10-Q 1 w60429e10-q.txt QUARTERLY REPORT FOR THE PERIOD ENDED 3/31/2002 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 March 31, 2002 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 May 3, 2002 Common Stock, $.01 par value 10,041,017 shares Class B Outstanding at May 3, 2002 Common Stock, $.01 par value 18,510,002 shares 1 TABLE OF CONTENTS
PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Income Statements 4 Consolidated Statements of Changes in Stockholders' Equity 5-6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 PART II - OTHER INFORMATION Item 1. Legal Proceedings 29 Item 6. Exhibits and Reports on Form 8-K 32
2 ITEM 1. FINANCIAL STATEMENTS ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS) MARCH 31, DECEMBER 31, 2002 2001 ----------- ------------ (UNAUDITED) ASSETS Cash $ 19,841 $ 20,952 Federal funds sold 273,582 229,889 Restricted interest-bearing deposits 110,280 113,956 Investments available for sale 171,629 246,679 Receivables, net: Held for sale 184,906 202,612 Other 217,193 220,795 ---------- ---------- Total receivables, net 402,099 423,407 Retained interests in securitizations 87,858 88,658 Amounts due from securitizations 83,865 80,325 Premises and equipment, net 24,946 25,722 Other assets 252,793 264,689 Net assets of discontinued operations 139,098 142,403 ---------- ---------- TOTAL ASSETS $1,565,991 $1,636,680 ---------- ---------- LIABILITIES Deposits: Noninterest-bearing $ 8,849 $ 6,500 Interest-bearing 630,237 630,415 ---------- ---------- Total deposits 639,086 636,915 Debt 294,978 323,582 Other borrowings 0 32,317 Other liabilities 164,802 177,567 ---------- ---------- TOTAL LIABILITIES 1,098,866 1,170,381 ---------- ---------- Commitments and contingencies 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 2002 and 2001 1,010 1,010 Class A voting common stock, $.01 par value: authorized - 200,000,000 shares; issued - 10,041,071 shares in 2002 and 2001 100 100 Class B non-voting common stock, $.01 par value: authorized - 200,000,000 shares; issued - 20,079,598 shares in 2002 and 17,939,639 shares in 2001 201 179 Additional paid-in capital 241,467 223,362 Deferred compensation (17,018) (64) Unearned ESOP shares (11,165) (11,295) Accumulated other comprehensive income 816 1,259 Retained earnings 181,409 179,370 Less: Treasury stock at cost, 1,559,079 Class B common shares in 2002 and 1,348,079 Class B common shares in 2001 (29,695) (27,622) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 367,125 366,299 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,565,991 $1,636,680 ---------- ----------
See Notes to Consolidated Financial Statements 3 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED MARCH 31, 2002 2001 -------- ---------- (UNAUDITED) Interest income: Receivables $ 20,476 $ 18,503 Investments 3,270 15,501 Other interest income 2,660 2,187 -------- ---------- Total interest income 26,406 36,191 Interest expense: Deposits 6,265 12,658 Debt 6,786 10,783 Other borrowings 59 835 -------- ---------- Total interest expense 13,110 24,276 -------- ---------- Net interest income 13,296 11,915 Provision for credit losses 10,700 7,940 -------- ---------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 2,596 3,975 NONINTEREST REVENUES: Securitization income 29,647 21,261 Interchange income 20,193 17,622 Servicing revenues 7,942 6,652 Other revenues, net (2,315) (17,723) -------- ---------- TOTAL NONINTEREST REVENUES 55,467 27,812 -------- ---------- EXPENSES: Operating expenses 48,958 43,053 Minority interest in income of consolidated subsidiary 2,220 2,220 Unusual charges 0 40,750 -------- ---------- TOTAL EXPENSES 51,178 86,023 -------- ---------- Income (loss) before income taxes 6,885 (54,236) Income tax expense (benefit) 2,651 (16,880) -------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS 4,234 (37,356) Loss from discontinued operations, net of tax 0 (8,438) Gain, net, on discontinuance of mortgage and leasing businesses, net of tax 0 16,361 -------- ---------- NET INCOME (LOSS) $ 4,234 $ (29,433) -------- ---------- Basic income (loss) from continuing operations per common share Class A $ 0.14 $ (1.49) Class B 0.17 (1.48) Combined 0.16 (1.48) -------- ---------- Diluted income (loss) from continuing operations per common share Class A $ 0.14 $ (1.49) Class B 0.17 (1.48) Combined 0.16 (1.48) -------- ---------- Basic net income (loss) per common share Class A $ 0.14 $ (1.18) Class B 0.17 (1.16) Combined 0.16 (1.17) -------- ---------- Diluted net income (loss) per common share Class A $ 0.14 $ (1.18) Class B 0.17 (1.16) Combined 0.16 (1.17) -------- ---------- Basic weighted average common shares outstanding Class A 9,133 9,103 Class B 16,301 16,200 Combined 25,434 25,303 -------- ---------- Diluted weighted average common shares outstanding Class A 9,139 9,103 Class B 16,980 16,200 Combined 26,119 25,303 -------- ---------- See Notes to Consolidated Financial Statements
4 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, 2000 $1,010 $100 $176 $220,371 --------- ------ ---- ---- -------- Net income (loss) $ (70,533) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of ($1,379) 2,561 --------- Comprehensive income (loss) $ (67,972) ========= Preferred and common cash dividends declared Exercise of stock options 4 3,476 Stock option exchange for stock and restricted stock tender offer 934 Modification of stock options 1,966 Issuance of restricted stock 1 720 Amortization of deferred compensation Retirement of restricted stock (2) (4,118) Stock buyback ESOP shares committed to be released 13 --------- ------ ---- ---- -------- BALANCE AT DECEMBER 31, 2001 $1,010 $100 $179 $223,362 --------- ------ ---- ---- -------- Net income (loss) $ 4,234 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $238 (443) --------- Comprehensive income (loss) $ 3,791 ========= Preferred and common cash dividends declared Exercise of stock options 28 Issuance of restricted stock 23 18,096 Amortization of deferred compensation Retirement of restricted stock (1) 1 Stock buyback ESOP shares committed to be released (20) --------- ------ ---- ---- -------- BALANCE AT MARCH 31, 2002 $1,010 $100 $201 $241,467 --------- ------ ---- ---- --------
See Notes to Consolidated Financial Statements 5 ($ IN THOUSANDS)
