-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J9f6wuhLlnCEmU16eXyvjFrYcANv5t8idHeCiDr18GhR2PwTLjey4EHwV+gxSs5m rVFv3LY+rg2g45pIt/UYsg== 0000893220-01-500567.txt : 20010815 0000893220-01-500567.hdr.sgml : 20010815 ACCESSION NUMBER: 0000893220-01-500567 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14120 FILM NUMBER: 1708530 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19477 BUSINESS PHONE: 2154445051 MAIL ADDRESS: STREET 1: C/O WELSH & MCKEAN ROADS STREET 2: P.O. BOX 844 CITY: SPRING HOUSE STATE: PA ZIP: 19477-0844 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 10-Q 1 w52415e10-q.txt ADVANTA CORP. 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2001 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______ Commission File Number 0-14120 Advanta Corp. (Exact name of registrant as specified in its charter) Delaware 23-1462070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477 (Address of Principal Executive Offices) (Zip Code) (215) 657-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Applicable only to issuers involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class A Outstanding at August 3, 2001 Common Stock, $.01 par value 10,041,764 shares Class B Outstanding at August 3, 2001 Common Stock, $.01 par value 17,359,944 shares
1 2 TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Income Statements 4 Consolidated Statements of Changes in Stockholders' Equity 5-6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 35 PART II - OTHER INFORMATION Item 1. Legal Proceedings 36 Item 4. Submission of Matters to a Vote of Security Holders 37 Item 6. Exhibits and Reports on Form 8-K 38
2 3 ITEM 1. FINANCIAL STATEMENTS ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS) JUNE 30, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) ASSETS Cash $ 24,149 $ 1,716 Federal funds sold 443,651 107,584 Restricted interest-bearing deposits 123,621 16,398 Investments available for sale 155,628 758,792 Receivables, net: Held for sale 153,749 154,265 Other 210,231 186,026 ----------- ----------- Receivables, net 363,980 340,291 Retained interests in securitizations 88,658 72,908 Amounts due from securitizations 69,421 61,610 Premises and equipment, net 24,838 26,185 Other assets 275,368 256,658 Net assets of discontinued operations 203,012 1,201,330 ----------- ----------- TOTAL ASSETS $ 1,772,326 $ 2,843,472 ----------- ----------- LIABILITIES Deposits: Noninterest-bearing $ 6,334 $ 4,546 Interest-bearing 647,894 1,342,430 ----------- ----------- Total deposits 654,228 1,346,976 Long-term debt 401,334 755,184 Other borrowings 0 4,289 Other liabilities 205,817 196,121 ----------- ----------- TOTAL LIABILITIES 1,261,379 2,302,570 ----------- ----------- 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 2001 and 2000 1,010 1,010 Class A voting common stock, $.01 par value: authorized - 214,500,000 shares; issued - 10,041,764 shares in 2001 and 10,040,230 shares in 2000 100 100 Class B non-voting common stock, $.01 par value: authorized - 230,000,000 shares; issued - 17,810,229 shares in 2001 and 17,613,166 shares in 2000 178 176 Additional paid-in capital 225,488 220,371 Deferred compensation (4,248) (7,336) Unearned ESOP shares (11,505) (11,714) Accumulated other comprehensive income (loss) 815 (1,302) Retained earnings 217,074 257,562 Less: Treasury stock at cost, 527,168 Class B common shares in 2001 and 2000 (17,965) (17,965) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 410,947 440,902 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,772,326 $ 2,843,472 ----------- -----------
See Notes to Consolidated Financial Statements 3 4 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Interest income $ 32,836 $ 34,081 $ 66,840 $ 64,464 Interest expense 26,119 21,559 50,395 41,738 -------- --------- --------- --------- Net interest income 6,717 12,522 16,445 22,726 Provision for credit losses 8,384 5,050 16,324 12,670 -------- --------- --------- --------- NET INTEREST AFTER PROVISION FOR CREDIT LOSSES (1,667) 7,472 121 10,056 NONINTEREST REVENUES: Securitization income 25,609 17,994 47,782 31,238 Servicing revenues 6,909 4,546 13,561 8,386 Interchange income 20,586 15,397 38,208 27,999 Other revenues, net (7,274) 2,651 (23,722) 14,126 -------- --------- --------- --------- TOTAL NONINTEREST REVENUES 45,830 40,588 75,829 81,749 -------- --------- --------- --------- EXPENSES: Operating expenses 44,116 31,401 87,169 64,326 Minority interest in income of consolidated subsidiary 2,220 2,220 4,440 4,440 Unusual charges 1,000 0 41,750 0 -------- --------- --------- --------- TOTAL EXPENSES 47,336 33,621 133,359 68,766 -------- --------- --------- --------- Income (loss) before income taxes (3,173) 14,439 (57,409) 23,039 Income tax benefit 0 (3,310) (16,880) 0 -------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS (3,173) 17,749 (40,529) 23,039 Loss from discontinued operations, net of tax 0 (210,444) (8,438) (198,665) Gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax (4,000) 0 12,361 0 -------- --------- --------- --------- NET LOSS $ (7,173) $(192,695) $ (36,606) $(175,626) -------- --------- --------- --------- Basic income (loss) from continuing operations per common share Class A $ (0.13) $ 0.69 $ (1.61) $ 0.89 Class B (0.12) 0.71 (1.58) 0.93 Combined (0.12) 0.70 (1.59) 0.92 -------- --------- --------- --------- Diluted income (loss) from continuing operations per common share Class A $ (0.13) $ 0.69 $ (1.61) $ 0.88 Class B (0.12) 0.70 (1.58) 0.91 Combined (0.12) 0.70 (1.59) 0.90 -------- --------- --------- --------- Basic net loss per common share Class A $ (0.29) $ (7.65) $ (1.46) $ (7.05) Class B (0.27) (7.63) (1.43) (7.01) Combined (0.28) (7.64) (1.44) (7.03) -------- --------- --------- --------- Diluted net loss per common share Class A $ (0.29) $ (7.60) $ (1.46) $ (6.94) Class B (0.27) (7.58) (1.43) (6.91) Combined (0.28) (7.59) (1.44) (6.92) -------- --------- --------- --------- Basic weighted average common shares outstanding Class A 9,098 9,097 9,082 9,093 Class B 16,744 16,135 16,473 15,916 Combined 25,842 25,232 25,555 25,009 -------- --------- --------- --------- Diluted weighted average common shares outstanding Class A 9,098 9,151 9,082 9,147 Class B 16,744 16,253 16,473 16,247 Combined 25,842 25,404 25,555 25,394 -------- --------- --------- ---------
See Notes to Consolidated Financial Statements 4 5 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) ($ IN THOUSANDS)
CLASS A CLASS A CLASS B ADDITIONAL COMPREHENSIVE PREFERRED COMMON COMMON PAID-IN INCOME (LOSS) STOCK STOCK STOCK CAPITAL ------------- ----- -------- ----- ------- BALANCE AT DECEMBER 31, 1999 $1,010 $105 $182 $232,585 Net loss $(156,684) Other comprehensive income: Change in unrealized appreciation (depreciation) of investments, net of tax expense of $5,111 9,492 --------- Comprehensive 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 DECEMBER 31, 2000 $1,010 $100 $176 $220,371 ------ ---- ---- -------- Net loss $ (36,606) Other comprehensive income: Change in unrealized appreciation (depreciation) of investments, net of tax expense of $1,140 2,117 --------- Comprehensive loss $ (34,489) ========= Preferred and common cash dividends declared Exercise of stock options 3 2,429 Modifications of stock options and issuance of restricted stock 4,118 Issuance of stock- Benefit plans 419 Amortization of deferred compensation Termination benefit- Benefit plans (1) (1,877) ESOP shares committed to be released 28 ------ ---- ---- -------- BALANCE AT JUNE 30, 2001 $1,010 $100 $178 $225,488 ------ ---- ---- --------
See Notes to Consolidated Financial Statements 5 6 ($ IN THOUSANDS)
DEFERRED ACCUMULATED COMPENSATION OTHER TOTAL & UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY ----------- ------------- -------- ----- ------ BALANCE AT DECEMBER 31, 1999 $(28,729) $(10,794) $421,741 $(26,469) $589,631 Net loss (156,684) (156,684) Other comprehensive income: Change in unrealized appreciation (depreciation) of investments, net of tax expense of $5,111 9,492 9,492 Comprehensive 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 DECEMBER 31, 2000 $(19,050) $ (1,302) $257,562 $(17,965) $440,902 -------- -------- -------- -------- -------- Net loss (36,606) (36,606) Other comprehensive income: Change in unrealized appreciation (depreciation) of investments, net of tax expense of $1,140 2,117 2,117 Comprehensive loss Preferred and common cash dividends declared (3,882) (3,882) Exercise of stock options 2,432 Modifications of stock options and issuance of restricted stock 4,118 Issuance of stock- Benefit plans (419) 0 Amortization of deferred compensation 1,629 1,629 Termination benefit- Benefit plans 1,878 0 ESOP shares committed to be released 209 237 -------- -------- -------- -------- -------- BALANCE AT JUNE 30, 2001 $(15,753) $ 815 $217,074 $(17,965) $410,947 -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements 6 7 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED ($ IN THOUSANDS) JUNE 30, - ---------------- -------- 2001 2000 ---- ---- (UNAUDITED) OPERATING ACTIVITIES Net loss $ (36,606) $ (175,626) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operations, net of tax 8,438 198,665 Gain, net, on discontinuance of mortgage and leasing businesses, net of tax (12,361) 0 Investment securities (gains) losses 14,316 (9,866) Loss on sale of deposits 2,835 0 Depreciation and amortization 5,198 5,368 Provision for credit losses 16,324 12,670 Change in receivables held for sale (197,033) (304,213) Proceeds from sale of receivables held for sale 197,549 146,713 Change in other assets and other liabilities (4,344) (27,467) Change in retained interests in securitizations (15,750) (9,422) ----------- ----------- Net cash used in operating activities (21,434) (163,178) ----------- ----------- INVESTING ACTIVITIES - CONTINUING OPERATIONS Change in federal funds sold and interest- bearing deposits (443,290) 37,607 Purchase of investments available for sale (1,001,643) (864,523) Proceeds from sales of investments available for sale 844,566 496,269 Proceeds from maturing investments available for sale 749,182 194,206 Change in receivables not held for sale (40,529) (68,766) Purchases of premises and equipment, net (3,843) (10,400) ----------- ----------- Net cash provided by (used in) investing activities 104,443 (215,607) ----------- ----------- FINANCING ACTIVITIES - CONTINUING OPERATIONS Change in demand and savings deposits (11,311) (21,398) Proceeds from issuance of time deposits 376,747 1,113,062 Payments for maturing time deposits (676,153) (291,332) Payment for sale of deposits and related accrued interest (392,511) 0 Change in repurchase agreements, term fed funds and FHLB advances 0 (324,191) Proceeds from issuance of long-term debt 116,259 130,416 Payments on redemption of long-term debt (470,109) (153,348) Change in other borrowings (4,289) (2,836) Proceeds from issuance of stock 2,432 152 Cash dividends paid (3,882) (3,760) ----------- ----------- Net cash (used in) provided by financing activities (1,062,817) 446,765 ----------- ----------- DISCONTINUED OPERATIONS Proceeds from sale of mortgage business 1,093,975 0 Other cash used in operating activities (91,734) 9,462 ----------- ----------- Net cash provided by operating activities 1,002,241 9,462 Net cash used in investing activities 0 (76,506) Net cash provided by financing activities 0 35,765 ----------- ----------- Net cash provided by (used in) discontinued operations 1,002,241 (31,279) ----------- ----------- Net increase in cash 22,433 36,701 Cash at beginning of period 1,716 5,784 ----------- ----------- Cash at end of period $ 24,149 $ 42,485 ----------- -----------
See Notes to Consolidated Financial Statements 7 8 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED) JUNE 30, 2001 (UNAUDITED) In these notes to consolidated financial statements, "we", "us", and "our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. NOTE 1) BASIS OF PRESENTATION Advanta Corp. (collectively with its subsidiaries, "Advanta") has prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto included in our latest annual report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for securitization income, 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. Certain prior period balances have been reclassified to conform to the current period presentation. NOTE 2) DISCONTINUED OPERATIONS Effective February 28, 2001, we completed the sale of our mortgage business, Advanta Mortgage, to Chase Manhattan Mortgage Corporation as buyer. 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 $60 million before transaction expenses, severance expenses and other costs. Although the sale of our mortgage business resulted in a gain for financial reporting purposes, due to book/tax differences, we will not pay any material federal income tax as a result of the sale. See Note 13 for a discussion of litigation related to the sale of our mortgage business. 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. 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, representing the estimated operating results through the remaining term of the leasing 8 9 portfolio. In the six months ended June 30, 2001, we recorded an additional $6.0 million pretax loss due to a change in estimate of those operating results. This change in estimate was needed due to an increase in estimated credit losses expected throughout the remaining term of the leasing portfolio based on recent credit loss experience in 2001. A principal factor contributing to the credit losses is that one of our former leasing vendors recently filed for bankruptcy protection and this vendor's financial problems are impacting its ability to service a segment of our leasing portfolio. 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. Advanta Leasing Services incurred a net loss of $9.0 million for the three months ended June 30, 2000, including revenues of $6.6 million, interest expense of $3.1 million, other expenses of $9.2 million, and income tax expense of $3.3 million. For the six months ended June 30, 2000, Advanta Leasing Services incurred a net loss of $14.2 million, including revenues of $10.1 million, interest expense of $6.1 million, and other expenses of $18.2 million. Revenues and expenses of Advanta Mortgage were as follows for the period from January 1, 2001 to the disposal date of February 28, 2001 and for the three and six months ended June 30, 2000:
