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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2003 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 5, 2003
Common Stock, $.01 par value 10,041,017 shares
Class B Outstanding at May 5, 2003
Common Stock, $.01 par value 17,187,202 shares
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) 3
Consolidated Income Statements (Unaudited) 4
Consolidated Statements of Changes in
Stockholders' Equity (Unaudited) 5-6
Consolidated Statements of Cash Flows (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 34
Item 4. Controls and Procedures 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 36
2
ITEM 1. FINANCIAL STATEMENTS
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA) MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Cash $ 45,032 $ 14,834
Federal funds sold 367,830 332,257
Restricted interest-bearing deposits 78,447 79,449
Investments available for sale 159,251 171,222
Receivables, net:
Held for sale 181,530 177,065
Other 287,494 278,282
----------- -----------
Total receivables, net 469,024 455,347
Accounts receivable from securitizations 397,980 198,238
Premises and equipment, net 22,653 25,496
Other assets 291,621 277,658
Assets of discontinued operations, net 119,219 127,112
----------- -----------
TOTAL ASSETS $ 1,951,057 $ 1,681,613
----------- -----------
LIABILITIES
Deposits:
Noninterest-bearing $ 7,219 $ 6,561
Interest-bearing 923,185 707,467
----------- -----------
Total deposits 930,404 714,028
Debt 318,490 315,886
Other liabilities 278,728 230,386
----------- -----------
TOTAL LIABILITIES 1,527,622 1,260,300
----------- -----------
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 2003 and 2002 1,010 1,010
Class A voting common stock, $.01 par value:
Authorized - 200,000,000 shares; issued - 10,041,017
shares in 2003 and 2002 100 100
Class B non-voting common stock, $.01 par value:
Authorized - 200,000,000 shares; issued - 20,315,007
shares in 2003 and 20,326,289 shares in 2002 203 204
Additional paid-in capital 243,824 243,910
Deferred compensation (17,250) (17,837)
Unearned ESOP shares (10,719) (10,831)
Accumulated other comprehensive income 200 186
Retained earnings 151,073 147,205
Less: Treasury stock at cost, 3,175,362 Class B
common shares in 2003 and 2,896,112 Class B
common shares in 2002 (45,006) (42,634)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 323,435 321,313
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,951,057 $ 1,681,613
----------- -----------
See Notes to Consolidated Financial Statements
3
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
---- ----
Interest income:
Receivables $17,473 $20,476
Investments 1,926 3,270
Other interest income 3,592 2,660
------- -------
Total interest income 22,991 26,406
Interest expense:
Deposits 6,221 6,265
Debt 5,049 6,786
Other borrowings 1 59
------- -------
Total interest expense 11,271 13,110
------- -------
Net interest income 11,720 13,296
Provision for credit losses 9,446 10,700
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 2,274 2,596
NONINTEREST REVENUES:
Securitization income 29,610 29,647
Servicing revenues 10,027 7,942
Other revenues, net 25,432 17,878
------- -------
TOTAL NONINTEREST REVENUES 65,069 55,467
------- -------
EXPENSES:
Operating expenses 55,522 48,958
Minority interest in income of consolidated subsidiary 2,220 2,220
------- -------
TOTAL EXPENSES 57,742 51,178
------- -------
Income before income taxes 9,601 6,885
Income tax expense 3,696 2,651
------- -------
NET INCOME $ 5,905 $ 4,234
------- -------
Basic net income per common share
Class A $ 0.22 $ 0.14
Class B 0.25 0.17
Combined 0.24 0.16
------- -------
Diluted net income per common share
Class A $ 0.22 $ 0.14
Class B 0.25 0.17
Combined 0.24 0.16
------- -------
Basic weighted average common shares
outstanding
Class A 9,183 9,133
Class B 14,816 16,301
Combined 23,999 25,434
------- -------
Diluted weighted average common shares
outstanding
Class A 9,184 9,139
Class B 15,212 16,980
Combined 24,396 26,119
------- -------
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, 2001 $1,010 $100 $179 $223,362
------ ---- ---- --------
Net income (loss) $(24,182)
Other comprehensive income (loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $577 (1,073)
---------
Comprehensive income (loss) $(25,255)
========
Preferred and common cash
dividends declared
Exercise of stock options 1 362
Stock option exchange program stock
distribution
Issuance of restricted stock 28 22,529
Amortization of deferred
compensation
Forfeitures of restricted stock (4) (2,275)
Stock buyback
ESOP shares committed to be released (68)
------ ---- ---- --------
BALANCE AT DECEMBER 31, 2002 $1,010 $100 $204 $243,910
------ ---- ---- --------
Net income (loss) $ 5,905
Other comprehensive income (loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $(7) 14
--------
Comprehensive income (loss) $ 5,919
========
Preferred and common cash
dividends declared
Issuance of restricted stock 603
Amortization of deferred
compensation
Forfeitures of restricted stock (1) (649)
Stock buyback
ESOP shares committed to be released (40)
------ ---- ---- --------