DEFERRED ACCUMULATED COMPENSATION OTHER TOTAL & UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY ----------- ------------- -------- ----- ------ BALANCE AT DECEMBER 31, 2000 $(19,050) $ (1,302) $257,562 $(17,965) $440,902 -------- -------- -------- -------- -------- Net income (loss) (70,533) (70,533) Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of ($1,379) 2,561 2,561 Comprehensive income (loss) Preferred and common cash dividends declared (7,659) (7,659) Exercise of stock options 3,480 Stock option exchange for stock and restricted stock tender offer 618 (2,152) (600) Modification of stock options 1,966 Issuance of restricted stock (721) 0 Amortization of deferred compensation 3,256 3,256 Retirement of restricted stock 4,120 0 Stock buyback (7,505) (7,505) ESOP shares committed to be released 418 431 -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2001 $(11,359) $ 1,259 $179,370 $(27,622) $366,299 -------- -------- -------- -------- -------- Net income (loss) 4,234 4,234 Other comprehensive income (loss): Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $238 (443) (443) Comprehensive income (loss) Preferred and common cash dividends declared (2,195) (2,195) Exercise of stock options 28 Issuance of restricted stock (18,119) 0 Amortization of deferred compensation 1,164 1,164 Retirement of restricted stock 0 Stock buyback (2,073) (2,073) ESOP shares committed to be released 131 111 -------- -------- -------- -------- -------- BALANCE AT MARCH 31, 2002 $(28,183) $ 816 $181,409 $(29,695) $367,125 -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements 6 ADVANTA CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED ($ IN THOUSANDS) MARCH 31, 2002 2001 --------- ---------- (UNAUDITED) OPERATING ACTIVITIES - CONTINUING OPERATIONS Net income (loss) $ 4,234 $ (29,433) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss from discontinued operations, net of tax 0 8,438 Gain, net, on discontinuance of mortgage and leasing businesses, net of tax 0 (16,361) Investment securities losses 2,627 8,197 Depreciation 2,276 3,103 Provision for credit losses 10,700 7,940 Change in deferred origination costs, net of deferred fees (611) (2,416) Change in receivables held for sale 12,706 (113,752) Proceeds from sale of receivables held for sale 5,000 100,000 Change in amounts due from securitizations, other assets and other liabilities 9,213 24,762 Change in retained interests in securitizations 800 0 --------- ---------- Net cash provided by (used in) operating activities 46,945 (9,522) --------- ---------- INVESTING ACTIVITIES - CONTINUING OPERATIONS Change in federal funds sold and interest- bearing deposits (40,017) (417,108) Purchase of investments available for sale (90,097) (1,188,996) Proceeds from sales of investments available for sale 125,193 584,698 Proceeds from maturing investments available for sale 36,645 225,166 Change in receivables not held for sale (6,487) (15,853) Purchases of premises and equipment, net (1,500) (2,325) --------- ---------- Net cash provided by (used in) investing activities 23,737 (814,418) --------- ---------- FINANCING ACTIVITIES - CONTINUING OPERATIONS Change in demand and savings deposits (391) 13,063 Proceeds from issuance of time deposits 98,386 187,538 Payments for maturing time deposits (98,818) (408,861) Proceeds from issuance of debt 27,576 107,860 Payments on redemption of debt (65,294) (48,808) Change in other borrowings (32,317) (131) Proceeds from issuance of stock 28 1,230 Stock buyback (2,073) 0 Cash dividends paid (2,195) (2,006) --------- ---------- Net cash used in financing activities (75,098) (150,115) --------- ---------- DISCONTINUED OPERATIONS Proceeds from the exit of our mortgage business 0 1,093,975 Other cash provided by (used in) operating activities 3,305 (100,836) --------- ---------- Net cash provided by operating activities of discontinued operations 3,305 993,139 --------- ---------- Net increase (decrease) in cash (1,111) 19,084 Cash at beginning of period 20,952 1,716 --------- ---------- Cash at end of period $ 19,841 $ 20,800 --------- ----------
See Notes to Consolidated Financial Statements 7 ADVANTA CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED) MARCH 31, 2002 (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 accounting principles generally accepted in the United States 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 allowance for credit losses, the fair value of venture capital investments, 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) RESTRICTED INTEREST-BEARING DEPOSITS AND INVESTMENTS AVAILABLE FOR SALE Restricted interest-bearing deposits include amounts held in escrow in connection with our litigation with Fleet Financial Group ("Fleet") of $72.4 million at March 31, 2002 and $72.0 million at December 31, 2001. Restricted interest-bearing deposits also include amounts held in escrow in connection with other litigation-related contingencies of $33.1 million at March 31, 2002 and $36.1 million at December 31, 2001. 8 Investments available for sale consisted of the following:
MARCH 31, 2002 DECEMBER 31, 2001 -------------------------- ------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE -------- -------- -------- -------- U.S. Treasury & other U.S. Government securities $ 55,760 $ 56,534 $ 85,064 $ 86,202 State and municipal securities 3,024 3,081 3,889 4,005 Collateralized mortgage obligations 15,935 16,220 20,909 21,318 Mortgage-backed securities 10,405 10,549 9,961 10,235 Equity securities(1) 22,869 22,869 26,621 26,621 Other 62,381 62,376 98,299 98,298 -------- -------- -------- -------- Total investments available for sale $170,374 $171,629 $244,743 $246,679 -------- -------- -------- --------
(1) Includes venture capital investments of $14.9 million at March 31, 2002 and $18.6 million at December 31, 2001. The amount shown as amortized cost represents fair value for these investments. NOTE 3) RECEIVABLES Receivables on the balance sheet, including those held for sale, consisted of the following:
MARCH 31, DECEMBER 31, 2002 2001 -------- -------- Business credit card receivables $395,766 $416,265 Other receivables 28,170 28,189 -------- -------- Gross receivables 423,936 444,454 -------- -------- Add: Deferred origination costs, net of deferred fees 21,535 20,924 Less: Allowance for credit losses Business credit cards (42,370) (41,169) Other receivables (1,002) (802) -------- -------- Total allowance (43,372) (41,971) -------- -------- Receivables, net $402,099 $423,407 -------- --------
Gross managed receivables (owned receivables and securitized receivables) and managed credit quality data were as follows:
MARCH 31, DECEMBER 31, 2002 2001 ---------- ---------- Owned business credit card receivables $ 395,766 $ 416,265 Owned other receivables 28,170 28,189 Securitized business credit card receivables 1,630,309 1,626,709 ---------- ---------- Total managed receivables 2,054,245 2,071,163 ---------- ---------- Nonperforming assets - managed 92,907 81,666 Receivables 30 days or more delinquent - managed 147,428 137,517 Net charge-offs year-to-date - managed 48,285 143,593 ---------- ----------
9 NOTE 4) ALLOWANCE FOR CREDIT LOSSES The following table presents activity in the allowance for credit losses for the periods presented:
THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2002 2001 -------- -------- Beginning balance $ 41,971 $ 33,367 Provision for credit losses 10,700 7,940 Gross charge-offs (10,383) (6,830) Recoveries 1,084 891 -------- -------- Net charge-offs (9,299) (5,939) -------- -------- Ending balance $ 43,372 $ 35,368 -------- --------
NOTE 5) SECURITIZATION ACTIVITIES The following represents business credit card securitization data for the three months ended March 31, 2002 and 2001, and the key assumptions used in measuring the fair value of retained interests at the time of each new securitization or replenishment during those periods.