January 1 Three Months Six Months through Ended Ended February 28, June 30, June 30, 2001 2000 2000 ---- ---- ---- Revenues $ 36,631 $(108,460) $ (654) Interest expense (11,160) (27,063) (51,638) Other expenses (37,721) (76,545) (132,146) Income tax benefit 3,812 10,638 0 Income (loss) from discontinued operations $ (8,438) $(201,430) $(184,438) --------- ---------- ----------
The estimated operating results of Advanta Leasing Services through the remaining term of the lease portfolio were estimated at the measurement date of December 31, 2000 in the determination of the loss on discontinuance. As discussed above, the estimate was revised and an additional $6.0 million loss was recorded in the six months ended June 30, 2001 as a loss on discontinuance. In the three months ended June 30, 2001, we increased our estimate of mortgage transaction expenses by $2.0 million. The gain on the sale of the mortgage business does not reflect any impact from the post-closing adjustment process that has been extended by agreement of the parties. The components of the gain (loss) on discontinuance of our mortgage and leasing businesses were as follows:
Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 Advanta Advanta Advanta Leasing Advanta Leasing Mortgage Services Mortgage Services -------- -------- -------- -------- Pretax gain (loss) on discontinuance of mortgage and leasing businesses $(2,000) $ (2,000) $ 25,753 $(6,000) Income tax (expense) benefit 0 0 (8,637) 1,245 Gain (loss) on discontinuance of mortgage and leasing businesses, net of tax $(2,000) $ (2,000) $ 17,116 $(4,755) ------- -------- -------- -------
9 10 Per share data was as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- Advanta Advanta Advanta Mortgage Leasing Services Advanta Mortgage Leasing Services ---------------- ---------------- ---------------- ---------------- 2001 2000 2001 2000 2001 2000 2001 2000 ---- ---- ---- ---- ---- ---- ---- ---- Basic loss from discontinued operations per common share Class A $ 0.00 $(7.98) $ 0.00 $(0.36) $(0.33) $(7.37) $ 0.00 $(0.57) Class B 0.00 (7.98) 0.00 (0.36) (0.33) (7.37) 0.00 (0.57) Combined 0.00 (7.98) 0.00 (0.36) (0.33) (7.37) 0.00 (0.57) Diluted loss from discontinued operations per common share Class A $ 0.00 $(7.93) $ 0.00 $(0.35) $(0.33) $(7.26) $ 0.00 $(0.56) Class B 0.00 (7.93) 0.00 (0.35) (0.33) (7.26) 0.00 (0.56) Combined 0.00 (7.93) 0.00 (0.35) (0.33) (7.26) 0.00 (0.56) Basic gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax, per common share Class A $(0.08) $ 0.00 $(0.08) $ 0.00 $ 0.67 $ 0.00 $(0.19) $ 0.00 Class B (0.08) 0.00 (0.08) 0.00 0.67 0.00 (0.19) 0.00 Combined (0.08) 0.00 (0.08) 0.00 0.67 0.00 (0.19) 0.00 Diluted gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax, per common share Class A $(0.08) $ 0.00 $(0.08) $ 0.00 $ 0.67 $ 0.00 $(0.19) $ 0.00 Class B (0.08) 0.00 (0.08) 0.00 0.67 0.00 (0.19) 0.00 Combined (0.08) 0.00 (0.08) 0.00 0.67 0.00 (0.19) 0.00
The components of net assets of discontinued operations were as follows:
June 30, December 31, 2001 2000 ---- ---- Loans and leases, net $ 65,339 $ 370,682 Other assets 155,103 887,168 Liabilities 17,430 56,520 -------- ---------- Net assets of discontinued operations $203,012 $1,201,330 ======== ==========
As discussed above, we will continue to service the existing lease portfolio. At June 30, 2001, there were $518 million of securitized leases outstanding, and we had retained interests in leasing securitizations of $65 million. At December 31, 2000, there were $658 million of securitized leases outstanding, and we had retained interests in leasing securitizations of $78 million. The retained interests in leasing securitizations are included in net assets of discontinued operations in the consolidated balance sheets. At June 30, 2001, the fair value of the retained interests in leasing securitizations was estimated using an 8.5% discount rate on future cash flows excluding credit losses, a 5.0% discount rate on future credit losses, a 5.2% loss rate and a weighted average life of 1.2 years. Actual results may vary from our estimates, and the impact of any differences will be recognized in income when determined. 10 11 NOTE 3) RESTRICTED INTEREST-BEARING DEPOSITS AND INVESTMENTS AVAILABLE FOR SALE Restricted interest-bearing deposits at June 30, 2001 include $70.9 million of amounts held in escrow in connection with our litigation with Fleet Financial Group ("Fleet"), and $44.1 million held in escrow in connection with other litigation-related contingencies. Investments available for sale consisted of the following:
JUNE 30, 2001 DECEMBER 31, 2000 AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---- ----- ---- ----- U.S. Treasury & other U.S. Government securities $ 56,650 $ 57,690 $401,168 $401,225 State and municipal securities 4,290 4,333 4,280 4,436 Collateralized mortgage obligations 28,500 28,575 165,689 162,897 Mortgage-backed securities 9,501 9,597 91,520 91,973 Equity securities(1) 36,287 36,287 72,403 72,403 Other(2) 19,146 19,146 25,735 25,858 -------- -------- -------- -------- Total investments available for sale $154,374 $155,628 $760,795 $758,792 ======== ======== ======== ========
(1) Includes venture capital investments of $28.2 million at June 30, 2001 and $45.3 million at December 31, 2000. The amount shown as amortized cost represents fair value for these investments. (2) Other investments at June 30, 2001 include $19.0 million of short-term investments held in a custodial account in connection with Advanta National Bank's February 2001 agreement with the Office of the Comptroller of the Currency. NOTE 4) RECEIVABLES Receivables on the balance sheet, including those held for sale, consisted of the following:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- Business credit card receivables $ 353,978 $ 335,087 Other receivables 28,252 24,203 --------- --------- Gross receivables 382,230 359,290 --------- --------- Add: Deferred origination costs, net of deferred fees 19,318 14,368 Less: Allowance for credit losses Business credit cards (37,166) (33,165) Other receivables (402) (202) --------- --------- Total allowance (37,568) (33,367) --------- --------- Receivables, net $ 363,980 $ 340,291 ========= =========
Gross managed receivables (owned receivables and securitized receivables) and managed credit quality data were as follows:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- Owned business credit card receivables $ 353,978 $ 335,087 Owned other receivables 28,252 24,203 Securitized business credit card receivables 1,545,326 1,324,137 Total managed receivables 1,927,556 1,683,427 Nonperforming assets - managed 63,009 45,160 Receivables 30 days or more delinquent - managed 110,867 83,798 Net charge-offs year-to-date - managed 61,852 64,638 ---------- ----------
11 12 NOTE 5) ALLOWANCE FOR CREDIT LOSSES The following table presents activity in the allowance for credit losses for the periods presented:
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 2001 2000 ---- ---- Beginning balance $ 33,367 $ 14,865 Provision for credit losses 16,324 36,309 Gross charge-offs (14,374) (20,176) Recoveries 2,251 2,369 -------- -------- Net charge-offs (12,123) (17,807) -------- -------- Ending balance $ 37,568 $ 33,367 ======== ========
NOTE 6) SECURITIZATION ACTIVITIES In September 2000, the FASB issued Statement of Financial Accounting Standards ("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 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement was effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material effect on our financial position or results of operations. The following represents business credit card securitization data for the three and six months ended June 30, 2001 and 2000.
Three Months Ended Six Months Ended June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 ------------- ------------- ------------- ------------- Securitization income $ 25,609 $ 17,994 $ 47,782 $ 31,238 Servicing revenues 6,909 4,546 13,561 8,386 Proceeds from new securitizations 97,549 0 197,549 146,713 Proceeds from collections reinvested in revolving-period securitizations 805,607 514,691 1,523,245 920,037 Cash flows received on retained interests 39,582 24,440 78,332 42,925 ------- ------- --------- -------
There were no purchases of delinquent accounts during the three or six months ended June 30, 2001 or 2000. Retained interests in business credit card securitizations serve as credit enhancements for securitization transactions and include restricted cash reserves, the retained interest-only strip and subordinated trust assets. The following assumptions were used in measuring the fair value of retained interests in business credit card securitizations at June 30, 2001 and December 31, 2000. The assumptions listed represent weighted averages of assumptions used for each securitization. 12 13
June 30, December 31, 2001 2000 ---- ---- Discount rate 12.0% 12.0% Monthly payment rate 17.9 19.0 Loss rate 8.8 7.8 Net interest margin 13.2 10.8
We have prepared sensitivity analyses of the valuations of retained interests in securitizations. 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 June 30, 2001. Fair value at June 30, 2001 $88,658 Effect on fair value of the following hypothetical changes in key assumptions: Discount rate increased by 2% $ (867) Discount rate increased by 4% (1,725) Monthly payment rate at 110% of base assumption (954) Monthly payment rate at 125% of base assumption (1,913) Loss rate at 110% of base assumption (3,758) Loss rate at 125% of base assumption (9,405) Net interest margin decreased by 1% (4,294) Net interest margin decreased by 2% (8,589)
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 value the retained interests at each reporting date. These estimates do not factor in the impact of simultaneous changes in other key assumptions. The above scenarios 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 7) SELECTED BALANCE SHEET INFORMATION
JUNE 30, DECEMBER 31, OTHER ASSETS 2001 2000 - ------------ ---- ---- Current and deferred income taxes, net $100,455 $ 87,794 Cash surrender value of insurance contracts 21,131 20,432 Other 153,782 148,432 -------- -------- Total other assets $275,368 $256,658 ======== ========
JUNE 30, DECEMBER 31, OTHER LIABILITIES 2001 2000 - ----------------- ---- ---- Accounts payable and accrued expenses $ 52,722 $ 70,041 Accrued interest payable 25,683 31,048 Other 127,412 95,032 -------- -------- Total other liabilities $205,817 $196,121 ======== ========
13 14 NOTE 8) LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of over one year. The composition of long-term debt was as follows:
JUNE 30, DECEMBER 31, 2001 2000 ---- ---- SENIOR DEBT: 12 month senior notes, fixed (10.66%-11.33%) $155,823 $152,553 18 month senior notes, fixed (9.08%-11.38%) 9,278 9,229 24 month senior notes, fixed (8.60%-11.42%) 79,020 86,109 30 month senior notes, fixed (8.85%-11.47%) 15,095 14,684 48 month senior notes, fixed (7.19%-11.51%) 9,493 8,384 60 month senior notes, fixed (6.49%-11.56%) 35,735 34,849 Value notes, fixed 0 3,271 Medium-term notes, fixed (6.92%-7.47%) 23,505 313,100 Medium-term notes, floating 10 30,500 Medium-term bank notes, fixed 0 3,404 Other senior notes, fixed (5.05%-11.33%) 72,739 98,387 -------- -------- Total senior debt 400,698 754,470 Subordinated notes, fixed (9.08%-9.94%) 636 714 -------- -------- Total long-term debt $401,334 $755,184 ======== ========
We used part of the proceeds from the sale of mortgage assets in the first quarter of 2001 to pay off substantially all of our outstanding medium-term notes and to reduce our outstanding senior notes. In addition, in the second quarter of 2001, we sold $389.7 million of deposit liabilities to E*TRADE Bank, a wholly-owned subsidiary of E*TRADE Group, Inc. NOTE 9) CAPITAL STOCK The Board of Directors of Advanta Corp. has authorized management to purchase up to 1.5 million shares of Advanta Corp. common stock or the equivalent dollar amount of our capital securities, or some combination thereof. As of July 31, 2001, we have repurchased approximately 120,000 shares of our Class B Common Stock. Cash dividends per share of common stock declared during the three months ended June 30, 2001 and 2000 were $0.063 for Class A Common Stock and $0.076 for Class B Common Stock. Cash dividends per share of common stock declared during the six months ended June 30, 2001 and 2000 were $0.126 for Class A Common Stock and $0.151 for Class B Common Stock. NOTE 10) SEGMENT INFORMATION Our reportable segments as of January 1, 2001 were Advanta Business Cards and our venture capital segment. During the first quarter of 2001, we made changes to the methods used to allocate centrally incurred interest and operating expenses to the reportable segments. These changes were made in order to better reflect the results of the continuing businesses due to the discontinuance of the mortgage and leasing segments and the restructuring of our corporate functions in the first quarter of 2001. Prior period segment results have been restated to reflect the current allocation methods. Advanta Business Cards offers MasterCard(R)* business credit cards to small businesses using targeted direct mail, the Internet and 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. - ---------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc. 14 15 Our venture capital segment makes venture capital investments through our affiliates. The investment objective 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.