BALANCE AT MARCH 31, 2003 $1,010 $100 $203 $243,824
------ ---- ---- --------
See Notes to Consolidated Financial Statements
5
($ IN THOUSANDS)
DEFERRED ACCUMULATED
COMPENSATION OTHER TOTAL
& UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
ESOP SHARES INCOME (LOSS) EARNINGS STOCK EQUITY
----------- ------------- -------- ----- ------
-------- ------ -------- -------- --------
BALANCE AT DECEMBER 31, 2001 $(11,359) $ 1,259 $179,370 $(27,622) $366,299
-------- ------ -------- -------- --------
Net income (loss) (24,182) (24,182)
Other comprehensive income (loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $577 (1,073) (1,073)
Comprehensive income (loss)
Preferred and common cash
dividends declared (7,983) (7,983)
Exercise of stock options 363
Stock option exchange program
stock distribution 542 542
Issuance of restricted stock (22,557) 0
Amortization of deferred
compensation 2,842 2,842
Forfeitures of restricted stock 1,941 (338)
Stock buyback (15,554) (15,554)
ESOP shares committed to be released 465 397
-------- ------ -------- -------- --------
BALANCE AT DECEMBER 31, 2002 $(28,668) $ 186 $147,205 $(42,634) $321,313
-------- ------ -------- -------- --------
Net income (loss) 5,905 5,905
Other comprehensive income (loss):
Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $(7) 14 14
Comprehensive income (loss)
Preferred and common cash
dividends declared (2,037) (2,037)
Issuance of restricted stock (603) 0
Amortization of deferred
compensation 622 622
Forfeitures of restricted stock 569 (81)
Stock buyback (2,372) (2,372)
ESOP shares committed to be released 111 71
-------- ------ -------- -------- --------
BALANCE AT MARCH 31, 2003 $(27,969) $ 200 $151,073 $(45,006) $323,435
-------- ------ -------- -------- --------
See Notes to Consolidated Financial Statements
6
ADVANTA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ IN THOUSANDS) THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
---- ----
OPERATING ACTIVITIES - CONTINUING OPERATIONS
Net income $ 5,905 $ 4,234
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Investment securities losses 608 2,627
Depreciation 2,118 1,946
Provision for credit losses 9,446 10,700
Provision for interest and fee losses 2,594 1,437
Change in deferred origination costs, net of deferred fees 4,016 (611)
Change in receivables held for sale (76,990) 12,706
Proceeds from sale of receivables held for sale 72,525 5,000
Change in accounts receivable from securitizations (199,742) (2,740)
Change in other assets and other liabilities 40,421 12,753
-------- ------
Net cash provided by (used in) operating activities (139,099) 48,052
-------- ------
INVESTING ACTIVITIES - CONTINUING OPERATIONS
Change in federal funds sold and restricted interest-bearing
deposits (34,571) (40,017)
Purchase of investments available for sale (117,897) (90,097)
Proceeds from sales of investments available for sale 117,331 125,193
Proceeds from maturing investments available for sale 11,949 36,645
Change in receivables not held for sale (25,268) (7,924)
Sales (purchases) of premises and equipment, net 725 (1,170)
-------- ------
Net cash provided by (used in) investing activities (47,731) 22,630
-------- ------
FINANCING ACTIVITIES - CONTINUING OPERATIONS
Change in demand and savings deposits (93) (391)
Proceeds from issuance of time deposits 253,497 98,386
Payments for maturing time deposits (39,175) (98,818)
Proceeds from issuance of debt 28,910 27,576
Payments on redemption of debt (29,595) (65,294)
Change in other borrowings 0 (32,317)
Proceeds from exercise of stock options 0 28
Cash dividends paid (2,037) (2,195)
Stock buyback (2,372) (2,073)
-------- ------
Net cash provided by (used in) financing activities 209,135 (75,098)
-------- ------
DISCONTINUED OPERATIONS
Net cash provided by operating activities of discontinued
operations 7,893 3,305
-------- ------
Net increase (decrease) in cash 30,198 (1,111)
Cash at beginning of period 14,834 20,952
-------- ------
Cash at end of period $ 45,032 $ 19,841
-------- ------
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, 2003
(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 accounting principles
generally accepted in the United States 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. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the near
term relate to the accounting for the fair value of venture capital investments,
allowance for receivable losses, securitization income, business credit card
rewards programs, litigation contingencies, income taxes, and discontinued
operations.
Certain prior period balances have been reclassified to conform to the current
period presentation.
8
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," defines a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it permits entities to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. We have elected to continue
with the accounting methodology in Opinion No. 25 and, as a result, have
provided pro forma disclosures of compensation expense for stock option plans,
net of related tax effects, net income and earnings per share and other
disclosures, as if the fair value based method of accounting had been applied.