THREE MONTHS ENDED MARCH 31, MARCH 31, 2002 2001 ------------ ------------ Securitization income $ 29,647 $ 21,261 Interchange income 15,655 13,124 Servicing revenues 7,942 6,652 Proceeds from new securitizations 5,000 100,000 Proceeds from collections reinvested in revolving-period securitizations 903,768 717,638 Cash flows received on retained interests 51,394 38,750 KEY ASSUMPTIONS: Discount rate 12.0% 12.0% Monthly payment rate 18.2% - 18.3% 18.8% - 19.0% Loss rate 10.4% - 10.7% 7.8% Finance charge yield, net of interest paid to note holders 15.8% - 15.9% 10.8% - 12.1% ------------ ------------
There were no purchases of delinquent accounts during the three months ended March 31, 2002 or 2001. The following assumptions were used in measuring the fair value of retained interests in business credit card securitizations at March 31, 2002 and 2001. The assumptions listed represent weighted averages of assumptions used for each securitization.
MARCH 31, MARCH 31, 2002 2001 ---- ---- Discount rate 12.0% 12.0% Monthly payment rate 18.3% 18.8% Loss rate 10.7% 7.8% Finance charge yield, net of interest paid to note holders 15.9% 12.1% ---- ----
In addition to the assumptions identified above, management also considered qualitative factors such as the impact of the current economic environment on the performance of the business credit card receivables sold and the potential volatility of the current market for similar instruments in assessing the fair value of retained interests in business credit card securitizations. 10 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 March 31, 2002. Fair value at March 31, 2002 $87,858 Effect on fair value of the following hypothetical changes in key assumptions: Discount rate increased by 2% $(877) Discount rate increased by 4% (1,745) Monthly payment rate at 110% of base assumption (580) Monthly payment rate at 125% of base assumption (1,494) Loss rate at 110% of base assumption (4,509) Loss rate at 125% of base assumption (11,273) Finance charge yield, net of interest paid to note holders, decreased by 1% (4,234) Finance charge yield, net of interest paid to note holders, decreased by 2% (8,468)
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 6) SELECTED BALANCE SHEET INFORMATION
MARCH 31, DECEMBER 31, OTHER ASSETS 2002 2001 -------- -------- Current and deferred income taxes, net $ 93,244 $ 94,922 Amounts due from transfer of consumer credit card business 70,545 70,545 Cash surrender value of insurance contracts 22,643 26,065 Investment in Fleet Credit Card LLC 20,000 20,000 Other 46,361 53,157 -------- -------- Total other assets $252,793 $264,689 -------- --------
MARCH 31, DECEMBER 31, OTHER LIABILITIES 2002 2001 -------- -------- Accounts payable and accrued expenses $ 30,728 $ 43,554 Business credit card rewards 11,099 10,389 Accrued interest payable 10,707 9,095 Other 112,268 114,529 -------- -------- Total other liabilities $164,802 $177,567 -------- --------
NOTE 7) 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. During the year ended December 31, 2001, we repurchased 693,300 shares of our Class B Common Stock. In the three months ended March 31, 2002 we repurchased 211,000 shares of our Class B Common Stock. Cash dividends per share of common stock declared during the three months ended March 31, 2002 and 2001 were $0.063 for Class A Common Stock and $0.076 for Class B Common Stock. 11 NOTE 8) SEGMENT INFORMATION
ADVANTA BUSINESS VENTURE CARDS CAPITAL OTHER (1) TOTAL ----------- -------- ----------- ----------- THREE MONTHS ENDED MARCH 31, 2002 Interest income $ 22,778 $ 2 $ 3,626 $ 26,406 Interest expense 8,771 205 4,134 13,110 Noninterest revenues (losses), net 58,139 (2,579) (93) 55,467 Pretax income (loss) from continuing operations 13,744 (3,435) (3,424) 6,885 Average managed receivables 2,013,103 0 28,191 2,041,294 Total assets 575,397 17,529 973,065 1,565,991 ----------- -------- ----------- ----------- THREE MONTHS ENDED MARCH 31, 2001 Interest income $ 20,680 $ 31 $ 15,480 $ 36,191 Interest expense 7,220 418 16,638 24,276 Noninterest revenues (losses), net 44,989 (11,355) (5,822) 27,812 Unusual charges 0 0 40,750 40,750 Pretax income (loss) from continuing operations 13,448 (12,715) (54,969) (54,236) Average managed receivables 1,691,479 0 28,547 1,720,026 Total assets 488,934 35,631 2,176,349 2,700,914 ----------- -------- ----------- -----------
(1) Other includes insurance operations and assets, investment and other activities not attributable to reportable segments. Total assets in the "Other" segment include net assets of discontinued operations. NOTE 9) UNUSUAL CHARGES Effective February 28, 2001, we completed the exit of our mortgage business, Advanta Mortgage, through a purchase and sale agreement with Chase Manhattan Mortgage Corporation as buyer (the "Mortgage Transaction"). Subsequent to the Mortgage Transaction 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. Costs associated with this restructuring activity 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:
DEC. 31, MAR. 31, CHARGED 2001 CHARGED 2002 ACCRUED IN TO ACCRUAL ACCRUAL TO ACCRUAL ACCRUAL 2001 IN 2001 BALANCE IN 2002 BALANCE ------- ------- ------ ------ ------ Employee costs $27,296 $24,768 $2,528 $1,655 $ 873 Expenses associated with exited businesses/products 11,895 11,266 629 55 574 Asset impairments 2,559 2,559 0 0 0 ------- ------- ------ ------ ------ Total $41,750 $38,593 $3,157 $1,710 $1,447 ======= ======= ====== ====== ======
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, 12 information technology, legal and facilities management. Employees were notified in March 2001, and severance amounts were paid over a 12-month period. These payments will be completed in the second quarter of 2002. Additionally, during 2001, we incurred $23.2 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 were 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 Mortgage Transaction. This acceleration resulted in a noncash charge of $1.3 million. In connection with reviewing our compensation plans after the Mortgage Transaction and restructuring of corporate functions, we implemented a program whereby all outstanding stock appreciation rights and shares of phantom stock were terminated in exchange for cash to be paid through a deferred compensation arrangement. We recorded charges of $2.9 million associated with this exchange. The charge reflects a $0.7 million reduction recorded in the three months ended September 30, 2001, as actual cash settlement costs were less than estimated. Due to the restructuring of the company, we implemented programs whereby certain out-of-the-money options were exchanged for shares of stock, and whereby certain shares of restricted stock were exchanged for cash and stock options in a tender offer, subject to certain performance conditions and vesting requirements. Noncash charges associated with the issuance of the stock, stock options and the tender offer totaled $3.6 million. This charge reflects a $1.4 million increase recorded in the three months ended September 30, 2001, as actual noncash charges associated with the tender offer were more than estimated. Expenses associated with exited businesses/products In the first quarter of 2001, we recorded charges of $2.2 million related to other products exited for which no future revenues or benefits would be received. In the third quarter of 2001, we were able to settle some of these commitments for less than originally estimated, and reduced the charge by $0.7 million. We expect to pay the remaining costs, which include lease and other commitments, in 2002. In 1998, in connection with the transfer of our consumer credit card business to Fleet Credit Card LLC (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 Credit Card 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 quarter of 2001, and we recorded an additional charge relating to the settlement of these commitments of $10.3 million. 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. 13 NOTE 10) 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 MARCH 31, 2002 2001 -------- -------- Income (loss) from continuing operations $ 4,234 $(37,356) Less: Preferred A dividends (141) (141) -------- -------- Income (loss) from continuing operations available to common shareholders 4,093 (37,497) Loss from discontinued operations, net of tax 0 (8,438) Gain, net, on discontinuance of mortgage and leasing businesses, net of tax 0 16,361 -------- -------- Net income (loss) available to common shareholders 4,093 (29,574) Less: Class A dividends declared (574) (572) Less: Class B dividends declared (1,480) (1,293) -------- -------- Undistributed net income (loss) $ 2,039 $(31,439) -------- -------- Basic income (loss) from continuing operations per common share Class A $ 0.14 $ (1.49) Class B 0.17 (1.48) Combined(1) 0.16 (1.48) Diluted income (loss) from continuing operations per common share Class A $ 0.14 $ (1.49) Class B 0.17 (1.48) Combined(1) 0.16 (1.48) Basic net income (loss) per common share Class A $ 0.14 $ (1.18) Class B 0.17 (1.16) Combined(1) 0.16 (1.17) Diluted net income (loss) per common share Class A $ 0.14 $ (1.18) Class B 0.17 (1.16) Combined(1) 0.16 (1.17) -------- -------- Basic weighted average common shares outstanding Class A 9,133 9,103 Class B 16,301 16,200 Combined 25,434 25,303 Options Class B 346 0 Restricted shares Class A 6 0 Restricted shares Class B 333 0 Diluted weighted average common shares outstanding Class A 9,139 9,103 Class B 16,980 16,200 Combined 26,119 25,303 Antidilutive shares Options Class B 1,589 2,847 Restricted shares Class A 8 47 Restricted shares Class B 1,979 914 -------- --------