ADVANTA BUSINESS VENTURE CARDS CAPITAL OTHER (1) TOTAL ----- ------- --------- ----- THREE MONTHS ENDED JUNE 30, 2001 Interest income $ 19,113 $ 2 $ 13,721 $ 32,836 Interest expense 7,998 421 17,700 26,119 Noninterest revenues (losses), net 53,598 (5,607) (2,161) 45,830 Unusual charges 0 0 1,000 1,000 Pretax income (loss) from continuing operations 14,243 (6,551) (10,865) (3,173) Average managed receivables 1,848,424 0 28,184 1,876,608 Total assets 545,015 30,447 1,196,864 1,772,326 ----------- -------- ----------- ----------- THREE MONTHS ENDED JUNE 30, 2000 Interest income $ 19,136 $ 23 $ 14,922 $ 34,081 Interest expense 8,599 342 12,618 21,559 Noninterest revenues (losses), net 39,261 1,352 (25) 40,588 Pretax income (loss) from continuing operations 15,481 433 (1,475) 14,439 Average managed receivables 1,319,434 0 19,939 1,339,373 Total assets 612,270 48,403 3,206,495 3,867,168 ----------- -------- ----------- ----------- SIX MONTHS ENDED JUNE 30, 2001 Interest income $ 37,606 $ 33 $ 29,201 $ 66,840 Interest expense 15,218 839 34,338 50,395 Noninterest revenues (losses), net 100,774 (16,962) (7,983) 75,829 Unusual charges 0 0 41,750 41,750 Pretax income (loss) from continuing operations 27,691 (19,266) (65,834) (57,409) Average managed receivables 1,770,385 0 28,364 1,798,749 ----------- -------- ----------- ----------- SIX MONTHS ENDED JUNE 30, 2000 Interest income $ 35,020 $ 54 $ 29,390 $ 64,464 Interest expense 13,792 659 27,287 41,738 Noninterest revenues (losses), net 70,383 12,278 (912) 81,749 Pretax income (loss) from continuing operations 24,585 10,462 (12,008) 23,039 Average managed receivables 1,220,035 0 20,346 1,240,381 ----------- -------- ----------- -----------
(1) Other includes insurance operations and assets, investment and other activities not attributable to reportable segments. 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. 15 16 NOTE 11) UNUSUAL CHARGES In the first quarter of 2001, we implemented a plan to restructure our corporate functions to a size commensurate with our ongoing businesses and incurred certain other unusual charges related to employee costs. Costs associated with these restructuring activities and other employee costs are included in unusual charges in the consolidated income statements. Accruals related to these costs are included in other liabilities in the consolidated balance sheets. The details of these costs are as follows:
June 30, Charged 2001 Accrued in to Accrual Accrual 2001 in 2001 Balance ---- ------- ------- Employee costs $26,626 $16,330 $10,296 Expenses associated with exited businesses/products 12,565 10,356 2,209 Asset impairments 2,559 2,559 0 ------- ------- ------- Total $41,750 $29,245 $12,505 ======= ======= =======
Employee costs In the first quarter of 2001, we recorded a $4.1 million charge for severance and outplacement costs associated with the restructuring of corporate functions. There were 69 employees severed who were entitled to benefits. These employees worked in corporate support functions including accounting and finance, human resources, information technology, legal and facilities management. Employees were notified in March 2001, and we expect to pay severance amounts over a 12-month period. Additionally, during the first quarter of 2001, we incurred $21.6 million of other employee costs. This amount includes approximately $10 million attributable to bonuses to certain key employees in recognition of their efforts on behalf of Advanta in the strategic alternatives process. It also includes approximately $4.5 million of bonuses in recognition of the restructuring of the company and other significant transitional efforts. These bonuses will be paid over a 12-month period. In the second quarter of 2001, we recorded a $1.0 million increase in employee costs related to a revision in estimate associated with these bonuses. In 2001, we accelerated vesting of 32% of outstanding options that were not vested at the date of the closing of the sale of our mortgage business. This acceleration resulted in a non-cash charge of $1.3 million. In connection with reviewing our compensation plans after the sale of the mortgage business and restructuring of corporate functions, management identified certain programs that would not be continued, including stock appreciation rights and phantom stock programs. We recorded charges of $3.6 million associated with the settlement of outstanding stock appreciation rights and phantom stock with employees and directors. In addition, due to the restructuring of the company, we implemented a program whereby certain out-of-the money options are exchanged for shares of restricted stock. Non-cash charges associated with the issuance of the restricted stock under this program totaled $2.2 million. Expenses associated with exited businesses/products In 1998, in connection with the sale of our consumer credit card business (the "Consumer Credit Card Transaction"), 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. As of December 31, 2000, the remaining accrual related to charges associated with these organizational changes was $13.0 million. This accrual related to contractual commitments to certain customers, and non-related financial institutions that were providing benefits to those customers, under a product that was no longer offered and for which no future revenues or benefits would be received. A third party assumed the liabilities associated with these commitments in the first 16 17 quarter of 2001, and we recorded an additional charge relating to the settlement of these commitments of $10.3 million. In addition, in the three months ended March 31, 2001, there were charges of $2.2 million recorded related to other products exited in the first quarter of 2001 for which no future revenues or benefits would be received. We expect to pay these costs, which include lease and other commitments, over the next 12 months. Asset impairments In connection with our plan to restructure our corporate functions to a size commensurate with our ongoing businesses during the first quarter of 2001, we identified certain assets that would no longer be used, and the carrying costs of these assets were written off resulting in a charge of $2.6 million. We estimated the realizable value of these assets to be zero due to the nature of the assets, which include leasehold improvements and capitalized software. 17 18 NOTE 12) EARNINGS (LOSS) PER SHARE The following table presents the calculation of basic earnings (loss) per common share and diluted earnings (loss) per common share.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ---- ---- ---- ---- Income (loss) from continuing operations $ (3,173) $ 17,749 $(40,529) $ 23,039 Less: Preferred A dividends 0 0 (141) (141) -------- --------- -------- --------- Income (loss) from continuing operations available to common shareholders (3,173) 17,749 (40,670) 22,898 Loss from discontinued operations, net of tax 0 (210,444) (8,438) (198,665) Gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax (4,000) 0 12,361 0 -------- --------- -------- --------- Net loss available to common shareholders (7,173) (192,695) (36,747) (175,767) Less: Class A dividends declared (574) (573) (1,146) (1,092) Less: Class B dividends declared (1,302) (1,296) (2,595) (2,527) -------- --------- -------- --------- Undistributed net loss $ (9,049) $(194,564) $(40,488) $(179,386) -------- --------- -------- --------- Basic income (loss) from continuing operations per common share Class A $ (0.13) $ 0.69 $ (1.61) $ 0.89 Class B (0.12) 0.71 (1.58) 0.93 Combined(1) (0.12) 0.70 (1.59) 0.92 Diluted income (loss) from continuing operations per common share Class A $ (0.13) $ 0.69 $ (1.61) $ 0.88 Class B (0.12) 0.70 (1.58) 0.91 Combined(1) (0.12) 0.70 (1.59) 0.90 Basic net loss per common share Class A $ (0.29) $ (7.65) $ (1.46) $ (7.05) Class B (0.27) (7.63) (1.43) (7.01) Combined(1) (0.28) (7.64) (1.44) (7.03) Diluted net loss per common share Class A $ (0.29) $ (7.60) $ (1.46) $ (6.94) Class B (0.27) (7.58) (1.43) (6.91) Combined(1) (0.28) (7.59) (1.44) (6.92) -------- --------- -------- --------- Basic weighted average common shares outstanding Class A 9,098 9,097 9,082 9,093 Class B 16,744 16,135 16,473 15,916 Combined 25,842 25,232 25,555 25,009 Options Class A 0 1 0 1 Options Class B 0 118 0 183 Restricted shares Class A 0 53 0 53 Restricted shares Class B 0 0 0 148 Diluted weighted average common shares outstanding Class A 9,098 9,151 9,082 9,147 Class B 16,744 16,253 16,473 16,247 Combined 25,842 25,404 25,555 25,394 Antidilutive shares Options Class B 2,663 2,534 2,755 2,527 Restricted shares Class A 24 46 36 46 Restricted shares Class B 513 1,051 712 1,118 -------- --------- -------- ---------
(1) Combined represents a weighted average of Class A and Class B earnings (loss) per common share. 18 19 NOTE 13) 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 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 October 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 of $1.2 million. 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 in the United States District Court for the Northern District of Illinois, Eastern Division, 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 Banc One's second amended complaint was filed July 3, 2001 denying liability, raising affirmative defenses and asserting a counterclaim. The case is in active discovery with a discovery cut-off date of April 2, 2002 and a trial ready date of May 2, 2002. 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 Delaware Chancery Court in an attempt to block the sale of our mortgage business to Chase Manhattan Mortgage Corporation. The complaint alleged that the terms of the proposed sale of our mortgage business 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, $70.1 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, $70.9 million including interest, 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. 19 20 On July 26, 2001, Chase Manhattan Mortgage Corporation ("Chase") filed a complaint against Advanta and certain of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, that Advanta breached its contract with Chase in connection with the sale of Advanta's mortgage business to Chase. Specifically, Chase claims that Advanta misled Chase concerning the value of certain of the assets sold to Chase. We believe that the lawsuit is without merit and will vigorously defend Advanta. We do not expect this lawsuit to have any impact on our continuing business and, based on the complete lack of merit, we do not anticipate that the lawsuit will have a material adverse impact to Advanta or the named subsidiaries. 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 outside of our control, it is reasonably possible that our estimated liability under these proceedings may change. NOTE 14) DERIVATIVES We use derivative financial instruments as part of our risk management strategy to reduce interest rate risk. Derivatives are not used for trading or speculative activities. We adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133," on January 1, 2001. The adoption of SFAS No. 133 had no impact on income from continuing operations and was not material to income from discontinued operations. We recognize all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, we may designate the derivative as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded immediately in earnings. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, we will discontinue hedge accounting prospectively. We have used interest rate swaps to manage the impact of fluctuating interest rates on our cost of funds. 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. In 2001, we used interest rate swaps to effectively convert fixed rate medium-term notes to a LIBOR-based variable rate. There were no interest rate swaps outstanding at June 30, 2001 because of the substantial reduction in outstanding medium-term notes during the second quarter of 2001. The notional amount of interest rate swaps outstanding was $194.5 million at December 31, 2000, and the estimated fair value was $379 thousand. 20 21 The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of our exposure through our use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivative contracts. The fair value of interest rate swaps 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. Our credit exposure is represented by swaps with a positive fair value without giving consideration to the value of any collateral exchanged. On January 1, 2001, all interest rate swaps used in continuing operations were designated as fair value hedges. There were no derivatives designated as cash flow hedges. There were no net gains (losses) from hedge ineffectiveness or from excluding a portion of a derivative instrument's gain or loss from the assessment of hedge effectiveness included in other income for the three or six months ended June 30, 2001. There was also no gain or loss recognized in earnings as a result of a hedged firm commitment no longer qualifying as a fair value hedge. 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this Form 10-Q, "Advanta", "we", "us", and "our" refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires. OVERVIEW During the year ended December 31, 2000, our lending and leasing business units consisted of Advanta Business Cards, Advanta Mortgage and Advanta Leasing Services. 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, announced the discontinuance of our leasing business, and restructured our corporate functions to a size commensurate with our ongoing businesses. We are continuing 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. The results of our ongoing businesses are reported as continuing operations for all periods presented. For the three months ended June 30, 2001, we reported a net loss from continuing operations of $3.2 million or $0.12 per combined diluted common share, compared to net income from continuing operations of $17.7 million or $0.70 per combined diluted common share for the same period of 2000. For the six months ended June 30, 2001, we reported a net loss from continuing operations of $40.5 million or $1.59 per combined common share, assuming dilution, compared to net income from continuing operations of $23.0 million or $0.90 per combined diluted common share for the same period of 2000. The losses from continuing operations in 2001 include unusual charges representing costs associated with the restructure of our corporate functions to a size commensurate with our ongoing businesses and certain other unusual charges related to employee costs. These charges totaled $40.8 million in the first quarter of 2001 and $1.0 million in the second quarter of 2001. Net income for Advanta Business Cards was $8.8 million for the three months ended June 30, 2001 and $19.0 million for the same period of 2000. Net income for Advanta Business Cards for the six months ended June 30, 2001 was $17.0 million, compared to $24.6 for the same period of 2000. Our venture capital segment had a net loss of $4.0 million for the three months ended June 30, 2001, and net income of $4.3 million for the same period of 2000. For the six months ended June 30, 2001 our venture capital segment had a net loss of $11.8 million, compared to net income of $10.5 million for the same period of 2000. Loss from discontinued operations, net of tax, was $8.4 million for the six months ended June 30, 2001, compared to $198.7 million for the same period of 2000. In addition to the operating results of discontinued operations, we recorded an after-tax gain on the discontinuance of our mortgage and leasing businesses of $12.4 million for the six months ended June 30, 2001. The components of this net gain include a pretax gain on the sale of our mortgage business of $25.8 million, a pretax loss on the discontinuance of our leasing business of $6.0 million and tax expense of $7.4 million. The gain on the sale of our mortgage business includes a $2.0 million increase in our estimate of transaction expenses recorded in the second quarter of 2001. The loss on the discontinuance of our leasing business includes a $2.0 million revision in estimate recorded in the second quarter of 2001 related to an increase in estimated credit losses expected throughout the remaining term of the leasing portfolio based on recent credit loss experience in 2001. 22 23 This report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements can be identified by the use of forward-looking phrases such as "will likely result," "may," "are expected to," "is anticipated," "estimate," "projected," "intends to" or other similar words. The most significant among these risks and uncertainties are: (1) our managed net interest margin; (2) competitive pressures; (3) factors that affect the level of delinquencies and charge-offs, including a deterioration of general economic conditions; (4) factors affecting fluctuations in the number of accounts or loan balances; (5) interest rate fluctuations; (6) the level of expenses; (7) the timing of the securitizations of our receivables; (8) factors affecting the value of investments that we hold; (9) the effects of government regulation, including restrictions and limitations imposed by banking laws, regulators, examinations, and the agreements between our bank subsidiaries and their regulators; (10) relationships with significant vendors, business partners and customers; (11) the amount and cost of financing available to us; (12) the ratings on the debt of Advanta Corp. and its subsidiaries; (13) the completion of the post-closing process following the sale of our mortgage business and the ultimate amount of restructuring and other related charges associated with the conclusion of the strategic alternatives process for our mortgage and leasing business; (14) the impact of litigation; and (15) the ability to attract and retain key personnel. Additional risks that may affect our future performance are set forth elsewhere in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2000 and in our other filings with the Securities and Exchange Commission. ADVANTA BUSINESS CARDS OVERVIEW Advanta Business Cards offers MasterCard(R) business credit cards to small businesses using targeted direct mail, the Internet and 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. The managed business credit card receivable portfolio grew from $1.4 billion at June 30, 2000 to $1.7 billion at December 31, 2000 and to $1.9 billion at June 30, 2001. Advanta Business Cards originated 66,546 new accounts in the three months ended June 30, 2001, compared to 95,230 new accounts for the same period of 2000. Originations for the six months ended June 30, 2001 were 135,317 new accounts, compared to 201,641 new accounts in the same period of 2000. The growth in receivables and origination results for 2001 reflect our plan to grow our portfolio in a controlled manner that we believe is prudent in the present economic environment. Pretax income for Advanta Business Cards was $14.2 million for the three months ended June 30, 2001 as compared to $15.5 million for the same period of 2000. The decrease of $1.3 million is comprised of a $0.5 million increase in net interest income and a $14.3 million increase in noninterest revenues, offset by a $3.1 million increase in the provision for credit losses and a $13.0 million increase in operating expenses. Pretax income for the six months ended June 30, 2001 was $27.7 million as compared to $24.6 million for the same period of 2000. The increase of $3.1 million for the six months ended June 30, 2001 as compared to the same period of 2000 includes a $1.2 million 23 24 increase in net interest income and a $30.4 million increase in noninterest revenues, offset by a $3.5 million increase in the provision for credit losses and a $25.0 million increase in operating expenses. The increases in both net interest income and noninterest revenues in both periods are due primarily to growth in managed receivables, increases in portfolio yields and increased interchange income. The increases in operating expenses in both periods resulted from growth in managed receivables and account origination activities. The increases in provision for credit losses in both periods relate to the seasoning of the business credit card portfolio and the current economic environment. SECURITIZATION INCOME Advanta Business Cards recognized securitization income of $25.6 million for the three months ended June 30, 2001 and $47.8 million for the six months ended June 30, 2001. This compares to $18.0 million of securitization income recognized for the three months ended June 30, 2000 and $31.2 million of securitization income recognized for the six months ended June 30, 2000. Advanta Business Cards sells interests in receivables through securitizations. Advanta Business Cards also sells receivables to existing securitization trusts on a continuous basis to replenish the investors' interest in trust receivables that have been repaid by the card holders. The increase in securitization income in 2001 was due to increased yields on the securitized receivables and increased volume of securitized receivables, partially offset by increased credit losses on securitized receivables. The following table provides selected information on a managed loan portfolio basis.