Had compensation cost for these plans been determined using the fair value
method, our compensation expense for stock option plans, net of related tax
effects, net income and net income per common share would have changed to the
following pro forma amounts:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Compensation expense for stock option plans, net of
related tax effects
As reported $ 0 $ 0
Pro forma 613 753
--------- ---------
Net income
As reported $ 5,905 $ 4,234
Pro forma 5,292 3,481
--------- ---------
Basic net income per common share
As reported
Class A $ 0.22 $ 0.14
Class B 0.25 0.17
Combined 0.24 0.16
Pro forma
Class A $ 0.20 $ 0.11
Class B 0.22 0.14
Combined 0.21 0.13
--------- ---------
Diluted net income per common share
As reported
Class A $ 0.22 $ 0.14
Class B 0.25 0.17
Combined 0.24 0.16
Pro forma
Class A $ 0.20 $ 0.11
Class B 0.22 0.14
Combined 0.21 0.13
--------- ---------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the three months ended March 31:
2003 2002
---- ----
Dividend yield 3% 4%
Expected life (in years) 7 7
Expected volatility 59% 58%
Risk-free interest rate 3.3% 4.4%
9
NOTE 2) RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," which
modifies the recognition and disclosure requirements of a company's guarantee
arrangements. Effective January 1, 2003, we adopted this interpretation, which
requires a company that enters into or modifies existing guarantee arrangements
to recognize a liability for the fair value of the obligation undertaken in
issuing the guarantee. The adoption of this interpretation did not have a
material impact on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - An Interpretation of ARB No. 51." This
interpretation requires a company to consolidate a variable interest entity if
the company has variable interests that give it a majority of the expected
losses or a majority of the expected residual returns of the entity. The
consolidation requirements apply to all variable interest entities created after
January 31, 2002. In addition, public companies must apply the consolidation
requirements to variable interest entities that existed prior to February 1,
2003 and remain in existence as of the beginning of annual or interim periods
beginning after June 15, 2003. The adoption of this interpretation did not have
a material effect on our financial position or results of operations since
qualifying special-purpose entities, as defined in SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a Replacement of FASB Statement No. 125," are exempt from the consolidation
requirements of this interpretation.
NOTE 3) RECEIVABLES
Receivables on the balance sheet, including those held for sale, consisted of
the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Business credit card receivables $ 465,436 $ 445,083
Other receivables 24,300 25,589
--------- ---------
Gross receivables 489,736 470,672
--------- ---------
Add: Deferred origination costs, net of deferred fees 26,818 30,834
Less: Allowance for receivable losses
Business credit cards (45,818) (44,466)
Other receivables (1,712) (1,693)
--------- ---------
Total allowance (47,530) (46,159)
--------- ---------
Receivables, net $ 469,024 $ 455,347
========= =========
10
NOTE 4) ALLOWANCE FOR RECEIVABLE LOSSES
The following table presents activity in the allowance for receivable losses for
the periods presented:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Beginning balance $ 46,159 $ 41,971
Provision for credit losses 9,446 10,700
Provision for interest and fee losses 2,594 1,437
Gross principal charge-offs:
Business credit cards (9,274) (10,383)
Other receivables (20) 0
-------- --------
Total gross principal charge-offs (9,294) (10,383)
-------- --------
Principal recoveries:
Business credit cards 866 1,084
-------- --------
Net principal charge-offs (8,428) (9,299)
-------- --------
Interest and fee charge-offs:
Business credit cards (2,241) (1,437)
-------- --------
Ending balance $ 47,530 $ 43,372
======== ========
Prior to October 1, 2002, the billing and recognition of interest and fees was
discontinued when the related receivable became 90 days past due or upon
notification of fraud, bankruptcy, death, hardship or credit counseling.
Effective October 1, 2002, we continue to bill and recognize interest and fees
on accounts when they become 90 days past due, and an additional allowance for
receivable losses is established for the additional billings estimated to be
uncollectible through a provision for interest and fee losses. The billing and
recognition of interest and fees on fraudulent, bankrupt, deceased, hardship and
credit counseling accounts is still discontinued upon receipt of notification of
these events. Provision for interest and fee losses are recorded as direct
reductions to interest and fee income.
NOTE 5) SECURITIZATION ACTIVITIES
Accounts receivable from securitizations consisted of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Retained interests in securitizations $165,547 $113,422
Accrued interest and fees on securitized
receivables, net 57,673 56,171
Amounts due from the trust 174,760 28,645
-------- --------
Total accounts receivable from securitizations $397,980 $198,238
-------- --------
11
The following represents business credit card securitization data and the key
assumptions used in estimating the fair value of retained interests in
securitizations at the time of each new securitization or replenishment if
quoted market prices were not available.