(1) Combined represents a weighted average of Class A and Class B earnings (loss) per common share. 14 NOTE 11) 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 Credit Card LLC in connection with the Consumer Credit Card Transaction in 1998. Fleet seeks damages of approximately $141 million. We 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 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. In October 2001, the court issued a ruling on summary judgment in favor of Fleet on certain legal issues and positions advocated by Fleet and against others that Fleet advocated. As a result, for purposes of trial only, the parties stipulated to a number of issues relating to the court's orders including certain amounts that would be owed by each party to the other, while preserving their rights to appeal. Many issues remained to be determined at trial, including the financial impact of all issues in dispute. The trial took place in November and December 2001. Post-trial briefing is complete and on April 10, 2002, the Court heard oral argument. As a result of related litigation with Fleet, $70.1 million of our reserves in connection with this litigation were funded in an escrow account in February 2001. Taking into account amounts that Fleet owes to us and the amount escrowed, including interest, we have funded our estimated maximum net exposure to Fleet in the litigation. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on our financial position or future operating results given the amount escrowed, our reserves and amounts that Fleet owes us. On December 5, 2000, a former executive of Advanta obtained a jury verdict against Advanta in the amount of $3.9 million in the United States District Court for the Eastern District of Pennsylvania, in connection with various claims against Advanta related to the executive's termination of employment. In September 2001, the District Court Judge issued orders denying both parties' post-trial motions. A judgment in the amount of approximately $6 million, which includes the $3.9 million described above, was entered against Advanta. In September 2001, Advanta filed an appeal to the United States Court of Appeals for the Third Circuit. Advanta has posted a supersedeas bond in the amount of $8 million. The plaintiff filed a cross-appeal from the order adverse to him. Advanta is vigorously pursuing its appeal. Both parties have filed their briefs in the Court of Appeals and oral argument is scheduled for June 2002. The District Court Judge has not yet ruled on the executive's petition for attorney's fees and costs in the amount of approximately $1.2 million, which Advanta has contested. 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. An answer to Banc One's second amended complaint was filed in July 2001 denying liability, raising affirmative defenses and asserting a counterclaim. Various motions were filed, including Advanta's motion for partial summary judgment under one of the two loan servicing agreements, Banc One's motion for summary judgment on liability under both loan servicing agreements, and Banc One's motions to strike Advanta's counterclaim and ninth affirmative defense (both alleging breach of the implied covenant of good faith and fair dealing). In January 2002, the court entered an 15 opinion and order on the pending motions, which granted in part and denied in part both parties' motions for summary judgment. The court treated Banc One's motions to strike as motions for summary judgment, and although not entirely clear on this point, apparently granted them in part and denied them in part. Banc One's motions to strike were denied as moot. The court's ruling is essentially an interlocutory ruling in favor of Advanta under one of the two agreements and in favor of Banc One under the other of the two agreements. Advanta's counterclaim survives in part. The court's order does not constitute a final judgment and no assessment of damages either on Advanta's counterclaim or Banc One's claim has occurred. Further proceedings in the trial court on the matter of damages on both the surviving portion of Advanta's counterclaim and Banc One's surviving claim are to ensue. At this time, motions on damages issues filed by both Advanta and Bank One are pending. Advanta's motion asks the court to enter summary judgment or judgment on the pleadings in its favor, dismissing Bank One's claim for punitive damages. Bank One's motion asks the court to enter findings that it is entitled to certain damages as a matter of law as a result of the court's decision awarding it partial summary judgment. Both parties ask for the opportunity to conduct further discovery and any decision on these motions still will not encompass a final judgment. Thus, the amount of damages which Banc One might ultimately be entitled to recover from Advanta remains undetermined and dependent upon a number of factors, including the resolution of various legal issues which remain to be resolved and the amount of any damages Advanta might be entitled to recover against Banc One on its counterclaim, which likewise remains undetermined. 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 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 Mortgage Transaction. Chase claims that Advanta misled Chase concerning the value of certain of the assets sold to Chase. In September 2001, Advanta filed an answer to the complaint in which Advanta denied all of the substantive allegations of the complaint and asserted a counterclaim against Chase for breach of contract relating to funds owed by Chase to Advanta in connection with the transaction. The matter is in discovery and trial is not anticipated before September 2003. 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. In addition to the cases described above, Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. Management believes that the aggregate liabilities, if any, resulting from all litigation, claims and other legal proceedings will not have a material adverse effect on the consolidated financial position or results of our operations based on the level of litigation reserves we have established and our expectations regarding the ultimate resolutions of these actions. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of our litigation, claims and other legal proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. 16 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 Our primary business segment is Advanta Business Cards, one of the nation's largest issuers of business credit cards to small businesses. In addition to our business credit card lending business, we have venture capital investments. Through the first quarter of 2001, we had two additional lending businesses, Advanta Mortgage and Advanta Leasing Services. In the first quarter of 2001, we exited 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 March 31, 2002, we reported net income from continuing operations of $4.2 million or $0.16 per combined diluted common share, compared to net loss from continuing operations of $37.4 million or $1.48 per combined diluted common share for the same period of 2001. The net loss from continuing operations for the three months ended March 31, 2001 included pretax unusual charges of $40.8 million, 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. Net income for Advanta Business Cards was $8.5 million for the three months ended March 31, 2002 and $8.3 million for the same period of 2001. Our venture capital segment had a net loss of $2.1 million for the three months ended March 31, 2002 and a net loss of $7.8 million for the same period of 2001. 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 Mortgage Transaction. 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 $16.4 million for the three months ended March 31, 2001. The components of this net gain include a pretax gain on the Mortgage Transaction of $27.8 million, a pretax loss on the discontinuance of our leasing business of $4.0 million, and tax provision of $7.4 million. The gain on the Mortgage Transaction does not reflect any impact from the post-closing adjustment process that has been extended by agreement of the parties. 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) political, social and/or general economic conditions that affect the level of new account acquisitions, customer spending, delinquencies and charge-offs; (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; 17 (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 agreements between our bank subsidiaries and their regulators; (10) relationships with customers, significant vendors and business partners; (11) the amount and cost of financing available to us; (12) the ratings on our debt and the debt of our subsidiaries; (13) revisions to estimated charges associated with the discontinued operations of our mortgage and leasing businesses; and (14) the impact of litigation. 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, 2001 and in our other filings with the Securities and Exchange Commission. ADVANTA BUSINESS CARDS OVERVIEW Advanta Business Cards offers 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 $1.8 billion at March 31, 2001 to $2.0 billion at December 31, 2001 and March 31, 2002. Advanta Business Cards originated 42,291 new accounts in the three months ended March 31, 2002, compared to 68,771 new accounts for the same period of 2001. The decrease in originations in the three months ended March 31, 2002 is consistent with our expectations and reflects the timing of direct mail marketing campaigns for 2002. Pretax income for Advanta Business Cards was $13.7 million for the three months ended March 31, 2002 as compared to $13.4 million for the same period of 2001. The components of pretax income for Advanta Business Cards for the three months ended March 31, 2002 and 2001 were as follows:
THREE MONTHS ENDED MARCH 31, ------------------------ 2002 2001 -------- -------- Net interest income on owned receivables $ 14,007 $ 13,460 Noninterest revenues 58,139 44,989 Provision for credit losses (10,500) (7,940) Operating expenses (47,902) (37,061) -------- -------- Pretax income $ 13,744 $ 13,448 -------- --------
The increase in noninterest revenues is due primarily to growth in managed receivables and increased interchange income. The increase in the provision for credit losses reflects the seasoning of the business credit card portfolio and the prevailing economic environment. The increase in operating expenses resulted from growth in managed receivables and additional investments in initiatives to strengthen our position as a leading issuer of business credit cards to the small business market. 18 SECURITIZATION INCOME Advanta Business Cards recognized securitization income of $29.6 million for the three months ended March 31, 2002 and $21.3 million for the three months ended March 31, 2001. Advanta Business Cards sells interests in receivables through securitizations. Advanta Business Cards also sells receivables to existing securitization trusts on a continuous basis to replenish the investors' interest in trust receivables that have been repaid by the cardholders. The increase in securitization income in 2002 was due to increased volume of securitized receivables and a decrease in the securitized cost of funds, partially offset by increased credit losses on securitized receivables. The following table provides selected information on a managed portfolio basis.
THREE MONTHS ENDED MARCH 31, -------------------------------- MANAGED PORTFOLIO DATA ($ IN THOUSANDS) 2002 2001 ------------ ------------ Average managed business credit card receivables $ 2,013,103 $ 1,691,479 Ending managed business credit card receivables 2,026,075 1,781,005 Ending number of accounts - managed 684,418 627,501 As a percentage of average managed receivables: Net interest margin 16.8% 13.7% Fee revenues 5.3% 5.2% Net charge-offs 9.6% 6.5% Risk-adjusted revenues (1) 12.5% 12.4% Total receivables 30 days or more delinquent at March 31 7.2% 5.2% ------------ ------------
(1) Risk-adjusted revenues represent net interest margin and fee revenues, less net charge-offs. SERVICING REVENUES Advanta Business Cards recognized servicing revenue of $7.9 million for the three months ended March 31, 2002, compared to servicing revenue of $6.7 million for the three months ended March 31, 2001. The increase in servicing revenue was due to increased volume of securitized receivables. INTERCHANGE INCOME Business credit card interchange income on managed business credit card receivables was $20.2 million for the three months ended March 31, 2002 and $17.6 million for the same period of 2001. 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 2.1% in the three months ended March 31, 2002 and 2001. VENTURE CAPITAL Our venture capital segment makes venture capital investments through certain of our affiliates. The investment objective is to earn attractive returns by building the long-term values of the businesses in which we invest. The fair value of our venture capital investments was $14.9 million at March 31, 2002 and $18.6 million at December 31, 2001. The fair values of these equity investments are subject to significant volatility. Our investments in specific companies and industry segments may vary over time, and changes in concentrations may affect price volatility. We primarily invest in privately-held companies, including early stage companies. These investments are inherently risky as the market for the technologies or products the investees have under development may never materialize. 19 Pretax loss for the venture capital segment was $3.4 million for the three months ended March 31, 2002, and included $2.6 million of decreases in valuations of venture capital investments. Pretax loss for the venture capital segment was $12.7 million for the three months ended March 31, 2001, and included a $4.9 million loss on the sale of a venture capital investment and $6.5 million of net decreases in valuations of venture capital investments. INTEREST INCOME AND EXPENSE Interest income decreased by $9.8 million for the three months ended March 31, 2002 as compared to the same period of 2001. The decrease in interest income for the three months ended March 31, 2002 was due primarily to a decrease in investments. Excess liquid assets resulting from the Mortgage Transaction in 2001 were held in short-term, high quality investments until they could be deployed. See further discussion in the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. Also contributing to the decreased interest income was a decrease in the average yield earned on our investment portfolio as a result of the prevailing interest rate environment. During the three months ended March 31, 2002, interest expense decreased by $11.2 million as compared to the same period of 2001. The decrease in interest expense for the three months ended March 31, 2002 was due to a reduction in outstanding deposits and debt and a decrease in our cost of funds. Our cost of funds decreased to 5.85% for the three months ended March 31, 2002 from 7.26% during the same period of 2001 as a result of the prevailing interest rate environment. The following table provides an analysis of owned interest income and expense data, average balance sheet data, net interest spread and net interest margin for both continuing and discontinued operations. Net interest spread represents the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin represents the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets. Interest income includes late fees on business credit card receivables. Average owned receivables include deferred origination costs, net of deferred fees. 20 INTEREST RATE ANALYSIS ($ IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------------------------------------------------------------------- 2002 2001 ------------------------------------- ------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE ---------- ------- ----- ---------- -------- ---- ON-BALANCE SHEET Receivables: Business credit cards(2) $ 397,447 $20,119 20.53% $ 370,465 $18,186 19.91% Other receivables 28,191 336 4.83 28,547 210 2.99 ---------- ------- ---------- -------- Total owned receivables 425,638 20,455 19.49 399,012 18,396 18.70 Investments(3) 568,657 3,294 2.32 1,119,174 15,719 5.62 Retained interests in securitizations 88,649 2,660 12.00 72,908 2,187 12.00 Interest-earning assets of discontinued operations 54,536 1,159 8.50 585,161 22,803 15.65 ---------- ------- ---------- -------- Total interest-earning assets $1,137,480 $27,568 9.80% $2,176,255 $59,105 10.93% Interest-bearing liabilities(4) $ 951,073 $13,716 5.85% $2,089,883 $37,518 7.26% Net interest spread 3.95% 3.67% Net interest margin 4.94% 4.02%
(1) Includes assets held and available for sale and nonaccrual receivables. (2) Interest income includes late fees on business credit card receivables of $2.8 million for the three months ended March 31, 2002 and $2.0 million for the three months ended March 31, 2001. (3) Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%. (4) Includes funding of assets for both continuing and discontinued operations. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses of $10.7 million for the three months ended March 31, 2002 increased by $2.8 million as compared to the provision for credit losses of $7.9 million for the same period of 2001. This increase reflects the seasoning of the business credit card portfolio and the current economic environment. These factors were evident in the delinquency rates and charge-off rates for those periods as shown in the following table. The allowance for credit losses on business credit card receivables was $42.4 million at March 31, 2002, or 10.7% of owned receivables, as compared to $41.2 million, or 9.9% of owned receivables at December 31, 2001. We have experienced a trend of increasing charge-off rates, consistent with our expectations of the seasoning portfolio and the current economic environment, which has been factored into our estimate of the allowance for credit losses. We ceased origination of business credit card accounts with credit scores of less than 661 in June 2000. This segment of the portfolio represented approximately 15.2% of our owned and managed business credit card receivables at December 31, 2001 and approximately 14.4% of our owned and managed business credit card receivables at March 31, 2002. Although charge-off levels are not always predictable since they are impacted by the economic environment and other factors, we expect charge-off rates to be higher in the first half of 2002 than in the second half based on the current composition of the portfolio. 21 The following table provides a summary of allowance for credit losses, nonperforming assets, delinquencies and charge-offs as of and for the year-to-date periods indicated ($ in thousands). Consolidated data includes business credit cards and other receivables.