June 30, -------- Managed Portfolio Data ($ in thousands) 2001 2000 - --------------------------------------- ---- ---- Average managed business credit card receivables: Three months ended June 30 $ 1,848,424 $ 1,319,434 Six months ended June 30 1,770,385 1,220,035 Ending managed business credit card receivables 1,899,304 1,428,732 Ending number of accounts managed 656,324 516,904 Managed net interest margin: Three months ended June 30 14.3% 12.3% Six months ended June 30 14.1 12.6 As a percentage of gross managed receivables Receivables 30 days or more delinquent 5.8% 3.7% Net charge-offs: Three months ended June 30 7.4% 3.8% Six months ended June 30 7.0 4.1
In September 2000, the FASB issued Statement of Financial Accounting Standards ("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 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement was effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material effect on our financial position or results of operations. SERVICING REVENUES Advanta Business Cards recognized servicing revenue of $6.9 million for the three months ended June 30, 2001 and $13.6 million for the six months ended June 30, 2001. This compares to servicing revenue of $4.5 million for the three months ended June 30, 2000 and $8.4 million for the six months ended June 30, 2000. The increase in servicing revenue was due to increased volume of securitized receivables. 24 25 INTERCHANGE INCOME Business credit card interchange income was $20.6 million for the three months ended June 30, 2001 and $38.2 million for the six months ended June 30, 2001. This compares to business credit card interchange income of $15.4 million for the three months ended June 30, 2000 and $28.0 million for the six months ended June 30, 2000. The increase in interchange income was primarily due to higher purchase volume related to the increase in average managed business credit card accounts and receivables. The average interchange rate was 2.2% in the three months ended June 30, 2001, compared to 2.1% in the same period of 2000. The average interchange rate was 2.1% for the six months ended June 30, 2001 and 2000. VENTURE CAPITAL Our venture capital segment makes venture capital investments through our affiliates. The investment objective 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. Consistent with market conditions, pretax loss for the venture capital segment was $6.6 million for the three months ended June 30, 2001, and included $5.6 million of decreases in valuations of venture capital investments. Pretax income for the venture capital segment was $0.4 million for the three months ended June 30, 2000, and included $1.4 million in gains on venture capital investments. For the six months ended June 30, 2001, pretax loss for the venture capital segment was $19.3 million as compared to pretax income of $10.5 million for the same period of 2000. The pretax loss for the six months ended June 30, 2001 included $17.0 million of decreases in valuations and losses on venture capital investments as compared to $12.3 million in gains realized on venture capital investments in the same period of 2000. DISCONTINUED OPERATIONS Loss from discontinued operations, net of tax, was $8.4 million for the period from January 1, 2001 through February 28, 2001, the effective date of the sale of our mortgage business. Loss from discontinued operations, net of tax, was $210.4 million for the three months ended June 30, 2000 and $198.7 million for the six months ended June 30, 2000. Loss from discontinued operations for the three and six months ended June 30, 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. In addition to the operating results through February 28, 2001 of discontinued operations, we recorded an after-tax gain on the discontinuance of our mortgage and leasing businesses of $12.4 million for the six months ended June 30, 2001. This net gain includes a pretax gain on the sale of our mortgage business of $25.8 million, a pretax loss on the discontinuance of our leasing business of $6.0 million and tax expense of $7.4 million. Effective February 28, 2001, we completed the sale of our mortgage business, Advanta Mortgage, to Chase Manhattan Mortgage Corporation as buyer. 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 25 26 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 $60 million before transaction expenses, severance expenses and other costs. The gain on the sale of the mortgage business does not reflect any impact from the post-closing adjustment process that has been extended by agreement of the parties. Although the sale of our mortgage business resulted in a gain for financial reporting purposes, due to book/tax differences, we will not pay any material federal income tax as a result of the sale. See Note 13 to the consolidated financial statements for a discussion of litigation related to the sale of our mortgage business. 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. 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, representing the estimated operating results through the remaining term of the leasing portfolio. In the six months ended June 30, 2001, we recorded an additional $6.0 million pretax loss due to a change in estimate of those operating results. This change in estimate was needed due to an increase in estimated credit losses expected throughout the remaining term of the leasing portfolio based on recent credit loss experience in 2001. A principal factor contributing to the credit losses is that one of our former leasing vendors recently filed for bankruptcy protection and this vendor's financial problems are impacting its ability to service a segment of our leasing portfolio. INTEREST INCOME AND EXPENSE Interest income on receivables and investments decreased $1.2 million for the three months ended June 30, 2001 as compared to the same period of 2000, and increased $2.4 million for the six months ended June 30, 2001 as compared to the same period of 2000. During the three months ended June 30, 2001, interest expense increased by $4.6 million as compared to the same period of 2000, and increased $8.7 million for the six months ended June 30, 2001 as compared to the same period of 2000. The decrease in interest income for the three months ended June 30, 2001 was due to a decrease in on-balance sheet business credit card receivables, offset by an increase in yields on business credit card receivables. The increase in interest income for the six months ended June 30, 2001 was due to an increase in yields on business credit card receivables. The increase in interest expense in both periods was due to an increase in our cost of funds. Our cost of funds increased to 7.41% for the three months ended June 30, 2001 from 6.75% during the same period of 2000, and increased to 7.33% for the six months ended June 30, 2001 from 6.58% for the same period of 2000. The increase in the cost of funds in 2001 was attributable to the increase in debt as a percentage of total interest-bearing liabilities and an increase in the interest rate on debt funding. Debt represented 32% of total average interest-bearing liabilities for the three months ended June 30, 2001 as compared to 25% for the same period of 2000, and represented 35% for the six months ended June 30, 2001 as compared to 25% for the same period of 2000. The average interest rate on debt funding was 9.77% for the three months ended June 30, 2001 as compared to 7.94% for the same period of 2000, and was 9.05% for the six months ended June 30, 2001 as compared to 7.74% for the same period of 2000. 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. Interest income includes late fees on business credit card receivables. Average owned receivables include certain loan fees and costs. 26 27 INTEREST RATE ANALYSIS ($ IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ---- ---- AVERAGE YIELD/ AVERAGE YIELD/ NET INTEREST INCOME BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE ---------- -------- ---- ---------- -------- ------ ON-BALANCE SHEET Receivables: Business credit cards $371,764 $18,841 20.33% $401,630 $18,894 18.92% Other receivables 28,184 348 4.95 19,939 153 3.09 ---------- ------- ---------- ------- Total owned receivables 399,948 19,189 19.24 421,569 19,047 18.17 Investments(2) 1,156,111 13,340 4.58 931,140 15,076 6.46 Interest-earning assets of discontinued operations 95,565 2,917 12.21 1,790,644 52,607 11.78 ---------- ------- ---------- ------- ----- Total interest-earning assets $1,651,624 $35,446 8.57% $3,143,353 $86,730 11.06% Interest-bearing liabilities(3) $1,503,172 $27,759 7.41% $3,009,002 $50,590 6.75% Net interest spread 1.16% 4.31% Net interest margin 1.87% 4.62%
SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 ---- ---- AVERAGE YIELD/ AVERAGE YIELD/ NET INTEREST INCOME BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE - ------------------- ---------- -------- ---- ---------- -------- ---- ON-BALANCE SHEET Receivables: Business credit cards $371,118 $37,027 20.12% $373,931 $ 34,580 18.60% Other receivables 28,364 558 3.97 20,346 396 3.92 ---------- ------- ---------- -------- Total owned receivables 399,482 37,585 18.97 394,277 34,976 17.84 Investments(2) 1,137,745 29,058 5.10 924,371 29,547 6.38 Interest-earning assets of discontinued operations 339,011 25,720 15.20 1,804,193 104,576 11.63 ---------- ------- ---------- -------- Total interest-earning assets $1,876,238 $92,363 9.88% $3,122,841 $169,099 10.86% Interest-bearing liabilities(3) $1,794,907 $65,279 7.33% $2,964,843 $97,239 6.58% Net interest spread 2.55% 4.28% Net interest margin 2.91% 4.63%
(1) Includes assets held and available for sale and nonaccrual receivables. (2) Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%. (3) Includes funding of assets for both continuing and discontinued operations. 27 28 OTHER REVENUES
($ in thousands) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- Investment securities gains (losses), net $(6,119) $(1,048) $(14,316) $ 9,866 Loss on sale of deposits (2,835) 0 (2,835) 0 Insurance revenues (losses), net and other 1,680 3,699 (6,571) 4,260 ------- ------- -------- ------- Total other revenues, net $(7,274) $ 2,651 $(23,722) $14,126 ======= ======= ======== =======
Investment securities gains (losses) include changes in the fair value and realized gains (losses) on venture capital investments. Investment securities losses for the three months ended June 30, 2001 include $5.6 million of decreases in valuations of venture capital investments and $0.5 million of realized losses on other investments. Investment securities losses for the six months ended June 30, 2001 also include a $4.9 million loss on the sale of a venture capital investment, $6.5 million of decreases in valuations of venture capital investments, and $3.2 million of realized gains on other investments. Investment securities gains for the six months ended June 30, 2000 include $1.4 million in gains on venture capital investments in the second quarter of 2000, $10.9 million in gains on venture capital investments in the first quarter of 2000, and $2.4 million of realized losses on other investments. In the second quarter of 2001, we sold $389.7 million of deposit liabilities to E*TRADE Bank, a wholly-owned subsidiary of E*TRADE Group, Inc., resulting in a $2.8 million loss. In the first quarter of 2001, we successfully negotiated an early termination of our strategic alliance with Progressive Casualty Insurance Company to direct market auto insurance. The loss in insurance revenues (losses), net and other for the six months ended June 30, 2001 includes operating results of insurance operations, the impact of the termination of the strategic alliance with Progressive Casualty Insurance Company and charges related to the write-off of certain assets previously associated with the auto insurance strategic alliance. 28 29 OPERATING EXPENSES
($ in thousands) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- Salaries and employee benefits $14,882 $ 7,877 $29,877 $20,433 Amortization of business credit card deferred origination costs, net 9,315 5,288 17,109 9,559 External processing 4,391 3,397 8,254 6,398 Professional/consulting fees 3,158 3,786 6,222 7,275 Marketing expense 2,150 3,511 6,974 5,296 Equipment expense 1,635 2,195 3,659 4,037 Occupancy expense 1,652 2,103 3,235 4,429 Telephone expense 757 1,184 2,230 2,242 Other 6,176 2,060 9,609 4,657 ------- ------- ------- ------- Total operating expenses $44,116 $31,401 $87,169 $64,326 ======= ======= ======= =======
Salaries and employee benefits, amortization of business credit card deferred origination costs, net, and external processing expense have increased for the three and six months ended June 30, 2001 as compared to the same periods of 2000, due primarily to increased account origination activities in Advanta Business Cards as well as the resulting growth in managed business credit card receivables. Average managed business credit card receivables increased to $1.8 billion for the three months ended June 30, 2001 from $1.3 billion for the same period of 2000, and increased to $1.8 billion for the six months ended June 30, 2001 from $1.2 billion for the same period of 2000. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses of $8.4 million for the three months ended June 30, 2001 increased by $3.3 million as compared to the provision for credit losses of $5.1 million for the same period of 2000. The provision for credit losses of $16.3 million for the six months ended June 30, 2001 increased by $3.6 million in comparison to the provision for credit losses of $12.7 million for the same period of 2000. The increases in provision for credit losses in both periods relate to the seasoning of the business credit card portfolio and the current economic environment. At June 30, 2001, the allowance for credit losses on a consolidated basis was $37.6 million, or 9.8% of owned receivables, as compared to $33.4 million, or 9.3% of owned receivables, at December 31, 2000. The allowance for credit losses on business credit card receivables was $37.2 million at June 30, 2001 as compared to $33.2 million at December 31, 2000. The allowance for credit losses on business credit card receivables represented 10.5% of owned receivables at June 30, 2001 and 9.9% of owned receivables at December 31, 2000. Total owned business credit card receivables 30 days or more delinquent at June 30, 2001 were 6.1% of gross receivables as compared to 5.5% at December 31, 2000. We have experienced a trend of increasing charge-off rates, consistent with our expectations of the seasoning portfolio and the current economic environment, which has been factored into our estimate of the allowance for credit losses.
Three Months Ended ------------------ Mar. Jun. Sept. Dec. Mar. Jun. 2000 2000 2000 2000 2001 2001 ---- ---- ---- ---- ---- ---- Net charge-offs as a % of owned business credit card receivables 4.1% 3.7% 4.9% 5.1% * 6.4% 6.7%
* The charge-off rate for the fourth quarter of 2000 includes a 0.5% acceleration of charge-offs to adopt a 60-day charge-off policy for bankrupt accounts. 29 30 Nonperforming assets include receivables past due 90 days or more, and bankrupt, decedent and fraudulent business credit card accounts. We charge losses on business credit card accounts against the allowance at 180 days contractually delinquent. Business credit card accounts suspected of being fraudulent are charged-off after a 90-day investigative period, unless our investigation shows no evidence of fraud. Effective October 1, 2000, bankrupt business credit cards are charged off within a 60-day investigative period after receipt of notification. The previous policy provided a 90-day investigative period. The following table provides a summary of nonperforming assets, delinquencies and charge-offs as of and for the year-to-date periods indicated ($ in thousands).