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2003 2002
---- ----
Average securitized receivables $2,171,815 $1,615,656
Securitization income 29,610 29,647
Discount accretion 3,592 2,660
Interchange income 20,404 15,655
Servicing revenues 10,027 7,942
Proceeds from new securitizations 72,525 5,000
Proceeds from collections reinvested in
revolving-period securitizations 1,058,392 903,768
Cash flows received on retained interests 48,300 51,394
KEY ASSUMPTIONS:
Discount rate 11.4% - 14.6% 12.0% - 15.0%
Monthly payment rate 18.9% - 21.0% 18.2% - 21.0%
Loss rate 8.8% - 10.3% 10.4% - 12.8%
Interest yield, net of interest
earned by note holders 14.3% - 15.0% 15.8% - 15.9%
Beginning in the fourth quarter of 2002, our interest yield assumption includes
both finance charge and late fee yield. Previously, the interest yield
assumption included only finance charge yield.
There were no purchases of delinquent accounts during the three months ended
March 31, 2003 or 2002.
The following assumptions were used in estimating the fair value of retained
interests in business credit card securitizations at March 31, 2003 and December
31, 2002 if quoted market prices were not available. The assumptions listed
represent weighted averages of assumptions used for each securitization.
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Discount rate 12.5% - 14.6% 11.4% - 14.0%
Monthly payment rate 18.9% - 21.0% 19.3% - 21.0%
Loss rate 8.8% - 9.7% 9.4% - 10.3%
Interest yield, net of interest
earned by note holders 14.3% 15.0%
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.
12
We have prepared sensitivity analyses of the valuations of retained interests in
securitizations estimated using the assumptions identified above. 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, 2003.
Effect on fair value of the following hypothetical changes in key
assumptions:
Discount rate increased by 2% $ (1,923)
Discount rate increased by 4% (3,773)
Monthly payment rate at 110% of base assumption (1,567)
Monthly payment rate at 125% of base assumption (3,029)
Loss rate at 110% of base assumption (5,355)
Loss rate at 125% of base assumption (13,387)
Interest yield, net of interest earned by note
holders, decreased by 1% (6,085)
Interest yield, net of interest earned by note
holders, decreased by 2% (12,170)
The objective of these hypothetical analyses is to measure the sensitivity of
the fair value of the retained interests to changes in assumptions. The
methodology used to calculate the fair value in the analyses is a discounted
cash flow analysis, the same methodology used to estimate the fair value of the
retained interests when quoted market prices are not available 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.
13
MANAGED RECEIVABLE DATA
Our managed business credit card receivable portfolio is comprised of both owned
business credit card receivables and securitized business credit card
receivables. Performance on a managed receivable portfolio basis is useful and
relevant because we retain interests in the securitized receivables and,
therefore, we have a financial interest in and exposure to the performance of
the securitized receivables. Credit quality data on the managed business credit
card receivable portfolio is as follows:
MARCH 31, DECEMBER 31, MARCH 31,
2003 (1) 2002 (1) 2002
-------- -------- ----
Owned business credit card receivables $ 465,436 $ 445,083 $ 395,766
Securitized business credit card receivables 2,278,746 2,149,147 1,630,309
--------- --------- ---------
Total managed receivables 2,744,182 2,594,230 2,026,075
--------- --------- ---------
Receivables 30 days or more delinquent:
Owned 27,846 23,406 28,119
Securitized 146,570 136,128 117,274
Total managed 174,416 159,534 145,393
Receivables 90 days or more delinquent:
Owned 13,403 11,959 13,297
Securitized 71,255 69,335 55,228
Total managed 84,658 81,294 68,525
Nonaccrual receivables:
Owned 6,581 4,729 17,872
Securitized 35,166 27,688 74,364
Total managed 41,747 32,417 92,236
Accruing receivables past due 90 days or more:
Owned 11,640 10,535 0
Securitized 61,824 61,045 0
Total managed 73,464 71,580 0
Net principal charge-offs for the three months ended March 31 and twelve months
ended December 31:
Owned 8,408 37,400 9,299
Securitized 45,475 156,282 38,986
Total managed 53,883 193,682 48,285
--------- --------- ---------
(1) See Note 4 for a discussion of the change in income billing practice
effective October 1, 2002.
NOTE 6) SELECTED BALANCE SHEET INFORMATION
Other assets consisted of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Current and deferred income taxes, net $ 81,653 $ 84,684
Amounts due from transfer of consumer credit
card business 70,545 70,545
Investment in Fleet Credit Card Services, L.P. 34,500 34,000
Cash surrender value of insurance contracts 24,754 24,437
Intangible assets 3,081 3,085
Other assets 77,088 60,907
-------- --------
Total other assets $291,621 $277,658
======== ========
14
Other liabilities consisted of the following:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Amounts due to the securitization trust $ 42,515 $ 3,255
Accounts payable and accrued expenses 35,489 33,486
Business credit card rewards 17,138 16,416
Accrued interest payable 10,878 5,641
Other (1) 172,708 171,588
-------- --------
Total other liabilities $278,728 $230,386
======== ========
(1) A substantial portion of other liabilities represents our litigation
reserves.