MARCH 31, DECEMBER 31, MARCH 31, CREDIT QUALITY 2002 2001 2001 -------------- ---------- ---------- ---------- CONSOLIDATED - MANAGED Nonperforming assets $ 92,907 $ 81,666 $ 54,016 Receivables 30 days or more delinquent 147,428 137,517 93,478 As a percentage of gross receivables: Nonperforming assets 4.5% 3.9% 3.0% Receivables 30 days or more delinquent 7.2 6.6 5.2 Net charge-offs: Amount $ 48,285 $ 143,593 $ 27,489 As a percentage of average gross receivables (annualized) 9.5% 7.6% 6.4% CONSOLIDATED - OWNED Allowance for credit losses $ 43,372 $ 41,971 $ 35,368 Nonperforming assets 18,543 20,052 11,961 Receivables 30 days or more delinquent 30,154 29,520 19,917 As a percentage of gross receivables: Allowance for credit losses 10.2% 9.4% 9.2% Nonperforming assets 4.4 4.5 3.1 Receivables 30 days or more delinquent 7.1 6.6 5.2 Net charge-offs: Amount $ 9,299 $ 27,372 $ 5,939 As a percentage of average gross receivables (annualized) 8.7% 6.7% 6.0% BUSINESS CREDIT CARDS - MANAGED Nonperforming assets $ 92,236 $ 81,083 $ 53,556 Receivables 30 days or more delinquent 145,393 136,037 92,692 As a percentage of gross receivables: Nonperforming assets 4.6% 4.0% 3.0% Receivables 30 days or more delinquent 7.2 6.7 5.2 Net charge-offs: Amount $ 48,285 $ 143,590 $ 27,489 As a percentage of average gross receivables (annualized) 9.6% 7.7% 6.5% BUSINESS CREDIT CARDS - OWNED Allowance for credit losses $ 42,370 $ 41,169 $ 35,166 Nonperforming assets 17,872 19,469 11,501 Receivables 30 days or more delinquent 28,119 28,040 19,131 As a percentage of gross receivables: Allowance for credit losses 10.7% 9.9% 9.9% Nonperforming assets 4.5 4.7 3.2 Receivables 30 days or more delinquent 7.1 6.7 5.4 Net charge-offs: Amount $ 9,299 $ 27,369 $ 5,939 As a percentage of average gross receivables (annualized) 9.4% 7.2% 6.4%
22 OTHER REVENUES
($ in thousands) THREE MONTHS ENDED MARCH 31, ------------------------ 2002 2001 ------- -------- Investment securities losses, net $(2,627) $ (8,197) Business credit card rewards (2,004) (1,543) Insurance revenues (losses), net, and other 2,316 (7,983) ------- -------- Total other revenues, net $(2,315) $(17,723) ======= ========
Investment securities losses, net, include changes in the fair value and realized gains (losses) on venture capital investments. Investment securities losses for the three months ended March 31, 2002 include $2.6 million of decreases in valuations of venture capital investments. Investment securities losses, net, for the three months ended March 31, 2001 include a $4.9 million loss on the sale of a venture capital investment, $6.5 million of net decreases in valuations of venture capital investments, and $3.2 million of realized gains on other investments. Business credit card rewards, which include bonus miles and cash-back rewards, are earned by eligible cardholders based on net purchases charged to their accounts. Increases in business credit card rewards in the three months ended March 31, 2002 were due to the increase in average managed business credit card accounts in the rewards programs and the corresponding purchase activity in those accounts, partially offset by a reduction in the estimated cost of future reward redemptions. 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. Insurance revenues, net, and other for the three months ended March 31, 2001 includes operating results of insurance operations, the impact of the termination of the strategic alliance with Progressive Casualty Insurance Company and $10 million of charges related to the write-off of insurance-related deferred acquisition costs that were unrealizable subsequent to the termination of the auto insurance strategic alliance. OPERATING EXPENSES
($ in thousands) THREE MONTHS ENDED MARCH 31, ------------------------ 2002 2001 ------- ------- Salaries and employee benefits $17,131 $14,995 Amortization of business credit card deferred origination costs, net 12,022 7,794 External processing 4,225 3,863 Professional/consulting fees 3,835 3,064 Equipment 2,601 2,026 Marketing 1,911 4,824 Credit 1,673 1,158 Occupancy 1,611 1,052 Insurance 817 1,416 Other 3,132 2,861 ------- ------- Total operating expenses $48,958 $43,053 ------- -------
Salaries and employee benefits, amortization of business credit card deferred origination costs, net, and external processing expenses have increased for the three months ended March 31, 2002 as compared to the same period of 2001, due primarily to growth in managed business credit card receivables. Average managed business credit card receivables increased 19% to $2.0 billion for the three months ended March 31, 2002 from $1.7 billion for the same period of 2001. Salaries and employee benefits in the three months ended March 31, 2002 also reflect additional investments in initiatives to strengthen our position as a leading issuer of business credit cards to the small business market. We expect our total operating 23 expenses to continue to increase in 2002 as we continue to make these types of additional investments. These include initiatives to provide additional value to our existing customers, customer retention campaigns, development of ancillary non-financial products and services, development of affinity cards and partnership relationships, and enhancement of internet capabilities for servicing our customers. The decrease in marketing expense in the three months ended March 31, 2002 as compared to 2001 reflects our decreased origination activities in our retail note program as a result of our liquidity position subsequent to the Mortgage Transaction in 2001. The decrease in insurance expense in the three months ended March 31, 2002 as compared to 2001 is primarily a result of a decrease in FDIC insurance costs on deposit liabilities. Our FDIC insurance costs decreased due to the significant reduction in our outstanding deposits at Advanta National Bank subsequent to the Mortgage Transaction, and due to a decrease in the insurance assessment rate at Advanta Bank Corp. LITIGATION CONTINGENCIES Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. See discussion in Note 11 to the consolidated financial statements. Management believes that the aggregate liabilities, if any, resulting from these actions will not have a material adverse effect on the consolidated financial position or results of our operations based on the level of litigation reserves we have established and our expectations regarding the ultimate resolutions of these actions. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of these proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. Our litigation reserves are included in other liabilities on the consolidated balance sheets. UNUSUAL CHARGES Subsequent to the exit of our 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 expected and realized lower personnel expenses in the support functions in the 12 months following the charges, and expected to realize lower depreciation and amortization expense over the following 5-7 years. These decreases were due to the termination of employees and the write-off or write-down of assets previously deployed in connection with exited businesses. We also expected and realized the elimination of the costs of the contractual commitments associated with exited business products from future operating results over the estimated timeframe of the contracts. EMPLOYEE COSTS 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 severance amounts were paid over a 12-month period. These payments will be completed in the second quarter of 2002. 