JUNE 30, DEC. 31, JUNE 30, CREDIT QUALITY 2001 2000 (A) 2000 - -------------- ---- -------- ---- CONSOLIDATED - MANAGED Nonperforming assets $ 63,009 $45,160 $31,726 Receivables 30 days or more delinquent 110,867 83,798 53,593 As a percentage of gross receivables: Nonperforming assets 3.3% 2.7% 2.2% Receivables 30 days or more delinquent 5.8 5.0 3.7 Net charge-offs: Amount $ 61,852 $64,638 $25,043 As a percentage of average gross receivables (annualized) 6.9% 4.6% 4.0% CONSOLIDATED - OWNED Allowance for credit losses $ 37,568 $33,367 $20,334 Nonperforming assets 12,669 10,700 11,568 Receivables 30 days or more delinquent 22,482 19,395 19,602 As a percentage of gross receivables: Allowance for credit losses 9.8% 9.3% 3.9% Nonperforming assets 3.3 3.0 2.2 Receivables 30 days or more delinquent 5.9 5.4 3.7 Net charge-offs: Amount $ 12,123 $17,807 $ 7,201 As a percentage of average gross receivables (annualized) 6.1% 4.2% 3.7% BUSINESS CREDIT CARDS - MANAGED Nonperforming assets $ 62,606 $44,600 $31,199 Receivables 30 days or more delinquent 109,877 82,915 52,828 As a percentage of gross receivables: Nonperforming assets 3.3% 2.7% 2.2% Receivables 30 days or more delinquent 5.8 5.0 3.7 Net charge-offs: Amount $ 61,852 $64,636 $25,043 As a percentage of average gross receivables (annualized) 7.0% 4.7% 4.1% BUSINESS CREDIT CARDS - OWNED Allowance for credit losses $ 37,166 $33,165 $20,132 Nonperforming assets 12,266 10,140 11,041 Receivables 30 days or more delinquent 21,492 18,512 18,837 As a percentage of gross receivables: Allowance for credit losses 10.5% 9.9% 4.0% Nonperforming assets 3.5 3.0 2.2 Receivables 30 days or more delinquent 6.1 5.5 3.7 Net charge-offs: Amount $ 12,123 $17,805 $ 7,201 As a percentage of average gross receivables (annualized) 6.5% 4.5% 3.9%
(A) Beginning in the fourth quarter of 2000, business credit card charge-off 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. Business credit card charge-offs for the year ended December 31, 2000 include a 0.2% acceleration of charge-offs in connection with the adoption of this policy. 30 31 UNUSUAL CHARGES Subsequent to the sale of the mortgage business and discontinuance of our leasing business in the first quarter of 2001, we implemented a plan to restructure our corporate functions to a size commensurate with our ongoing businesses and incurred certain other unusual charges related to employee costs. The restructuring activities had no significant impact on operations while they were ongoing. Due to the termination of employees and the write-off of certain assets no longer used, we expect to realize 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. EMPLOYEE COSTS In the first quarter of 2001, we recorded a $4.1 million charge for severance and outplacement costs associated with the restructuring of corporate functions. There were 69 employees severed who were entitled to benefits. These employees worked in corporate support functions including accounting and finance, human resources, information technology, legal and facilities management. Employees were notified in March 2001, and we expect to pay severance amounts over a 12-month period. Additionally, during the first quarter of 2001, we incurred $21.6 million of other employee costs. This amount includes approximately $10 million attributable to bonuses to certain key employees in recognition of their efforts on behalf of Advanta in the strategic alternatives process. It also includes approximately $4.5 million of bonuses in recognition of the restructuring of the company and other significant transitional efforts. These bonuses will be paid over a 12-month period. In the second quarter of 2001, we recorded a $1.0 million increase in employee costs related to a revision in estimate associated with these bonuses. In 2001, we accelerated vesting of 32% of outstanding options that were not vested at the date of the closing of the sale of our mortgage business. This acceleration resulted in a non-cash charge of $1.3 million. In connection with reviewing our compensation plans after the sale of the mortgage business and restructuring of corporate functions, management identified certain programs that would not be continued, including stock appreciation rights and phantom stock programs. We recorded charges of $3.6 million associated with the settlement of outstanding stock appreciation rights and phantom stock with employees and directors. In addition, due to the restructuring of the company, we implemented a program whereby certain out-of-the money options are exchanged for shares of restricted stock. Non-cash charges associated with the issuance of the restricted stock under this program totaled $2.2 million. EXPENSES ASSOCIATED WITH EXITED BUSINESSES/PRODUCTS In 1998, in connection with the Consumer Credit Card Transaction, 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. As of December 31, 2000, the remaining accrual related to charges associated with these organizational changes was $13.0 million. This accrual related to contractual commitments to certain customers, and non-related financial institutions that were providing benefits to those customers, under a product that was no longer offered and for which no future revenues or benefits would be received. A third party assumed the liabilities 31 32 associated with these commitments in the first quarter of 2001, and we recorded an additional charge relating to the settlement of these commitments of $10.3 million. In addition, in the three months ended March 31, 2001, there were charges of $2.2 million recorded related to other products exited in the first quarter of 2001 for which no future revenues or benefits would be received. We expect to pay these costs, which include lease and other commitments, over the next 12 months. ASSET IMPAIRMENTS In connection with our plan to restructure our corporate functions to a size commensurate with our ongoing businesses during the first quarter of 2001, we identified certain assets that would no longer be used, and the carrying costs of these assets were written off resulting in a charge of $2.6 million. We estimated the realizable value of these assets to be zero due to the nature of the assets, which include leasehold improvements and capitalized software. INCOME TAXES Income tax expense (benefit) is based on the estimated annual effective tax rate of 29% for the six months ended June 30, 2001, compared to a 0% tax rate for the comparable 2000 period. The income tax benefit for the six months ended June 30, 2001 represents the benefit we expect to realize over the remaining six months of fiscal year 2001. ASSET/LIABILITY MANAGEMENT We manage our financial condition with a focus on maintaining disciplined management of market risks and prudent levels of leverage and liquidity. MARKET RISK SENSITIVITY We measure our interest rate risk using a rising rate scenario and a declining rate scenario. Net interest income is estimated using a third party software model that uses standard income modeling techniques. We estimate that at June 30, 2001, our net interest income over a 12-month period would increase by approximately 3% if interest rates were to rise by 200 basis points, and that our net interest income over a 12-month period would decrease by approximately 1% 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 assets and net interest income on securitized receivables. We estimate that at June 30, 2001, our managed net interest income over a 12-month period would decrease by approximately 8 to 10% if interest rates were to rise by 200 basis points, and that our managed net interest income over a 12-month period would increase by approximately 10 to 12% 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. The interest rate floors also cause a decrease in managed net interest income in a rising rate scenario. Current rates are well below certain of the interest rate floors, and a 200 basis point increase in rates would not impact the contractual rate on a substantial portion of the receivables. 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. 32 33 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. 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 six months ended June 30, 2001, we securitized approximately $215 million of business credit card receivables. At June 30, 2001, we had $444 million of federal funds sold, $154 million of receivables held for sale, and $98.7 million of investments, which could be sold to generate additional liquidity. Components of funding were as follows:
June 30, 2001 December 31, 2000 ------------- ----------------- Amount % Amount % ------ - ------ - Off-balance sheet business credit card receivables $1,545,326 50% $1,324,137 33% Deposits 654,228 21 1,346,976 34 Debt and other borrowings 401,334 13 759,473 19 Equity, including capital securities 510,947 16 540,902 14 ---------- --- ---------- --- Total $3,111,835 100% $3,971,488 100% ---------- --- ---------- ---
At June 30, 2001, we had a $280 million committed commercial paper conduit facility secured by business credit card receivables, of which $235 million was unused at June 30, 2001. In the first quarter of 2001, we received in excess of $1 billion in cash proceeds from the sale of our mortgage business. We have strategically used the proceeds to strengthen Advanta for the future, including a significant reduction in our leverage. In the second quarter of 2001, we sold $389.7 million of our deposit liabilities to E*TRADE Bank, a wholly-owned subsidiary of E*TRADE Group, Inc. We also paid off substantially all of our outstanding medium-term notes and reduced our outstanding retail notes. In the three months ended June 30, 2001, we reduced debt and deposits by $902 million. Also, because of our current liquidity position, Advanta Corp. is temporarily not originating or renewing retail notes and Advanta National Bank has suspended originations of deposit accounts. The sale of the mortgage business in the first quarter of 2001 resulted in liquidity in excess of the needs of our continuing businesses. Excess liquid assets are being held in short-term, high-quality investments earning money market rates until they can be deployed. As a result we had interest expense in excess of interest income on this excess liquidity in 2001. The deposit sale and significant debt reduction in the second quarter of 2001 will reduce this net interest expense and excess liquidity. However, we expect to continue to have interest expense in excess of interest income on excess liquidity for the next several quarters due to the time required to reduce interest-bearing liabilities. In the first quarter of 2001, we successfully negotiated an early termination of our strategic alliance with Progressive Casualty Insurance Company to 33 34 direct market auto insurance and received regulatory approval for a dividend from our insurance subsidiary to the parent company. The insurance dividend, along with other payments from the insurance subsidiary in the first quarter of 2001, increased parent liquidity by $62.5 million. In the second quarter of 2001, there was an additional dividend from an insurance subsidiary of $5.6 million. In the first quarter of 2001, after consideration of the parent liquidity and the capital requirements for the ongoing business, the Board of Directors of Advanta Corp. authorized management to purchase up to 1.5 million shares of Advanta Corp. common stock or the equivalent dollar amount of our capital securities, or some combination thereof. We intend to make purchases modestly and when we believe it is prudent to do so while we analyze evolving capital requirements. As of July 31, 2001, we have repurchased approximately 120,000 shares of our Class B Common Stock. Our regulatory agreements with the Office of the Comptroller of the Currency (the "OCC") 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 sale of our mortgage business in the first quarter of 2001, 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 reduced the 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. At June 30, 2001, Advanta National Bank's combined total capital ratio (combined Tier I and Tier II capital) was 20.30%, and Advanta Bank Corp.'s combined total capital ratio was 15.36%. 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%. 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 OCC, even though we have achieved the higher imposed capital ratios required by the agreement. 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 34 35 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this item is set forth in "Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report on Form 10-Q. See "Asset/Liability Management-Market Risk Sensitivity." 35 36 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 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 October 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 of $1.2 million. 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 in the United States District Court for the Northern District of Illinois, Eastern Division, 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 Banc One's second amended complaint was filed July 3, 2001 denying liability, raising affirmative defenses and asserting a counterclaim. The case is in active discovery with a discovery cut-off date of April 2, 2002 and a trial ready date of May 2, 2002. 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 Delaware Chancery Court in an attempt to block the sale of our mortgage business to Chase Manhattan Mortgage Corporation. The complaint alleged that the terms of the proposed sale of our mortgage business 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 36 37 "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, $70.1 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, $70.9 million including interest, 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. On July 26, 2001, Chase Manhattan Mortgage Corporation ("Chase") filed a complaint against Advanta and certain of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, that Advanta breached its contract with Chase in connection with the sale of Advanta's mortgage business to Chase. Specifically, Chase claims that Advanta misled Chase concerning the value of certain of the assets sold to Chase. We believe that the lawsuit is without merit and will vigorously defend Advanta. We do not expect this lawsuit to have any impact on our continuing business and, based on the complete lack of merit, we do not anticipate that the lawsuit will have a material adverse impact to Advanta or the named subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Advanta Corp. held its Annual Meeting of Stockholders on June 21, 2001. (b) Not required. (c) The following proposal was submitted to a vote of stockholders. (i) The election of three directors to hold office until the 2004 Annual Meeting of Stockholders.
NOMINEES VOTES FOR VOTES WITHHELD -------- --------- -------------- Dennis Alter 8,242,839 1,458,805 Dana Becker Dunn 9,438,058 263,606 Arthur Bellis 9,397,402 304,262
37 38 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The following exhibits are being filed with this report on Form 10-Q.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 2.1 Purchase and Assumption Agreement, dated as of May 7, 2001, by and between Advanta Corp. and E*TRADE Bank. 12 Consolidated Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K (b)(1) A Current Report on Form 8-K, dated April 9, 2001, was filed by Advanta announcing that $237.7 million of medium-term notes had been tendered in response to the tender offer which was announced March 7, 2001. (b)(2) A Current Report on Form 8-K, dated April 24, 2001, was filed by Advanta setting forth the financial highlights of Advanta's results of operations for the three months ended March 31, 2001. (b)(3) A Current Report on Form 8-K, dated June 28, 2001, was filed by Advanta announcing its sale of $389.7 million of deposit liabilities to E*TRADE Bank, a wholly-owned subsidiary of E*TRADE Group, Inc. 38 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Advanta Corp. (Registrant) August 14, 2001 By /s/Philip M. Browne -------------------------- Senior Vice President and Chief Financial Officer August 14, 2001 By /s/David B. Weinstock -------------------------- Vice President and Chief Accounting Officer 39 40 EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 2.1 Purchase and Assumption Agreement, dated as of May 7, 2001, by and between Advanta Corp. and E*TRADE Bank. 12 Consolidated Computation of Ratio of Earnings to Fixed Charges