NOTE 7) DEPOSITS
Deposit accounts consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
---- ----
Demand deposits $ 7,219 $ 6,561
Money market savings 1,629 2,380
Time deposits of $100,000 or less 422,314 441,611
Time deposits of more than $100,000 499,242 263,476
-------- --------
Total deposits $930,404 $714,028
======== ========
Time deposit maturities are as follows:
Year Ended December 31,
2003 $466,252
2004 399,698
2005 48,979
2006 6,523
2007 104
NOTE 8) CONTINGENCIES
On January 22, 1999, Fleet Financial Group, Inc. ("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
Services, L.P. in connection with the transfer of our consumer credit card
business to Fleet Credit Card Services, L.P. (the "Consumer Credit Card
Transaction") in 1998. We filed an answer to the complaint, and we also filed a
countercomplaint against Fleet for damages we believe have been caused by
certain actions of Fleet. 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. On January 22, 2003, the trial court issued a
decision ruling on all but one of the remaining issues, and ordered further
briefing on the remaining outstanding issue. In the year ended December 31,
2002, we recognized a $43.0 million pretax loss on the transfer of our consumer
credit card business, representing the estimated impact of implementing the
court's decisions. This amount represented the amount in excess of the reserves
we had been carrying for the litigation, which was based on our expectations of
the outcome of the litigation. We estimate that the court's decisions will have
a favorable impact to our liquidity since we would recoup approximately $8
million in cash from the escrow account funded in February 2001, after payment
of amounts due to Fleet. The court's ruling on the remaining outstanding issue
and/or the ultimate resolution of any issues that may be appealed could reduce
or eliminate the charge to our earnings, although there can be no assurance as
to the potential benefit, if any, to earnings at this time.
15
In an ongoing element of Fleet's disputes with us, Fleet has claimed $508
million of tax deductions from its partnership with us in connection with the
Consumer Credit Card Transaction, which are required under the law to be
allocated solely to Advanta. As required, we reported these deductions on our
1998 corporate tax return. However, we have not used or booked the benefit from
most of these deductions because for tax purposes we have a very substantial net
operating loss carryforward. The deductions are attributable to deductions for
bad debt reserves that we expensed in computing our book income or loss before
the Consumer Credit Card Transaction, but which were not deductible by Advanta
for tax purposes until after the closing of the transaction in 1998. The tax law
requires "built in losses" like these to be deducted by the party who
contributed the assets to the partnership, in this case, Advanta. The Internal
Revenue Service agents who have examined the returns at issue have to ensure
that both parties do not obtain the deductions and therefore, following standard
practice, proposed to disallow the deductions to both parties until there is a
final resolution. The deductions, as well as the allocation of a gain from the
sale of a partnership asset of approximately $47 million, are now before the IRS
Regional Office of Appeals.
On January 15, 2003, Fleet filed a complaint in Rhode Island Superior Court
seeking a declaratory judgment that we indemnify Fleet under the applicable
partnership agreement for any damage Fleet incurs by not being entitled to the
$508 million of tax deductions. Fleet is also seeking a declaratory judgment
that it should not indemnify us for any damages that we incur due to any
allocation to Advanta of the $47 million gain on the sale of a partnership
asset. Fleet's claim for indemnification appears to be brought by Fleet in the
hope that we will advise the IRS that we will agree with a substantial part of
Fleet's tax position. On February 28, 2003, we filed a motion to dismiss the
complaint. We believe that the indemnification provision in the partnership
agreement does not indemnify Fleet for damages incurred related to the tax
deductions and that the lawsuit is frivolous, having no legal basis whatsoever.
We do not expect this lawsuit or the tax issues discussed above to have a
material adverse effect on our financial condition or results of operations.
On December 5, 2000, a former executive of Advanta obtained a jury verdict
against us 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 and a judgment in
the amount of approximately $6 million was entered against Advanta. On July 8,
2002, the Court of Appeals partially reversed the judgement. On May 6, 2003, the
District Court entered an amended judgement in the amount of approximately $4.7
million plus interest from December 7, 2000 and on May 12, 2003, we paid the
amended judgement in full. The payment had no impact on our operating results,
due to the reserves we established in connection with this litigation. The
District Court judge has not yet ruled on the executive's petition for
attorney's fees and costs in the amount of approximately $1.4 million, which we
have contested. Management expects that the ultimate resolution of this item
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 Corp. and certain of its subsidiaries in the United
States District Court for the District of Delaware alleging, among other things,
that we breached our contract with Chase in connection with the Mortgage
Transaction. Chase claims that we misled Chase concerning the value of certain
of the assets sold to Chase. In September 2001, we filed an answer to the
complaint in which we 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 us in connection
16
with the transaction. The matter is in discovery and the parties extended the
discovery period. Trial is scheduled to begin in January 2004. We believe that
the lawsuit is without merit and will vigorously defend Advanta in this
litigation. 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 on our financial position or future
operating results.
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 our exit from that business in the first quarter of 2001.
Management believes that the aggregate loss, if any, resulting from these
actions will not have a material adverse effect on our financial position or
results of our operations based on the level of litigation reserves we have
established and our current expectations regarding the ultimate resolutions of
these existing actions. Our litigation reserves are estimated based on the
status of litigation and our assessment of the ultimate resolution of each
action after consultation with our attorneys. 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.
