the Board and
- ------------------------------------------ Chief Executive Officer
Dennis Alter
/s/ WILLIAM A. ROSOFF President and Vice Chairman
- ------------------------------------------ of the Board
William A. Rosoff
/s/ PHILIP M. BROWNE Senior Vice President and
- ------------------------------------------ Chief Financial Officer
Philip M. Browne
/s/ DAVID WEINSTOCK Vice President and Chief
- ------------------------------------------ Accounting Officer
David Weinstock
/s/ ARTHUR P. BELLIS Director
- ------------------------------------------
Arthur P. Bellis
Director
- ------------------------------------------
Max Botel
/s/ DANA BECKER DUNN Director
- ------------------------------------------
Dana Becker Dunn
89
91
NAME TITLE
---- -----
/s/ JAMES E. KSANSNAK Director
- ------------------------------------------
James E. Ksansnak
Director
- ------------------------------------------
Ronald Lubner
/s/ OLAF OLAFSSON Director
- ------------------------------------------
Olaf Olafsson
Director
- ------------------------------------------
Michael Stolper
90
92
EXHIBIT INDEX
93
Exhibit
Number Exhibit and Manner of Filing
- ------- ----------------------------
2 Purchase and Sale Agreement, dated January 8, 2001, by and
between Advanta Corp. and Chase Manhattan Mortgage
Corporation (incorporated by reference to Annex I to Advanta
Corp.'s Definitive Proxy Statement filed January 25, 2001).
3-a Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Pre-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-3 (File No. 33-53475), filed June 10, 1994), as
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's 6 3/4%
Convertible Class B Preferred Stock, Series 1995 (Stock
Appreciation Income Linked Securities (SAILS))(incorporated
by reference to Exhibit 4.3 to the Registrant's Current
Report on Form 8-K dated August 15, 1995), as further
amended by the Certificate of Designations, Preferences,
Rights and Limitations of the Registrant's Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to the Registrant's Registration Statement on Form
8-A, dated March 17, 1997).
3-b By-laws of the Registrant, as amended (incorporated by
reference to Exhibit 3.1 the Registrant's Current Report on
Form 8-K dated March 17, 1997).
3-c Rights Agreement, dated as of March 14, 1997, by and between
the Registrant and the Rights Agent, which includes as
Exhibit B thereto the Form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A dated March 17, 1997).
4-a* Trust Indenture dated April 22, 1981 between Registrant and
Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as
Trustee, including Form of Debenture.
4-b Specimen of Class A Common Stock Certificate and specimen of
Class B Common Stock Certificate (incorporated by reference
to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8
and Exhibit 1 to Registrant's Form 8-A, respectively, both
dated April 22, 1992).
4-c Trust Indenture dated as of November 15, 1993 between the
Registrant and The Chase Manhattan Bank (National
Association), as Trustee (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form
S-3 (No. 33-50883), filed November 2, 1993).
4-d Senior Trust Indenture, dated as of October 23, 1995,
between the Registrant and Mellon Bank, N.A., as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-3 (File No.
33-62601), filed September 13, 1995).
4-e Indenture dated as of December 17, 1996 between Advanta
Corp. and The Chase Manhattan Bank, as trustee relating to
the Junior Subordinated Debentures (incorporated by
reference to Exhibit 4-g to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
4-f Declaration of Trust dated as of December 5, 1996 of Advanta
Capital Trust I (incorporated by reference to Exhibit 4-h to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
4-g Amended and Restated Declaration of Trust dated as of
December 17, 1996 for Advanta Capital Trust I (incorporated
by reference to Exhibit 4-i to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
4-h Series A Capital Securities Guarantee Agreement dated as of
December 17, 1996. (incorporated by reference to Exhibit 4-j
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10-a Advanta Corp. 2000 Omnibus Stock Incentive Plan
(incorporated by reference to 4(f) to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement
on Form S-8 (File No. 333-04469).+
94
10-b* Application for membership in VISA(R) U.S.A. Inc. and
Membership Agreement executed by Colonial National Bank USA
on March 25, 1983.
10-c* Application for membership in MasterCard(R) International,
Inc. and Card Member License Agreement executed by Colonial
National Bank USA on March 25, 1983.
10-d* Indenture of Trust dated May 11, 1984 between Linda Alter,
as settlor, and Dennis Alter, as trustee.
10-d(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 Alter, and Michael Stolper, which
Agreement modifies the Indenture (incorporated by reference
to Exhibit 10-g(i) to the Registrant's Registration
Statement on Form S-3 (File No. 33-58660), filed February
23, 1993).
10-e Advanta Corp. Executive Deferral Plan (incorporated by
reference to the Exhibit 10-j to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).+
10-f Advanta Corp. Non-Employee Directors Deferral Plan
(incorporated by reference to Exhibit 10-K to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).+
10-g Life Insurance Benefit for Certain Key Executives and
Directors (filed herewith).+
10-h Amended and Restated Agreement of Limited Partnership of
Advanta Partners LP, dated as of October 1, 1996
(incorporated by reference to Exhibit 10-o to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10-i Agreement of Limited Partnership of Advanta Growth Capital
Fund L.P., dated as of July 28, 2000 (filed herewith).
10-j Agreement dated as of January 15, 1996 between the
Registrant and William A. Rosoff (incorporated by reference
to Exhibit 10-u to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995).+
10-k Agreement dated May 11, 1998 between the Registrant and
Philip M. Browne (incorporated by reference to Exhibit 10-r
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998).+
10-l Contribution Agreement, dated as of October 28, 1997, by and
between Advanta Corp. and Fleet Financial Group
(incorporated by reference to Exhibit (c)(2) to the
Registrant's Schedule 13E-4, dated January 20, 1998), as
amended by the First Amendment to the Contribution
Agreement, dated as of February 10, 1998, by and among
Advanta Corp., Fleet Financial Group and Fleet Credit Card,
LLC (incorporated by reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K, filed March 6,
1998).
10-n Commercial Lease, dated September 28, 1995, by and between
Draper Park North, L.C. and Advanta Financial Corp., as
amended January 31, 1996 and May 20, 1996 (incorporated by
reference to Exhibit 10-v to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999).
10-o Master Indenture, dated as of August 1, 2000, between
Wilmington Trust Company, as Owner Trustee of the Advanta
Business Card Master Trust and Bankers Trust Company, as
Indenture Trustee (incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K, filed August 20, 2000 by
Advanta Business Receivables Corp.).
10-p Series 2000-B Indenture Supplement, dated August 1, 2000,
between Advanta Business Card Master Trust and Bankers Trust
Company (incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K, filed August 20, 2000 by Advanta
Business Receivables Corp.).
10-q Transfer and Servicing Agreement, dated as of August 1,
2000, among Advanta Business Receivables Corp., Advanta Bank
Corp., as Servicer, and Advanta Business Card Master Trust
(incorporated by reference to Exhibit 4.3 to the Current
Report on Form 8-K, filed August 20, 2000 by Advanta
Business Receivables Corp.).
95
10-r Series 2000-C Indenture Supplement, dated as of November 1,
2000, between Advanta Business Card Master Trust and Bankers
Trust Company, as indenture trustee (incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K,
filed November 21, 2000 by Advanta Business Receivables
Corp.).
12 Computation of Ratio Earnings to Fixed Charges (filed
herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Independent Public Accountants (filed herewith).
24 Powers of Attorney (included on the signature page hereof).
- ---------------
* 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.