40 EX-2.1 3 w52415ex2-1.txt PURCHASE AND ASSUMPTION AGREEMENT 1 Exhibit 2.1 PURCHASE AND ASSUMPTION AGREEMENT --------------------------------- THIS AGREEMENT is made and entered into as of the 7th day of May, 2001, by and between ADVANTA NATIONAL BANK, a national banking association with its principal offices at One Righter Parkway, Wilmington, Delaware 19803 ("Seller") and E*TRADE BANK, a federal savings association with its principal offices at 1111 North Highland Street, Arlington, Virginia 22201 ("Purchaser"). WHEREAS, Seller desires to transfer to Purchaser certain Deposits on the terms and conditions set forth in this Agreement; and WHEREAS, Purchaser desires to acquire such Deposits and assume Seller's duties, obligations and liabilities associated therewith on the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises herein set forth and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. (a) Capitalized terms used in this Agreement shall have the meanings set forth in the preamble or in this Section 1. As used herein, words imparting the singular include the plural and vice versa. (b) The following terms shall have these meanings: "Accrued Interest" shall mean the interest, dividends, fees, costs and other charges that have been accrued on but not paid, credited or charged to the Deposits as due and payable through the day before the Closing Date as shown on Seller's general ledger. 2 "Business Day" shall mean any day except a Saturday or Sunday or other day on which Purchaser or Seller is authorized by law to close. "Closing Date" shall mean the date on which the Closing occurs as set forth in Section 8 hereof, as such date may be adjusted from time to time pursuant to such Section. "Deposit" or "Deposits" shall have the meaning set forth in Section 3 hereof. "Depositor" shall have the meaning set forth in Section 9(d) hereof. "Encumbrances" shall mean all claims, charges, liens, encumbrances, options, pledges, commitments security interests and other restrictions of any kind and nature. "FDIC" shall mean the Federal Deposit Insurance Corporation. "IRS" shall mean the Internal Revenue Service. "OTS" shall mean the Office of Thrift Supervision. "Requests for Withdrawal" shall mean checks, withdrawal orders and other similar items drawn on an account. "Records" shall mean the information in Seller's files concerning the Deposits. "Total Deposits" shall have the meaning set forth in Schedule 2(d) hereof. 2. Transfer and Consideration. The Purchaser and the Seller agree, subject to the terms and conditions of this Agreement: (a) Payment Amount. Seller shall pay to Purchaser an amount equal to the amount of the Total Deposits, less an amount equal to 80 basis points (0.80%) calculated on the Total Deposits as a premium for the assumption of the Deposits (the "Premium"), all as calculated as set out elsewhere in this Section 2. For the purposes of this Section 2(a), the - 2 - 3 amount of the Total Deposits shall be the amount of such Deposits as determined using the methodology set out in Schedule 2(e) hereto. (b) Assumption of Obligations. At the Closing and as provided in Section 4 hereof, Purchaser shall accept, assume and agree to pay, honor, perform and discharge all of Seller's liabilities, duties, responsibilities and obligations with respect to the Deposits, all as exist through the day before the Closing Date or arising or accruing thereafter but excluding any claim or other liability relating to the origination of any such Deposit or the administration of any such Deposit prior to such time. (c) Transfer of Account Relationships. In connection with Purchaser's assumption of the Deposits as set forth in Section 2 hereof, Seller shall sell, convey, assign, transfer and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of Seller's right, title and interest in, to and under the contracts and relationships giving rise to the Deposits. (d) Method of Payment. Payments to be made hereunder shall be made by wire transfer and in immediately available funds. Payments by Seller shall be made into an account designated by Purchaser ("Purchaser's Account"). Payment of Total Deposits by Seller and Total Premium Amount by Purchaser shall occur in two transactions. Payment in the first transaction (the "Transfer Amount") will occur on the Closing Date, using account values as of the last available date before the Closing Date and the U.S. Dollar Swap Curve representing interest rates available at 6:00 pm Eastern Time on June 22, 2001. Payment in the second transaction (if required) will use the same methodology and the same date for the U.S. Dollar Swap Curve, will follow the Post-Closing Adjustments (if any) and Review Period contemplated by Section 3 hereof, and will constitute payment for the final and complete reconcilement of all - 3 - 4 accounts and amounts transferred between Seller and Purchaser hereunder. This final payment will occur as set out in Section 3(c) hereof. (e) Assumptions and Methodology. The assumptions and methodology used to calculate the payment amounts referred to in this Section 2 shall be as set out on Schedule 2(e) attached hereto and made a part hereof. (f) Adjustments. Amounts paid at Closing shall be subject to subsequent adjustment, if any, based on the post-closing reconciliation contemplated by Section 3(b) hereof. (g) Disputes. In the event of any dispute as to the correct amount to be paid to either party under this Section 2, each party shall nonetheless pay to the other all amounts other than those in dispute, and the parties shall promptly take steps to address and resolve the dispute. Any disputed amounts held by a party which are later determined to be due to the other party shall be paid to the other party promptly upon that determination, with interest thereon from the date of the dispute to the date of payment at the federal funds rate in effect at the time of payment. 3. Assumption of Deposit Liabilities. Except as specifically provided below and upon the terms and subject to the conditions set forth in this Agreement: (a) Assumption of Deposits. At the Closing, Seller will transfer and assign to Purchaser, and, subject to the provisions of Section 2(b), Purchaser will accept and assume from Seller and will agree to pay, honor, perform and discharge all obligations with respect to, and be solely and exclusively liable for, all deposits, as defined in Section 3(1) of the Federal Deposit Insurance Act, as amended, (the "FDIA"), designated on the books of Seller as deposit accounts, and including principal together with interest that is accrued and posted through the day before the Closing Date (hereinafter referred to individually as a "Deposit" and collectively as the - 4 - 5 "Deposits"). Seller shall provide Purchaser a list of the Deposits and the aggregate amount of the Deposits as of the Closing Date (the "Schedule of Deposits"). (b) Adjustments and Review. Within forty-five (45) days after the Closing Date, Purchaser shall advise Seller (confirmed in writing) of any adjustments it deems necessary from the Schedule of Deposits delivered by Seller as of the Closing Date (the "Post-Closing Adjustments") setting forth in reasonable detail the basis therefor. Within ten (10) days after delivery of the Post-Closing Adjustments to Seller (the "Review Period"), Seller may dispute the Post-Closing Adjustments by giving notice (confirmed in writing) to Purchaser setting forth in reasonable detail the basis for such dispute (a "Disagreement"). The parties shall promptly commence good faith negotiations with a view toward resolving any such Disagreements. (c) Settlement. On the Business Day immediately following the end of the Review Period or the final resolution of any Disagreement (the "Final Settlement Date"), an amount equal to the final amount of the Deposits minus the final amount of the Premium (the "Final Transfer Amount") shall be calculated, as finally determined pursuant to Section 3(b) hereof. If the Final Transfer Amount exceeds the Transfer Amount, Seller shall pay the difference to Purchaser by the method provided in Section 2(d) hereof, and if the Transfer Amount exceeds the Final Transfer Amount, Purchaser shall refund the difference to Seller by wire transfer in immediately available funds to an account designated by Seller or otherwise as Seller may instruct. (d) Debit Cards. All of Seller's MAC cash access cards associated with Deposits shall be voided by Seller as of an effective date sufficiently before the closing Date to permit the conversion of accounts contemplated hereby, and Seller shall give timely notice thereof, in a form mutually acceptable to Seller and Purchaser, to the Depositors holding such cards. - 5 - 6 Promptly after the execution of this Agreement, Seller will provide to Purchaser the information relating to those Depositors which Purchaser may reasonably request, in an appropriate manner and format, to facilitate Purchaser's preparation of replacement debit cards for use by those Depositors. Such replacement cards will contain a validation feature or otherwise be distributed in a manner and on a schedule such that they will not be useable before the Closing Date. (e) Liabilities Not Assumed. Liabilities not assumed by Purchaser include, but are not limited to: i) Seller's cashiers checks, letters of credit, money orders, interest checks and expense checks issued prior to Closing, consignments of U S government Series E and Series EE bonds, and travelers checks; ii) liability or obligations with respect to any matters to which Purchaser is entitled to indemnification under Section 12(a) hereof; iii) deposit accounts associated with lines of credit; iv) deposit accounts associated with qualified retirement plans where Seller is named as the trustee or custodian of such plan or as the sponsor of a prototype plan related to such account; v) Individual Retirement Accounts or Individual Retirement Arrangements; and vi) except as otherwise set forth in this Agreement, any other liabilities, duties, responsibilities or obligations of any kind or nature, whether known or unknown, whether asserted or unasserted, whether accrued or unaccrued, whether contingent or otherwise, not expressly assumed by Purchaser. 4. Additional Obligations of Purchaser. At the Closing, Purchaser will assume and accept and agree to discharge the liabilities, duties, responsibilities and obligations of Seller with respect to the Deposits in accordance with Section 2(b) hereof, the terms and conditions of the - 6 - 7 contracts of deposit, and all rules and regulations applicable thereto, subject in any case to any post-Closing adjustments made as contemplated by Section 3(b) hereof. 5. Delivery of Deposit Records. Not fewer than three (3) Business Days prior to the Closing, Seller shall deliver to Purchaser copies of all applications showing original signatures relating to transaction accounts being assumed by Purchaser hereunder as are then in Seller's possession. Within a period of six (6) months following the Closing, Purchaser may elect to retain a third party, at Purchaser's expense, to extract for Purchaser's use such data from the information then in Seller's possession on the Deposits as Purchaser may reasonably request. At any time and from time to time following the Closing, Seller will take reasonable steps to accommodate Purchaser's reasonable requests for additional information regarding the Deposits as may then be in Seller's possession. 6. Agreements of Seller. (a) Regulatory Approval. Seller shall cooperate with Purchaser in Purchaser's preparation and filing of a joint application with Purchaser's primary federal regulator for approval of the transactions contemplated by this Agreement and shall also make such additional separate filings with such regulatory authorities, if any, as may be necessary or advisable to enable Seller to consummate the transactions contemplated by this Agreement and shall diligently proceed to obtain all approvals of such authorities, the costs of any such separate Seller filings to be at Seller's expense. (b) Assistance in Obtaining Regulatory Approvals. Seller agrees to make draft copies of any separate Seller applications to be filed available to Purchaser for review, to provide Purchaser promptly with a copy of any such applications as filed (together with copies of all material notices, orders, opinions, correspondence, and other documents with respect thereto), - 7 - 8 and to use its commercially reasonable efforts to obtain all such necessary regulatory approvals and consents at the earliest practicable date. Except as may be required by law or in connection with any regulatory inquiry, Seller agrees not to divulge any information contained in any such applications which is designated by Purchaser as confidential, and to promptly notify Purchaser upon receipt of notification that any application provided for hereunder has been denied or of any information that causes or reasonably should cause it to believe that any such application will be or is likely to be denied. Seller agrees to cooperate with Purchaser and use all commercially reasonable efforts to obtain all regulatory approvals required by Purchaser to consummate the transactions contemplated hereby, and Seller shall provide to Purchaser or to the appropriate regulatory authorities all information reasonably required to be submitted by Seller in connection with such approvals. (c) Conduct of Business Prior to Closing. Except as provided herein and as may be otherwise required by any regulatory authority, between the date hereof and the Closing Date, Seller shall perform all acts to be performed by it pursuant to this Agreement and shall refrain from taking or omitting to take any action that would violate Seller's representations and warranties hereunder or render them inaccurate as of the date hereof or as of the Closing Date or that in any way would prevent the consummation of the transactions contemplated hereby. (d) Access by Purchaser. Between the date hereof and the Closing Date, Seller shall provide Purchaser and its representatives, accountants and counsel reasonable access, during normal business hours and upon two (2) Business Days' notice to Seller, Seller's Records relating to the Deposits as Purchaser may reasonably request; provided that a representative of Seller shall be permitted to be present at all times. - 8 - 9 (e) Taxes. Any taxes which arise on either party as a result of the transactions contemplated by this Agreement shall be the obligation of and be timely paid by such party. Each party shall take all necessary steps to comply with any filing requirements in respect of such taxes, whether prior to or after the closing, and the other party agrees to cooperate as requested in preparing any such filings. (f) Further Assurances. Both before and after the Closing Date, Seller shall assist Purchaser in the conversion of the Deposits and shall give such further assurances to Purchaser and shall execute, acknowledge and deliver all such acknowledgments and other instruments as Purchaser shall reasonably request in that connection. (g) Prohibited Solicitations. From the date hereof through the Closing Date, and, conditioned upon the occurrence of the Closing, for a period of two (2) years following the date of this Agreement, Seller agrees that neither it nor any of its affiliates will, directly or indirectly, use any Depositor list or any other information derived from the Deposits to solicit Depositors for deposit products and will not otherwise solicit, encourage or induce a Depositor to close or transfer a Deposit account to another financial institution (any such use being a "Prohibited Solicitation"). Notwithstanding the foregoing, the following shall not constitute Prohibited Solicitations even if they result in receipt by Depositors of the promotion or solicitation materials referred to: i) promotions or solicitations directed to the general public by means of media or Internet advertisements, mailings to commercially-acquired lists or otherwise; ii) promotions or solicitations to persons who are present or former depositors (other than of the Deposits), borrowers, investors or insureds of, or who otherwise have any business relationship with, Seller or any of its affiliates; and - 9 - 10 iii) responses by Seller or any of its affiliates to requests from any persons for deposit product information which requests are not attributable to Prohibited Solicitations. (h) Deposit Histories. In case of any dispute with or inquiry by any Depositor which dispute or inquiry relates to the servicing of such Depositor's Deposit account by Seller prior to the date for which a Deposit history has been provided to Purchaser, Seller will provide to Purchaser, where available and to the extent reasonably requested by Purchaser and not already provided to Purchaser, information regarding the Deposit account and copies of pertinent documents or instruments with respect to such dispute or inquiry so as to facilitate Purchaser's response to such Depositor. 7. Agreements of Purchaser. (a) Regulatory Approval. Within ten (10) Business Days of the date hereof Purchaser shall apply for any required OTS, FDIC or other federal regulatory approval and, if required by law, approval by the banking authority of any state regulatory agency of the transactions contemplated by this Agreement and shall diligently proceed to obtain all such approvals, all at Purchaser's expense. If the transactions contemplated by this Agreement constitute a "conversion" under Section 5(d)(2) of the FDIA, Purchaser shall pay the amount of the entrance fee, if any, and the amount of the exit fee, if any, imposed by Section 5(d)(2)(E) of the FDIA at such times and in such manner as shall be required by applicable law and regulation. (b) Assistance in Obtaining Regulatory Approvals. Purchaser agrees to make draft copies of applications to be filed available to Seller for review, to provide Seller promptly with a copy of any such applications as filed (together with copies of all material notices, orders, opinions, correspondence, and other documents with respect thereto), and to use its commercially reasonable efforts to obtain all such necessary regulatory approvals and consents at - 10 - 11 the earliest practicable date. Except as may be required by law or in connection with any regulatory inquiry, Purchaser agrees not to divulge any information contained in any such applications which is designated by Seller as confidential, and to promptly notify Seller upon receipt of notification that any application provided for hereunder has been denied or of any information that causes or reasonably should cause it to believe that any such application will be or is likely to be denied. Purchaser agrees to cooperate with Seller and to use all commercially reasonable efforts to obtain the regulatory approvals required by Seller to consummate the transactions contemplated hereby and Purchaser agrees to provide to Seller or to the appropriate regulatory authorities all information reasonably required to be submitted by Purchaser in connection with such approvals (c) Acceptance of Seller's Forms. From and after the close of business on the Business Day immediately preceding the Closing Date, Purchaser shall for at least six (6) months after the Closing Date, accept and pay (to the extent of sufficiently available funds on deposit) all checks, negotiable orders of withdrawal, drafts or other withdrawal order forms and instructions which are properly drawn on Seller's forms and timely presented to Purchaser where the accounts on which such withdrawal instructions are drawn are Deposit accounts. In addition, during such time Purchaser shall also honor all Maturity Notices drawn on Seller's forms if so presented by depositors whose accounts to which such Maturity Notices relate are Deposit accounts. During such six (6) month period, Seller shall use commercially reasonable efforts to batch all checks, negotiable orders of withdrawal, drafts or other withdrawal order forms and instructions which are presented or delivered to Seller and to deliver same to Purchaser. - 11 - 12 (d) Further Assurances. On and after the Closing Date, Purchaser shall give such further assurances to Seller and shall execute, acknowledge and deliver all such acknowledgments and other instruments as Seller shall reasonably request to effectively relieve and discharge Seller from any obligations remaining with respect to the Deposits, other than as set forth in Sections 2(b), 3(e) and 12(a) hereof. (e) Consents. Purchaser shall cooperate with Seller in obtaining all consents of third parties, if any, to consummate the transactions contemplated hereunder. (f) Access to Customer Files. After the Closing, upon Seller's request, Purchaser shall provide Seller and its representatives, accountants and counsel reasonable access during normal business hours and upon two (2) Business Days' notice to Purchaser to (i) all information previously delivered to Purchaser by Seller at or subsequent to the Closing pertaining to the Deposits, and (ii) documents pertaining to the Deposits maintained by Purchaser, to the extent such documents relate to transactions between Depositors and Seller occurring prior to the Closing Date, provided that a representative of Purchaser shall be permitted to be present at all times. 