NOTE 9) CAPITAL STOCK
The Board of Directors of Advanta Corp. has authorized management to purchase up
to 3.0 million shares of Advanta Corp. common stock. In the year ended December
31, 2002, we repurchased 1,554,759 shares of our Class B Common Stock. In the
three months ended March 31, 2003, we repurchased 279,250 shares of our Class B
Common Stock.
Cash dividends per share of common stock declared during the three months ended
March 31, 2003 and 2002 were $0.063 for Class A Common Stock and $0.076 for
Class B Common Stock.
17
NOTE 10) SEGMENT INFORMATION
ADVANTA
BUSINESS VENTURE
CARDS CAPITAL OTHER (1) TOTAL
----------- ---------- -------------- -------------
THREE MONTHS ENDED MARCH 31, 2003
Interest income $ 20,754 $ 0 $ 2,237 $ 22,991
Interest expense 10,734 140 397 11,271
Noninterest revenues (losses), net 64,949 (610) 730 65,069
Pretax income (loss) from continuing operations 10,977 (1,376) 0 9,601
Total assets 915,667 13,934 1,021,456 1,951,057
------- ------ --------- ---------
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
Total assets 575,397 17,529 973,065 1,565,991
------- ------ --------- ---------
(1) Other includes investment and other activities not attributable to
reportable segments. Total assets in the "Other" segment include
assets of discontinued operations.
NOTE 11) SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Interchange income $ 26,138 $ 20,193
Business credit card rewards (4,132) (2,004)
Balance transfer fees 1,351 294
Cash advance fees 755 808
Investment securities losses, net (608) (2,627)
Insurance revenues, net, and other 1,928 1,214
-------- --------
Total other revenues, net $ 25,432 $ 17,878
======== ========
OPERATING EXPENSES THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
---- ----
Salaries and employee benefits $17,991 $17,131
Amortization of deferred origination costs, net 14,184 12,022
External processing 4,620 4,177
Professional fees 3,434 3,835
Equipment 3,394 2,601
Marketing 2,927 1,911
Occupancy 1,789 1,611
Credit 1,185 1,673
Telephone 1,074 627
Fraud 915 741
Postage 902 791
Other 3,107 1,838
------- -------
Total operating expenses $55,522 $48,958
======= =======
18
NOTE 12) CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of basic earnings per common share and
diluted earnings per common share.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
---- ----
Net income $ 5,905 $ 4,234
Less: Preferred A dividends (141) (141)
-------- --------
Net income available to common shareholders 5,764 4,093
Less: Class A dividends declared (576) (574)
Less: Class B dividends declared (1,320) (1,480)
-------- --------
Undistributed net income $ 3,868 $ 2,039
-------- --------
Basic net income per common share
Class A $ 0.22 $ 0.14
Class B 0.25 0.17
Combined (1) 0.24 0.16
Diluted net income per common share
Class A $ 0.22 $ 0.14
Class B 0.25 0.17
Combined (1) 0.24 0.16
-------- --------
Basic weighted average common shares outstanding
Class A 9,183 9,133
Class B 14,816 16,301
Combined 23,999 25,434
Dilutive effect of:
Options Class B 117 346
Restricted shares Class A 1 6
Restricted shares Class B 279 333
Diluted weighted average common shares outstanding
Class A 9,184 9,139
Class B 15,212 16,980
Combined 24,396 26,119
Antidilutive shares
Options Class B 2,736 1,589
Restricted shares Class B 142 1,979
-------- --------
(1) Combined represents net income available to common shareholders divided by
the combined total of Class A and Class B weighted average common shares
outstanding.
19
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
For the three months ended March 31, 2003, we reported net income of $5.9
million or $0.24 per combined diluted common share, compared to net income of
$4.2 million or $0.16 per combined diluted common share for the same period of
2002. The increase in net income is the result of lower unrealized losses on our
venture capital investments and the reduction in net interest expense on excess
liquidity not attributable to the Advanta Business Cards or Venture Capital
segments. These favorable variances are partially offset by a decrease in
Advanta Business Cards net income. Net income included the following
business segment results ($ in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Pretax income (loss):
Advanta Business Cards $ 10,977 $ 13,744
Venture Capital (1,376) (3,435)
Other (1) 0 (3,424)
-------- --------
Total pretax income 9,601 6,885
Income tax expense (3,696) (2,651)
-------- --------
Net income $ 5,905 $ 4,234
-------- --------
(1) Other includes investment and other activities not attributable to the
Advanta Business Cards or Venture Capital segments.
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 or phrases. The most significant among these risks and
uncertainties are:
(1) our managed net interest income;
(2) competitive pressures;
(3) political, social and/or general economic conditions that affect the
level of new account originations, customer spending, delinquencies
and charge-offs;
(4) factors affecting fluctuations in the number of accounts or loan
balances including retention of cardholders after promotional
pricing periods have expired;
(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
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;
20
(13) revisions to estimates associated with the discontinued operations
of our mortgage and leasing businesses;
(14) the impact of litigation;
(15) the proper design and operation of our disclosure controls and
procedures;
(16) difficulties or delays in the development, production, testing and
marketing of products or services; and
(17) 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, 2002 and in our other filings with the Securities and
Exchange Commission.