24 Additionally, during 2001, we incurred $23.2 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 were 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 Mortgage Transaction. This acceleration resulted in a noncash charge of $1.3 million. In connection with reviewing our compensation plans after the Mortgage Transaction and restructuring of corporate functions, we implemented a program whereby all outstanding stock appreciation rights and shares of phantom stock were terminated in exchange for cash to be paid through a deferred compensation arrangement. We recorded charges of $2.9 million associated with this exchange. The charge reflects a $0.7 million reduction recorded in the three months ended September 30, 2001, as actual cash settlement costs were less than estimated. Due to the restructuring of the company, we implemented programs whereby certain out-of-the-money options were exchanged for shares of stock, and whereby certain shares of restricted stock were exchanged for cash and stock options in a tender offer, subject to certain performance conditions and vesting requirements. Noncash charges associated with the issuance of the stock, stock options and the tender offer totaled $3.6 million. This charge reflects a $1.4 million increase recorded in the three months ended September 30, 2001, as actual noncash charges associated with the tender offer were more than estimated. EXPENSES ASSOCIATED WITH EXITED BUSINESSES/PRODUCTS In the first quarter of 2001, we recorded charges of $2.2 million related to other products exited for which no future revenues or benefits would be received. In the third quarter of 2001, we were able to settle some of these commitments for less than originally estimated, and reduced the charge by $0.7 million. We expect to pay the remaining costs, which include lease and other commitments, in 2002. In 1998, in connection with the transfer of our consumer credit card business to Fleet Credit Card LLC, we made major organizational changes to reduce corporate expenses incurred in the past: (a) to support the business contributed to Fleet Credit Card LLC in the transfer of our consumer credit card business, 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 quarter of 2001, and we recorded an additional charge relating to the settlement of these commitments of $10.3 million. 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. 25 ASSET/LIABILITY MANAGEMENT We manage our financial condition with a focus on maintaining high credit quality standards, disciplined management of market risks and prudent levels of growth, leverage and liquidity. MARKET RISK SENSITIVITY We are exposed to equity price risk on the equity securities in our investments available for sale portfolio. A 20% adverse change in equity prices would result in an approximate $4.6 million decrease in the fair value of our equity investments as of March 31, 2002. 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 also measure the effect of interest rate risk on our managed net interest income, which includes net interest income on owned assets and net interest income on securitized receivables. Both increasing and decreasing rate scenarios assume an instantaneous shift in rates and measure the corresponding change in expected net interest income as compared to a base case scenario. We estimate that at March 31, 2002, our net interest income over a 12-month period would increase by approximately 10% 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 7% if interest rates were to fall by 200 basis points. We estimate that at March 31, 2002, our managed net interest income over a 12-month period would decrease by approximately 4% 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 5% 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. This is because rates at March 31, 2002 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. 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. 26 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. Since Advanta Corp.'s debt rating is not investment grade, our access to unsecured, institutional debt is limited. However, we do have access to a diversity of funding sources as described below, and had a high level of liquidity at March 31, 2002. At March 31, 2002, we had $274 million of federal funds sold, $185 million of receivables held for sale, and $126 million of investments, which could be sold to generate additional liquidity. Components of funding were as follows:
MARCH 31, 2002 DECEMBER 31, 2001 --------------------- ----------------------- AMOUNT % AMOUNT % ---------- --- ---------- --- Off-balance sheet business credit card receivables $1,630,309 54% $1,626,709 53% Deposits 639,086 21 636,915 21 Debt and other borrowings 294,978 10 355,899 11 Equity, including capital securities 467,125 15 466,299 15 ---------- --- ---------- --- Total $3,031,498 100% $3,085,822 100% ---------- --- ---------- ---
At March 31, 2002, we had a $280 million committed commercial paper conduit facility secured by business credit card receivables, of which $155 million was unused at March 31, 2002. The Mortgage Transaction in the first quarter of 2001 resulted in liquidity in excess of the needs of our continuing businesses. Excess liquid assets were held in short-term, high-quality investments earning money market rates until they could be deployed. As a result, we had interest expense in excess of interest income on this excess liquidity in 2001. We expect to continue to have interest expense in excess of interest income for the next few quarters due to the time required for our high-rate debt to mature. We anticipate replacing these debt maturities with notes bearing lower interest rates more in line with the current market rates. 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. During the year ended December 31, 2001, we repurchased 693,300 shares of our Class B Common Stock. In the three months ended March 31, 2002 we repurchased 211,000 shares of our Class B Common Stock. In 2000, Advanta Bank Corp. entered into agreements with its bank regulatory agencies, primarily relating to the bank's subprime lending operations. These agreements imposed temporary deposit growth limits at Advanta Bank Corp. and required prior regulatory approval of cash dividends. In April 2002, the agreements were removed and, as a result, the restrictions in the agreements on deposit growth and payment of cash dividends are no longer applicable. We believe that the removal of the agreements is the result of our ongoing efforts to enhance Advanta Bank Corp.'s practices, procedures and regulatory relationships. In connection with removing the agreements, Advanta Bank Corp. has reached an understanding with its regulators to continue its ongoing efforts to enhance processes and practices. The understanding is consistent with the manner in which Advanta Bank Corp. is operating its business and includes no restrictions expected to have any impact on our financial results. In 2000, Advanta National Bank also reached agreements with its bank regulatory agency, primarily relating to the bank's subprime lending operations. The 27 agreements established temporary asset growth limits at Advanta National Bank, imposed restrictions on taking brokered deposits and required that Advanta National Bank maintain certain capital ratios in excess of the minimum regulatory standards. In 2001, Advanta National Bank entered into an additional agreement with its regulatory agency regarding restrictions on new business activities and product lines at Advanta National Bank after the Mortgage Transaction, 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 prohibits the payment of dividends by Advanta National Bank without prior regulatory approval. At March 31, 2002, Advanta Bank Corp.'s combined total capital ratio (combined Tier I and Tier II capital) was 21.71%, and Advanta National Bank's combined total capital ratio was 22.47%. At December 31, 2001, Advanta Bank Corp.'s combined total capital ratio (combined Tier I and Tier II capital) was 18.80% and Advanta National Bank's combined total capital ratio was 23.34%. In each case, Advanta Bank Corp. and Advanta National Bank had capital at levels a bank is required to maintain to be classified as "well-capitalized" under the regulatory framework for prompt corrective action. However, Advanta National Bank does not meet the definition of "well-capitalized" because of the existence of our agreement with the OCC, even though we have achieved the higher imposed capital ratios required by the agreement. 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." 