8. The Closing. The consummation of the transactions provided for herein (the "Closing") shall take place at the offices of Seller in Wilmington, Delaware at 10:00 a.m. local time on Monday, June 25, 2001 (assuming all regulatory approvals required pursuant to Sections 6(a) and 7 (a) hereof have been received), or at such other location and/or such other date and/or time, and/or in such other manner (including but not limited to the exchange of documents by electronic mail, facsimile transmittal or otherwise), as the parties may agree upon (the "Closing Date"). - 12 - 13 9. Certain Transitional Matters. (a) Requests for Withdrawal. Following the Closing, Purchaser agrees with respect to the Deposits to honor in accordance with law and customary banking practices all properly presented Requests for Withdrawal from the Deposits presented to Purchaser, whether drawn on the withdrawal forms associated with Deposit accounts as previously provided by Seller, or those provided by Purchaser and, in all other respects, to discharge, in the usual course of its banking business, the duties and obligations of Seller existing at or arising after the Closing with respect to the Deposits. If any Depositor whose Deposit account is transferred to and assumed by Purchaser, instead of accepting the obligation of Purchaser to pay such accrued Deposit, shall request withdrawal from Seller for all or any part of any such assumed Deposit, Seller shall not be responsible for making and shall not make such payment. If Seller inadvertently pays in accordance with law and customary banking practices any such request for withdrawal presented to it in person by or on behalf of such a depositor, then, provided there are sufficient collected and available balances in the Depositor's Deposit account for such payment, Purchaser agrees to reimburse Seller promptly for such payment upon receipt from Seller of its certification that such payment has been made together with the original of the properly payable withdrawal request signed by or on behalf of such Depositor. (b) Records of Interest Paid. Seller shall be responsible for maintaining records with respect to interest paid by and/or posted by Seller prior to and as of the Closing Date on the Deposits and shall make that information available to Purchaser promptly upon request, to the extent that such information has not been previously provided to Purchaser. However, Seller shall have no such obligation as to interest paid or received or as to any transactions occurring after the Closing Date. - 13 - 14 (c) Designation of Employees. Seller and Purchaser shall each assign an employee who is familiar with their respective deposit data processing systems and operational procedures as their respective principal coordinators for the transactions described herein and the conversion of the Deposits to Purchaser's data processing systems. Such persons shall be the primary representatives for communications between Purchaser and Seller with respect to conversion planning and implementation and as to operational and transition matters following the Closing. (d) Communications to Depositors. Promptly following the execution of this Agreement, Seller shall at its expense prepare and mail a letter addressed to each depositor who maintains a Deposit account (a "Depositor"), informing such Depositors of the transaction contemplated hereunder, identifying Purchaser, providing a tentative Closing Date and explaining that the transaction contemplated hereunder is subject to regulatory approval. Prior to mailing such letter, Seller shall provide a copy of such letter to Purchaser for its approval as to form and content, which approval shall not be unreasonably conditioned, delayed or withheld. Prior to Closing, Purchaser may prepare and mail at its expense one or more letters in the nature of a welcome letter to each Depositor. Prior to mailing such letter(s), Purchaser shall provide a copy of each such letter to Seller for its approval as to form and content, which approval shall not be unreasonably conditioned, delayed or withheld. (e) Filings and Form 1099. Purchaser shall be responsible for the filing of all information returns and other reports required by local, state and federal law to the IRS, the Depositors and otherwise with respect to interest paid or received by Seller in and for the calendar year in which the Closing occurs. With respect to that calendar year, Purchaser shall, to the extent required by law, provide to the IRS a Form 1099 with respect to each Depositor and - 14 - 15 provide such Depositor with a copy of such Form 1099. Purchaser hereby agrees to assume from Seller all responsibility to so provide such Form 1099 for the period up to including the Closing Date during which Seller held such account using Purchaser's name and taxpayer identification number assigned by the IRS (and also including, if such inclusion is approved by tax counsel for Seller and for Purchaser, a reference to Seller's name and Seller's federal tax identification number) and agrees to provide Seller with copies of each Form 1099 provided for such period; provided, however, that in preparing such forms, Purchaser shall be entitled to rely on the information provided by Seller as set forth in Section 9(b) hereof, and Seller shall be responsible for any errors in the information provided on any Form 1099 to the extent that such errors are attributable to errors in the information provided by Seller. (f) Communications from and on Behalf of Depositors. Purchaser shall have the primary responsibility to receive and respond to inquiries and other communications made by or on behalf of Depositors to Seller or to Purchaser from time to time on and after the Closing Date with respect to any Deposits or the transactions contemplated by this Agreement; provided, however, that Seller shall cooperate with Purchaser in that regard. 10. Representations and Warranties of Seller. Seller hereby makes the following representations and warranties to Purchaser: (a) Organization; Authority. Seller is a national banking association duly organized, validly existing and in good standing under the laws of the United States. Seller has the corporate power and authority to own its properties, to carry on its business as presently conducted, and to enter into this Agreement and effect the transactions described herein. This Agreement and any other documents or instruments executed pursuant hereto and the execution, delivery and performance hereof and thereof have been duly authorized and approved by all - 15 - 16 necessary corporate action on the part of Seller, and this Agreement and the instruments and documents executed pursuant hereto constitute, or when executed will constitute, the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as enforcement may be limited by receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as by bankruptcy, insolvency, reorganization, moratorium or other rights of general applicability relating to or affecting creditors' rights, or the limiting effect of rules of law governing specific performance, equitable relief and other equitable remedies or the waiver of rights and remedies. (b) No Violation. Neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, will violate or conflict with the charter or bylaws of Seller, with any provision of any material agreement or any other material restriction of any kind to which Seller is a party or by which Seller is bound or subject to the receipt of required regulatory approvals described in this Agreement, or with any relevant statute, law, decree, regulation or order of state or federal governmental authority. (c) Deposits. Seller's Deposits (i) are not subject to any Encumbrances or any legal restraint or other legal process as of the date of this Agreement, except as set forth in Schedule 10(c) and except for liens in favor of Seller, and (ii) were solicited and accepted and have been maintained by Seller in material compliance with all applicable federal laws and regulations and applicable state laws and regulations to the extent not preempted by federal law, including but not limited those requiring minimum disclosures. Seller has duly and timely filed all returns, information returns and statements required to be filed in respect of interest paid, and has duly collected and paid over all withholding taxes and duly paid all other charges and penalties in respect of the periods covered by such returns, information returns and statements. - 16 - 17 Such returns, information returns and statements set forth with reasonable accuracy all items required to be set forth therein. To Seller's best knowledge, and disregarding the possibility of immaterial inaccuracies, each Deposit (i) is evidenced by and subject to a legal, valid and binding agreement between Seller and the named Depositor(s), executed by or on behalf of such Depositor(s), each of whom at the time of such execution and the capacity to contract and any signature(s) are the true signatures of the persons purporting to have signed; (ii) is enforceable according to its terms; and (iii) is not subject to any defense, counterclaim or set-off. Seller is not in default in any material manner under any of such Deposit agreements. The Deposits are insured by the FDIC through the Bank Insurance Fund to the extent permitted by law, and all premiums and assessments required to be paid in connection therewith have been paid when due by Seller. (d) Due Diligence and Certification of TINS and Backup Withholding. Seller has complied in all material respects with all IRS regulations and requirements concerning due diligence and certification of taxpayer identification numbers and backup withholding with respect to the Deposits. (e) Regulatory Approvals. The information furnished or to be furnished by Seller to Purchaser for the purpose of obtaining any regulatory approvals set forth in Section 6(a) hereof to complete and file applications is or will be true and complete in all material respects as of the date so furnished. (f) Limitation of Warranties. Except as may be expressly represented or warranted by Seller in this Agreement, or in any other documents executed and delivered pursuant hereto, Seller makes no representations or warranties whatsoever with regard to any liability or obligation being assumed by Purchaser as to any other matter or thing. - 17 - 18 11. Representations and Warranties of Purchaser. Purchaser hereby makes the following representations and warranties to Seller: (a) Organization; Authority. Purchaser is a federal savings association duly organized and existing and in good standing under the laws of the United States. Purchaser has the corporate power and authority to own the Deposits being acquired, to assume the liabilities being transferred and to enter into this Agreement and effect the transfer described herein. This Agreement and any other documents or instruments executed pursuant hereto and the execution, delivery and performance hereof and thereof have been duly authorized and approved by all necessary corporate action on the part of Purchaser, and this Agreement and the instruments and documents executed pursuant hereto constitutes, or when executed will constitute, the valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as enforcement may be limited by receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as by bankruptcy, insolvency, reorganization, moratorium or other rights of general applicability relating to or affecting creditors' rights, or the limiting effect of rules of law governing specific performance, equitable relief and other equitable remedies or the waiver of rights and remedies. (b) No Violation. Neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, will violate or conflict with the charter or bylaws of Purchaser, with any provision of any agreement or any other restriction of any kind to which Purchaser is a party or by which Purchaser is bound or subject to the receipt of required regulatory approvals described in this Agreement, or with any relevant statute, law, decree, regulation, or order of any government authority. - 18 - 19 (c) Regulatory Approvals. The information furnished or to be furnished by Purchaser to Seller for the purpose of obtaining any regulatory approvals set forth in Subsection 7(a) hereof to complete and file applications is or will be true and complete in all material respects as of the date so furnished. (d) Limitation of Warranties. Except as may be expressly represented or warranted in this Agreement by Purchaser or in any other documents executed and delivered pursuant hereto, Purchaser makes no representations or warranties whatsoever with regard to any other matter or thing. 12. Indemnification. (a) Indemnification by Seller. Seller will indemnify, hold harmless, and defend Purchaser from and against any and all claims, demands, causes of action, suits, proceedings, losses, damages, decrees, rulings, liabilities, obligations, judgments, orders, costs, or expenses of every kind and nature, together with reasonable attorneys' fees and legal costs in connection herewith, whether known or unknown, and whether now existing or hereafter arising (such foregoing consequences are collectively referred to herein as "Indemnifiable Losses"), which are actually incurred by Purchaser in connection with or which arise out of or result from or are based upon (i) Seller's operations or business transactions occurring and to be wholly performed prior to the Closing or any information regarding the Deposits furnished by Seller to Purchaser; (ii) any liability or obligation of Seller not expressly assumed by Purchaser in this Agreement; or (iii) Seller's failure to comply with any statute or regulation of any federal or state governmental agency related to Seller's operations or business transactions as described in (i) above occurring prior to the Closing. - 19 - 20 (b) Indemnification by Purchaser. Purchaser will indemnify, hold harmless, and defend Seller from and against: (i) any and all Indemnifiable Losses which are actually incurred by Seller in connection with or which arise out of or result from or are based upon (A) Purchaser's operations or business transactions occurring after the Closing which in any manner, directly or indirectly, involve the Deposits; or (B) Purchaser's failure to comply with any statute or regulation of any federal or state governmental agency; and (ii) any and all Indemnifiable Losses resulting from, based upon, or arising out of any breach by Purchaser of any of its representations or warranties under or in connection with this Agreement, or any failure of Purchaser to perform any of its covenants, agreements, or obligations (including, without limitation, any obligation to provide copies of Form 1099 arising under Section 9(f) hereof) under or in connection with this Agreement; provided, however, that Purchaser shall have no duty to indemnify if the otherwise Indemnifiable Loss resulting from the obligations arising under Section 9(f) hereof is (i) related to a breach by Seller of the representation contained in Section 10(c) hereof or (ii) based on information regarding the Deposits furnished by Seller to Purchaser. (c) Notice and Procedure. The party seeking to be indemnified hereunder shall promptly give written notice and furnish adequate documentation to the other party of any claims in respect of which indemnity is sought. The indemnifying party, through its own counsel and at its own expense, shall defend any such claim and shall have exclusive control over the investigation, preparation, and defense of such claim and negotiations relating to its settlement or compromise. The obligations of either party to indemnify the other hereunder apply only if the party seeking to be indemnified cooperates with and assists the indemnifying party in all reasonably necessary respects in the conduct of the defense of such claim. - 20 - 21 13. Conditions to Purchaser's Obligations. Except as otherwise provided herein, the obligations of Purchaser to complete the transactions provided for in this Agreement are conditioned upon fulfillment (or written waiver), on or before the Closing Date, of each of the following conditions: (a) Representations and Warranties True. The representations and warranties made by Seller in this Agreement shall be true in all material respects on and as of the Closing Date except as to any representation or warranty which specifically relates to an earlier date and except for any changes permitted by the terms hereof or consented to by Purchaser. (b) Obligations Performed. Seller shall have performed and complied in all material respects with all obligations and agreements required by this Agreement to be performed or complied with by it prior to or on the Closing Date and shall have executed and have delivered all documents necessary to complete the transactions contemplated herein. (c) No Adverse Litigation or Other Proceedings. On the Closing Date, no action, suit, protest or proceeding (administrative, regulatory, or otherwise) shall be pending or threatened against Purchaser or Seller which involves the Deposits or the transactions contemplated herein and which might reasonably be expected to materially and adversely affect the transactions contemplated herein. 