ADVANTA BUSINESS CARDS
Advanta Business Cards originated, directly and through the use of third
parties, 53,931 new accounts during the three months ended March 31, 2003
compared to 42,291 new accounts for the same period of 2002. Our managed
business credit card receivable portfolio is comprised of both owned business
credit card receivables and securitized business credit card receivables. The
managed business credit card receivable portfolio grew from $2.0 billion at
March 31, 2002 to $2.6 billion at December 31, 2002 and to $2.7 billion at March
31, 2003. We expect owned and managed business credit card receivables to grow
approximately 15% to 20% in the year ended December 31, 2003. Our originations
in 2002 and 2003 have included a broad array of competitively-priced offerings
and products, including promotional pricing and rewards programs, designed to
selectively attract and retain more higher credit quality customers and to
respond to the competitive environment in the credit card industry.
Pretax income for Advanta Business Cards was $11.0 million for the three months
ended March 31, 2003 as compared to $13.7 million for the same period of 2002.
The components of pretax income for Advanta Business Cards for the three months
ended March 31, 2003 and 2002 were as follows ($ in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Net interest income on owned receivables $ 10,020 $ 14,007
Noninterest revenues 64,949 58,139
Provision for credit losses (9,408) (10,500)
Operating expenses (54,584) (47,902)
-------- --------
Pretax income $ 10,977 $ 13,744
-------- --------
Net interest income on owned receivables decreased by $4.0 million for the three
months ended March 31, 2003 as compared to the same period of 2002 due primarily
to a decrease in the average yield earned on our business credit card
receivables, partially offset by an increase in average owned business credit
card receivables of $118 million. The decrease in yield is a result of a broad
array of competitively-priced offerings and products, including promotional
pricing, designed to selectively attract and retain more higher credit quality
customers and to respond to the competitive environment.
The increase in noninterest revenues is comprised of increased servicing
revenues, interchange income and other fee revenues due to growth in average
owned and securitized receivables. A decrease in yield on securitized
receivables was offset by increased
21
volume of securitized receivables, a decrease in the floating interest rates
earned by note holders and a decreased net principal charge-off rate on
securitized receivables resulting in consistent levels of securitization income
in both periods. The decrease in provision for credit losses in the three months
ended March 31, 2003 as compared to the same period of 2002 reflects estimates
of a lower level of inherent losses in the portfolio, based on delinquency and
net principal charge-off trends and the current composition of the portfolio as
compared to estimates as of March 31, 2002, partially offset by the increase in
average owned business credit card receivables. The increase in operating
expenses resulted from growth in owned and securitized receivables. In addition,
amortization of deferred origination costs increased due to the number and
timing of new account originations.
VENTURE CAPITAL
The components of pretax loss for our venture capital segment for the three
months ended March 31, 2003 and 2002 were as follows ($ in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Net interest expense $ (140) $ (203)
Unrealized losses (610) (2,579)
Operating expenses (626) (653)
------- -------
Pretax loss $(1,376) $(3,435)
------- -------
As shown in the table above, pretax loss of our venture capital segment is
comprised primarily of net unrealized losses on our venture capital investments,
which reflect the market conditions for those investments in each respective
period, and operating expenses. The estimated fair value of our venture capital
investments was $12.9 million at March 31, 2003 and $13.5 million at December
31, 2002.
INTEREST INCOME AND EXPENSE
Interest income decreased by $3.4 million to $23.0 million for the three months
ended March 31, 2003 as compared to the same period of 2002. The decrease in
interest income for the three months ended March 31, 2003 was due primarily to a
decrease in the average yield earned on our investments and receivables as a
result of the prevailing interest rate environment and the competitively-priced
offers described below. Partially offsetting these decreases were increases in
average owned business credit card receivables of $118 million and average
investments of $6.4 million for the three months ended March 31, 2003 as
compared to the same period of 2002.
In 2002 and 2003, our marketing campaigns have included a broad array of
competitively-priced offerings and products, including promotional pricing and
rewards programs, designed to selectively attract and retain more higher credit
quality customers and to respond to the competitive environment. These
competitively-priced offers have resulted in a decline in yields on our business
credit card receivable portfolio and are anticipated to result in lower credit
losses in future periods and higher interchange income due to higher purchase
volume. We expect yields for the remaining three quarters of 2003 to be
relatively consistent with those experienced in the first quarter, due in part
to the expiration of promotional pricing periods on a portion of the business
credit card portfolio that we anticipate will offset the decline in yields
created by new offers at promotional rates.