28 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 Credit Card LLC in connection with the Consumer Credit Card Transaction in 1998. Fleet seeks damages of approximately $141 million. We 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 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. In October 2001, the court issued a ruling on summary judgment in favor of Fleet on certain legal issues and positions advocated by Fleet and against others that Fleet advocated. As a result, for purposes of trial only, the parties stipulated to a number of issues relating to the court's orders including certain amounts that would be owed by each party to the other, while preserving their rights to appeal. Many issues remained to be determined at trial, including the financial impact of all issues in dispute. The trial took place in November and December 2001. Post-trial briefing is complete and on April 10, 2002, the Court heard oral argument. As a result of related litigation with Fleet, $70.1 million of our reserves in connection with this litigation were funded in an escrow account in February 2001. Taking into account amounts that Fleet owes to us and the amount escrowed, including interest, we have funded our estimated maximum net exposure to Fleet in the litigation. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on our financial position or future operating results given the amount escrowed, our reserves and amounts that Fleet owes us. On December 5, 2000, a former executive of Advanta obtained a jury verdict against Advanta in the amount of $3.9 million in the United States District Court for the Eastern District of Pennsylvania, in connection with various claims against Advanta related to the executive's termination of employment. In September 2001, the District Court Judge issued orders denying both parties' post-trial motions. A judgment in the amount of approximately $6 million, which includes the $3.9 million described above, was entered against Advanta. In September 2001, Advanta filed an appeal to the United States Court of Appeals for the Third Circuit. Advanta has posted a supersedeas bond in the amount of $8 million. The plaintiff filed a cross-appeal from the order adverse to him. Advanta is vigorously pursuing its appeal. Both parties have filed their briefs in the Court of Appeals and oral argument is scheduled for June 2002. The District Court Judge has not yet ruled on the executive's petition for attorney's fees and costs in the amount of approximately $1.2 million, which Advanta has contested. 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. An answer to Banc One's second amended complaint was filed in July 2001 denying liability, raising affirmative defenses and asserting a counterclaim. Various motions were filed, including Advanta's motion for partial summary judgment under one of the two loan servicing agreements, Banc One's motion for summary judgment on liability under both loan servicing agreements, and Banc One's motions to strike Advanta's 29 counterclaim and ninth affirmative defense (both alleging breach of the implied covenant of good faith and fair dealing). In January 2002, the court entered an opinion and order on the pending motions, which granted in part and denied in part both parties' motions for summary judgment. The court treated Banc One's motions to strike as motions for summary judgment, and although not entirely clear on this point, apparently granted them in part and denied them in part. Banc One's motions to strike were denied as moot. The court's ruling is essentially an interlocutory ruling in favor of Advanta under one of the two agreements and in favor of Banc One under the other of the two agreements. Advanta's counterclaim survives in part. The court's order does not constitute a final judgment and no assessment of damages either on Advanta's counterclaim or Banc One's claim has occurred. Further proceedings in the trial court on the matter of damages on both the surviving portion of Advanta's counterclaim and Banc One's surviving claim are to ensue. At this time, motions on damages issues filed by both Advanta and Bank One are pending. Advanta's motion asks the court to enter summary judgment or judgment on the pleadings in its favor, dismissing Bank One's claim for punitive damages. Bank One's motion asks the court to enter findings that it is entitled to certain damages as a matter of law as a result of the court's decision awarding it partial summary judgment. Both parties ask for the opportunity to conduct further discovery and any decision on these motions still will not encompass a final judgment. Thus, the amount of damages which Banc One might ultimately be entitled to recover from Advanta remains undetermined and dependent upon a number of factors, including the resolution of various legal issues which remain to be resolved and the amount of any damages Advanta might be entitled to recover against Banc One on its counterclaim, which likewise remains undetermined. 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 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 Mortgage Transaction. Chase claims that Advanta misled Chase concerning the value of certain of the assets sold to Chase. In September 2001, Advanta filed an answer to the complaint in which Advanta denied all of the substantive allegations of the complaint and asserted a counterclaim against Chase for breach of contract relating to funds owed by Chase to Advanta in connection with the transaction. The matter is in discovery and trial is not anticipated before September 2003. 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. On November 8, 2001 and January 28, 2002, Grant Thornton, LLP ("Grant Thornton") filed third-party complaints against Advanta Mortgage Corp., USA ("AMCUSA") in two related lawsuits in the United States District Court for the Southern District of West Virginia. The third-party claims allege negligent misrepresentation, claiming without specificity or factual support that Grant Thornton received inaccurate information from AMCUSA concerning the amount of loans that AMCUSA had been servicing for the First National Bank of Keystone, West Virginia ("Keystone"). Grant Thornton was the former auditor for Keystone, which failed. Grant Thornton was sued on November 9, 1999 and January 28, 2000 by shareholders and others with purported ownership interests in Keystone, alleging that Grant Thornton rendered an unqualified opinion for Keystone's financial statements, when in fact the financial statements fraudulently overstated Keystone's assets by approximately $500 million. In December 2001 and February 2002, AMCUSA filed motions to dismiss the third-party complaints. We plan to vigorously defend this litigation, and because we believe that the likelihood of a final judgment of liability against AMCUSA is remote, we do not expect that the ultimate resolution of this litigation will have a material adverse effect on our financial position or future operating results. 30 In addition to the cases described above, Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to the Mortgage Transaction in the first quarter of 2001. Management believes that the aggregate liabilities, if any, resulting from all litigation, claims and other legal proceedings will not have a material adverse effect on the consolidated financial position or results of our operations based on the level of litigation reserves we have established and our expectations regarding the ultimate resolutions of these actions. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of our litigation, claims and other legal proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. 31 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 10.1 Relocation Agreement, made as of June 5, 2001, by and between Advanta Corp. and Jeffrey D. Beck 10.2 Agreement of Lease, made as of January 1, 2002, by and between Advanta Corp. and Rosemary Cauchon 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 January 22, 2002, was filed by Advanta setting forth the financial highlights of Advanta's results of operations for the three months ended December 31, 2001. 32 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) May 13, 2002 By /s/Philip M. Browne ------------------- Senior Vice President and Chief Financial Officer May 13, 2002 By /s/David B. Weinstock --------------------- Vice President and Chief Accounting Officer 33 EXHIBIT INDEX
MANNER OF EXHIBIT DESCRIPTION FILING ------- ----------- --------- 10.1 Relocation Agreement, made as of June 5, 2001, by and * between Advanta Corp. and Jeffrey D. Beck 10.2 Agreement of Lease, made as of January 1, 2002, by * and between Advanta Corp. and Rosemary Cauchon 12 Consolidated Computation of Ratio of Earnings to * Fixed Charges
* Filed electronically herewith. 34