14. Conditions to Seller's Obligations. Except as otherwise provided herein, the obligations of Seller to complete the transactions provided for in this Agreement are conditioned upon fulfillment (or written waiver), on or before the Closing Date, of each of the following conditions: (a) Representations and Warranties True. The representation and warranties made by Purchaser in this Agreement shall be true in all material respects on and as of the - 21 - 22 Closing Date, except as to any representation or warranty which specifically relates to an earlier date and except for any changes permitted by the terms hereof or consented to by Seller. (b) Obligations Performed. Purchaser shall have performed and complied in all material respects with obligations and agreements required by this Agreement to be performed or complied with by it prior to or on the Closing Date. (c) No Adverse Litigation or Other Proceedings. On the Closing Date, no action, suit, protest or proceeding (administrative, regulatory, or otherwise) shall be pending or threatened against Purchaser or Seller which involves the Deposits or the transactions contemplated herein and which might reasonably be expected to materially and adversely affect the transactions contemplated herein. 15. Condition to Obligations of Both Parties. The obligations of both parties to this Agreement are subject to Seller and Purchaser having received all such regulatory approvals, permissions and consents, if any, as are required pursuant to Sections 6(a) and 7(a) hereof to consummate the transactions contemplated herein. 16. Termination. (a) Methods of Termination. This Agreement may be terminated: (i) On or at any time prior to the Closing Date by the mutual consent in writing of Purchaser and Seller; (ii) On the Closing Date by Purchaser in writing if any of the conditions set forth in Section 16 of this Agreement shall not have been satisfied or effectively waived in writing by Purchaser; - 22 - 23 (iii) On the Closing Date by Seller in writing if any of the conditions set forth in Section 17 of this Agreement shall not have been satisfied or effectively waived in writing by Seller; (iv) On or at any time prior to the Closing by Purchaser or Seller in writing, if any representation or warranty of the other party shall be false in any material respect (as if such representation or warranty had been made on and as of date hereof and on the date of the notice of breach referred to below) , or if the other party shall materially breach or be in material violation of any covenant contained herein; provided, however, that if such falsity, breach or violation is reasonably subject to cure, then this provision shall apply only if the falsity, breach or violation shall not have been cured by the earlier of either five (5) Business Days after the giving of written notice to the breaching party of such breach or the Closing Date; or (v) On or at any time subsequent to December 31, 2001, if the Closing shall not have taken place by such date, by Purchaser or Seller in writing. (b) Procedure Upon Termination. In the event of termination by Purchaser or Seller pursuant to Section 16(a), written notice thereof shall be given to the other party, and this Agreement shall terminate immediately upon receipt of such notice unless an extension is consented to in writing by the party having the right to terminate provided herein. If this Agreement is terminated as provided herein: (i) each party will return or certify the destruction of all documents, work papers, and other materials of the other party relating to this transaction, whether obtained before or after the execution hereof, to the party furnishing the same, and - 23 - 24 (ii) all information received by either party with respect to the business of the other party (other than information which is a matter of public knowledge or which heretofore has been or hereafter is published in any publication for public distribution or filed as public information with any governmental authority) shall not at any time be used for any business purpose by such party or disclosed by such party to third persons. (c) Effect of Termination. No termination of this Agreement under Sections 16(a) (ii), (iii), (iv) or (v) for any reason or in any manner shall release, or be construed as so releasing, either party hereto from any liability for damage to the other party hereto arising out of, in connection with, or otherwise relating to, directly or indirectly, such party's material breach or violation, such party's material default or such party's failure in performance of any of its material covenants, agreements, duties or obligations arising hereunder. 17. Miscellaneous Provisions. (a) Amendment and Modification. Seller and Purchaser by mutual consent of their duly authorized officers may amend, modify and supplement this Agreement in such manner as may be agreed upon by them in writing. (b) Waiver or Extension. Except with respect to required approvals of the applicable governmental authorities, either Seller or Purchaser, by written instrument signed by a duly authorized officer thereof, may extend the time for the performance of any of the obligations or other acts of the other party and may waive (i) any inaccuracies in the representations or warranties in any document delivered pursuant hereto, or (ii) compliance with any of the undertakings, obligations, covenants or other acts required or contained herein. (c) Assignment. This Agreement and all of the provisions hereof shall be binding upon and shall inure solely to the benefit of the parties hereto and their respective successors, but - 24 - 25 neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, prior to the Closing Date, by either of the parties hereto. (d) Survival of Representations and Warranties. The representations and warranties set forth in this Agreement shall not survive the Closing Date except as expressly provided to the contrary herein or unless the context otherwise requires. Obligations of the parties arising under Sections 6(e), 6(f), 6(g), 6(h), 7(c), 7(d), 7(f), 9, 10 (c), 10 (d), , 12, 16 and 17 of this Agreement shall survive the Closing Date. (e) Payment of Expenses. Except as otherwise specifically provided in this Agreement, each party hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder. Except as otherwise provided herein, any expenses, fees and costs necessary for any approvals of the appropriate federal and/or state regulatory authorities, or for any notice to Depositors of the assumption of the Deposits provided for in this Agreement, shall be paid by the party seeking such approval or giving such notice. (f) Address for Notice, etc. All notices, requests, demands, consents and other communications provided hereunder and under any related documents shall be in writing (including telegraphic communication) and mailed (by registered or certified mail) or telegraphed or delivered to the applicable party at the addresses indicated below: If to Seller: ADVANTA NATIONAL BANK Attention: John Moore, Vice President One Righter Parkway Wilmington, Delaware 19803 With a copy to: Elizabeth Mai, Esq., General Counsel Advanta Corp. Welsh and McKean Roads Spring House, Pennsylvania 19477 - 25 - 26 If to Purchaser: E*TRADE BANK Attention: Arlen W. Gelbard, President Ballston Tower 671 North Glebe Road Arlington, Virginia 22203 With a copy to: John A. Buchman, General Counsel E*TRADE Bank Ballston Tower 671 North Glebe Road Arlington, VA 22203 or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 17(f). (g) Counterparts. This Agreement may be executed contemporaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (h) Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. (i) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware except to the extent federal law may be applicable. (j) Integration. This Agreement represents the complete understanding and agreement of the parties hereto, and supersedes all previous understandings and agreements, relating to the subject matter hereof. (k) Trial by Jury. Each party hereby irrevocably waives the right to demand, and no party or successor or assignee of a party may seek, a trial by jury in any action, proceeding or counterclaim arising out of or in any way relating to this Agreement or any of the other agreements, instruments and documents or the transactions contemplated hereby. No party will - 26 - 27 seek to consolidate any such action in which a jury trial has been waived with any other action in which a jury trial is available as of right or cannot be waived. The parties have fully considered the subject of this Section 17(k) and understand that it is subject to no exceptions. (l) Waiver of Certain Damages. Each party to the fullest extent permitted by law hereby irrevocably waives any rights that they may have to punitive, special, incidental, exemplary or consequential damages in respect of any litigation based upon, or arising out of, this Agreement or any related agreement or any course of conduct, course of dealing, statements or actions of any of them relating thereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the date first written above. SELLER: ATTEST: ADVANTA NATIONAL BANK /s/ Ronald Samuels By: /s/ John Moore - ------------------------------- ----------------------------- Title: Assistant Vice President Name: John Moore Title: Vice President PURCHASER: ATTEST: E*TRADE BANK /s/ By: /s/ Arlen W. Gelbard - ------------------------------- ----------------------------- Title: Secretary Name: Arlen W. Gelbard Title: President and Chief Operating Officer - 27 - 28 Schedule 2(e) Valuation Methodology: - ----------------------- For the purposes of this transaction, the term "Total Deposits" shall mean the sum of Total Time Deposits plus the Total Mark to Market Valuation (this calculation is applicable to the Total Time Deposit Accounts as described in Exhibit "A"), plus Total Other Deposits. "Total Time Deposits" shall mean the sum of Retail Time Deposits and Jumbo Time Deposits plus accrued interest on such deposits through the day before the Closing Date. "Total Other Deposits" shall mean the sum of the following [Advanta National Bank] deposits: Guaranteed Money Market Account, Jumbo Money Market Account, Statement Savings Account and Demand Deposit Account plus accrued interest on such accounts through the day before the Closing Date. "Total Mark to Market Valuation" shall mean the sum of Monthly Mark to Market Values between June 25, 2001 and June 30, 2005. "Monthly Mark to Market Values" shall mean the product of the Discount Rate Factor (expressed as a percentage) times the Total Time Deposits by maturity date. The "Discount Rate Factor" for any deposit shall mean the product of the Discount Rate times the number of months remaining to the deposit's maturity date divided by 12. The "Discount Rate" shall mean the Weighted Average Rate minus the Swap Rate calculated each month during the period June 25, 2001 to June 30, 2005. The "Weighted Average Rate" corresponding to each monthly maturity amount shall mean the sum of the product of each time deposit's annual percentage rate (such rates to be identified as the coupon rates on liability accounts converted from Seller's information system) multiplied by its respective principal and accrued interest though the day before the Closing Date, divided by the sum of such principal and accrued interest on these monthly maturities. The "Swap Rate" shall be defined by converting the Bond Equivalent Rates applicable to each month's Total Time Deposit maturities to a simple rate. The applicable Bond Equivalent Rates (quoted as the "ask" price) shall be obtained from a U.S. Dollar Swap Curve schedule accessed from the Bloomberg Bond Market Information Service (specifically, schedule "Corp. SWYC"). Swap Rates not available for specific months shall be interpolated from the rates obtained from this source. - 28 - 29 Payment Methodology: - --------------------- Payments to be made under Section 2 of this Agreement shall be calculated according to the methodology identified below. The amounts shown (except the 0.008 premium rate, which is defined in Section 2 (a) of this Agreement) represent estimates of their approximate values projected to the time of the Closing, expected to occur on or about June 25, 2001, and are subject to change.
Total Time Deposits: $335,000,000 Total Mark to Market Valuation: + 5,800,000 Total Other Deposits: + 62,000,000 ----------------- Total Deposits: $402,800,000 Total Premium Amount: [x .008] - $3,222,400 ----------------- Payment Amount: $399,577,600
- 29 - 30 Exhibit A ---------
TOTAL TIME MONTHS TO DEPOSITS BY NUMBER OF CD WEIGHTED DISCOUNT MONTHLY MARK TO EXPIRATION MATURITY MATURITY DATE MATURING AVERAGE RATE SWAP RATE RATE MARKET VALUES Apr-01 0 $23,429,558 550 6.2823% 4.5180% 1.76% $ 0.00 May-01 1 $23,344,390 520 5.9268% 4.4711% 1.46% $ 28,317.51 Jun-01 2 $17,904,288 410 5.8570% 4.4039% 1.45% $ 43,361.42 Jul-01 3 $24,387,360 315 6.1068% 4.3623% 1.74% $ 106,355.13 Aug-01 4 $22,336,782 30 5.7317% 4.3330% 1.40% $ 104,144.52 Sep-01 5 $17,301,019 22 6.0248% 4.3036% 1.72% $ 124,078.25 Oct-01 6 $29,191,212 20 5.9512% 4.2792% 1.67% $ 244,044.81 Nov-01 7 $17,569,001 20 6.2221% 4.2861% 1.94% $ 198,415.21 Dec-01 8 $11,668,279 20 6.1994% 4.2931% 1.91% $ 148,291.64 Jan-02 9 $21,562,274 20 6.1579% 4.3000% 1.86% $ 300,448.60 Feb-02 10 $29,824,735 20 5.8272% 4.3110% 1.52% $ 376,827.75 Mar-02 11 $29,184,336 20 6.8813% 4.3220% 2.56% $ 684,664.26 Apr-02 12 $41,241,584 20 7.0160% 4.3330% 2.68% $1,106,535.52 May-02 13 $2,757,542 20 6.6966% 4.3743% 2.32% $ 69,375.18 Jun-02 14 $2,895,304 20 6.6870% 4.4156% 2.27% $ 76,725.87 Jul-02 15 $6,579,775 20 6.7063% 4.4569% 2.25% $ 185,012.03 Aug-02 16 $3,267,518 20 6.1770% 4.4982% 1.68% $ 73,142.37 Sep-02 17 $1,796,838 20 5.9814% 4.5395% 1.44% $ 36,705.12 Oct-02 18 $5,198,279 20 6.0728% 4.5808% 1.49% $ 116,340.32 Nov-02 19 $3,424,905 20 6.6223% 4.6221% 2.00% $ 108,466.65 Dec-02 20 $1,770,433 20 6.3313% 4.6634% 1.67% $ 49,214.81 Jan-03 21 $3,847,584 20 6.2507% 4.7047% 1.55% $ 104,098.83 Feb-03 22 $15,109,241 20 5.7657% 4.7460% 1.02% $ 282,478.40 Mar-03 23 $4,637,302 20 6.2334% 4.7873% 1.45% $ 128,537.13 Apr-03 24 $3,800,135 20 7.0481% 4.8286% 2.22% $ 168,688.39 May-03 25 $578,202 20 6.4678% 4.8559% 1.61% $ 19,416.79 Jun-03 26 $244,068 20 6.3129% 4.8832% 1.43% $ 7,560.21 Jul-03 27 $112,529 20 5.7777% 4.9105% 0.87% $ 2,195.51 Aug-03 28 $295,548 20 6.0391% 4.9378% 1.10% $ 7,594.52 Sep-03 29 $1,519,087 20 6.0437% 4.9651% 1.08% $ 39,595.20 Oct-03 30 $8,744,253 20 5.8334% 4.9925% 0.84% $ 183,841.60 Nov-03 31 $2,098,085 20 5.7258% 5.0198% 0.71% $ 38,267.68 Dec-03 32 $1,905,489 20 5.5760% 5.0471% 0.53% $ 26,876.12 Jan-04 33 $624,152 20 5.5267% 5.0744% 0.45% $ 7,763.29 Feb-04 34 $1,822,054 20 5.7381% 5.1017% 0.64% $ 32,854.05 Mar-04 35 $1,423,072 20 5.8098% 5.1290% 0.68% $ 28,256.62 Apr-04 36 $1,280,619 20 6.3762% 5.1563% 1.22% $ 46,865.58 May-04 37 $794,510 20 6.5693% 5.1757% 1.39% $ 34,137.87 Jun-04 38 $40,067 20 5.6638% 5.1951% 0.47% $ 594.58 Jul-04 39 $171,633 20 5.9655% 5.2145% 0.75% $ 4,189.16 Aug-04 40 $236,329 20 5.9700% 5.2339% 0.74% $ 5,798.40 Sep-04 41 $195,937 20 5.9725% 5.2533% 0.72% $ 4,814.31 Oct-04 42 $153,988 20 6.0600% 5.2727% 0.79% $ 4,242.97 Nov-04 43 $52,139 20 6.1619% 5.2921% 0.87% $ 1,625.00 Dec-04 44 $41,718 20 6.2000% 5.3115% 0.89% $ 1,359.02 Jan-05 45 $10,329 20 6.4082% 5.3309% 1.08% $ 417.24 Feb-05 46 $859,802 20 7.0059% 5.3504% 1.66% $ 54,564.60 Mar-05 47 $660,059 20 7.0900% 5.3698% 1.72% $ 44,472.42 Apr-05 48 $2,965,091 20 7.0900% 5.3892% 1.70% $ 201,726.62 May-05 49 $1,864,169 20 7.0290% 5.4037% 1.63% $ 123,721.25 Jun-05 50 $154,372 20 6.9463% 5.4182% 1.53% $ 9,829.32 TOTAL $392,876,974.80 6.2267% 4.44 % 1.78% $5,796,849.62
Swap Rates - ----------
Duration 4/19/2001 Months Bond Equiv Simple Rate 0 4.5691% 4.5180% 1 4.5212% 4.4711% 2 4.4525% 4.4039% 3 4.4100% 4.3623% 4 4.3800% 4.3330% 5 4.3500% 4.3036% 6 4.3250% 4.2792% 9 4.3463% 4.3000% 12 4.3800% 4.3330% 24 4.8870% 4.8286% 36 5.2230% 5.1563% 48 5.4620% 5.3892% 60 5.6410% 5.5633%
TO DETERMINE THE MARK TO MARKET: 1. Each month's Total Time Deposits maturing were determined. 2. The Weighted Average Rate was determined for each month's Total Time Deposits maturing. 3. The Swap Rate was determined for month using the Bloomberg bond Market Information Service, (interpolated from this source when months were not available). 4. The Discount Rate was determined by taking the difference between the Weighted Average Rate and the Swap Rate. 5. The Monthly Mark to Market Values were determined using the discount rate. 6. The sum of all of the Monthly Mark to Market Values is the full mark to market. - 30 - 31 Schedule 10(c) None. - 31 - EX-12 4 w52415ex12.txt CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 ADVANTA CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
THREE MONTHS ENDED SIX MONTHS ENDED ($ IN THOUSANDS) JUNE 30, JUNE 30, - ---------------- -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- Income (loss) from continuing operations $ (3,173) $17,749 $(40,529) $23,039 Income tax benefit 0 3,310 16,880 0 -------- ------- -------- ------- Earnings (loss) before income tax benefit (A) (3,173) 14,439 (57,409) 23,039 Fixed charges: Interest 26,119 21,559 50,395 41,738 One-third of all rentals 536 467 805 896 Preferred stock dividend of subsidiary trust 2,248 2,248 4,495 4,495 -------- ------- -------- ------- Total fixed charges 28,903 24,274 55,695 47,129 -------- ------- -------- ------- Earnings (loss) before income tax benefit and fixed charges $ 25,730 $38,713 $ (1,714) $70,168 Ratio of earnings to fixed charges (B) N/M(C) 1.59x N/M(C) 1.49x
(A) Earnings before income taxes in the six months ended June 30, 2001 include $41.8 million of unusual charges. Unusual charges include severance, outplacement and other compensation costs associated with restructuring our corporate functions commensurate with the ongoing businesses as well as expenses associated with exited businesses and asset impairments. (B) For purposes of computing these ratios, "earnings" represent income from continuing operations before income taxes plus fixed charges. "Fixed charges" consist of interest expense, one-third (the portion deemed representative of the interest factor) of rental expense on operating leases, and preferred stock dividends of subsidiary trust. (C) The ratio calculated in the three and six months ending June 30, 2001 is less than 1.00 and therefore, not meaningful. In order to achieve a ratio of 1.00, earnings before income taxes and fixed charges would need to increase by $3,173 for the three months ended June 30, 2001 and $57,409 for the six months ended June 30, 2001. 41 -----END PRIVACY-ENHANCED MESSAGE-----