22
During the three months ended March 31, 2003, interest expense decreased by $1.8
million to $11.3 million as compared to the same period of 2002. The decrease in
interest expense for the three months ended March 31, 2003 was due primarily to
a decrease in our average cost of funds, partially offset by an increase in
average deposits and debt of $175 million. Our average cost of funds decreased
to 4.21% for the three months ended March 31, 2003 from 5.85% during the same
period of 2002. The decrease in our average cost of funds is primarily a result
of the prevailing interest rate environment.
The following table provides an analysis of interest income and expense data,
average balance sheet data, net interest spread and net interest margin for both
continuing and discontinued operations. The net interest spread represents the
difference between the yield on interest-earning assets and the average rate
paid on interest-bearing liabilities. The net interest margin represents the
difference between the yield on interest-earning assets and the average rate
paid to fund interest-earning assets. Interest income includes late fees on
business credit card receivables. Average receivables include deferred
origination costs, net of deferred fees.
23
INTEREST RATE ANALYSIS AND AVERAGE BALANCES
($ IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
2003 2002
------------------------------------- --------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Owned receivables:
Business credit cards(1) $ 515,452 $ 17,162 13.50% $ 397,447 $20,119 20.53%
Other receivables 24,860 311 5.07 28,191 336 4.83
---------- -------- ---------- ---------
Total owned receivables 540,312 17,473 13.11 425,638 20,455 19.49
Investments(2) 575,099 1,932 1.35 568,657 3,294 2.32
Retained interests in
securitizations 134,005 3,592 10.72 88,649 2,660 12.00
Interest-earning assets of
discontinued operations 41,786 1,277 12.22 54,536 1,159 8.50
---------- -------- ---------- ---------
Total interest-earning
assets(3) 1,291,202 $ 24,274 7.60% 1,137,480 $27,568 9.80%
Noninterest-earning
assets 518,488 468,996
---------- ----------
Total assets $1,809,690 $1,606,476
========== ==========
Interest-bearing
liabilities(4) $1,125,707 $ 11,674 4.21% $ 951,073 $13,716 5.85%
Noninterest-bearing
liabilities 262,225 187,953
---------- ----------
Total liabilities 1,387,932 1,139,026
Company-obligated mandatorily
preferred securities of
subsidiary trust holding
solely subordinated
debentures of Advanta Corp. 100,000 100,000
Stockholders' equity 321,758 367,450
---------- ----------
Total liabilities and
stockholders' equity
$1,809,690 $1,606,476
========== ==========
Net interest spread 3.39% 3.95%
Net interest margin 3.96% 4.94%
---- ----
(1) Interest income includes late fees for on-balance sheet business credit
cards receivables of $1.5 million for the three months ended March 31,
2003 and $2.8 million for the three months ended March 31, 2002.
(2) Interest and average rate for tax-free securities are computed on a tax
equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and non-accrual receivables.
(4) Includes funding of assets for both continuing and discontinued
operations.
24
PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES
For the three months ended March 31, 2003, provision for credit losses decreased
by $1.3 million to $9.4 million as compared to the same period in 2002. The
decrease in provision for credit losses reflects a reduction in our estimate of
losses inherent in the portfolio as of March 31, 2003, based on the improvement
of delinquency and principal charge-off trends and the current composition of
the portfolio as compared to our estimate as of March 31, 2002. This favorable
impact was partially offset by an increase in the average owned business credit
card receivables of $118 million to $515 million at March 31, 2003.
For the three months ended March 31, 2003, provisions for interest and fee
losses, which are recorded as direct reductions to interest and fee income,
increased by $1.2 million to $2.6 million as compared to the same period in
2002. The increase is due to a change in income billing practice effective
October 1, 2002. Prior to October 1, 2002, the billing and recognition of
interest and fees was discontinued when the related receivable became 90 days
past due or upon notification of fraud, bankruptcy, death, hardship or credit
counseling. Effective October 1, 2002, we continue to bill and recognize
interest and fees on accounts when they become 90 days past due, and an
additional allowance for receivable losses is established for the additional
billings estimated to be uncollectible through a provision for interest and fee
losses. The billing and recognition of interest and fees on fraudulent,
bankrupt, deceased, hardship and credit counseling accounts is still
discontinued upon receipt of notification of these events.
The allowance for receivable losses on business credit card receivables was
$45.8 million at March 31, 2003, or 9.8% of owned receivables, which was
relatively consistent with the allowance of $44.5 million, or 10.0% of owned
receivables at December 31, 2002.
DELINQUENCY AND CHARGE-OFF RATE TRENDS ON OWNED BUSINESS CREDIT CARD RECEIVABLES
MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
2003 2002 2002 2002 2002
---- ---- ---- ---- ----
Receivables 30 days or more delinquent 6.0% 5.3% 6.4% 6.5% 7.1%
Receivables 90 days or more delinquent 2.9% 2.7% 2.9% 3.3% 3.4%
Net principal charge-offs as a % of owned business
credit card receivables for
the three months ended (annualized) 6.5% 6.5% 8.2% 8.2% 9.4%
The improvements in delinquency rates at March 31, 2003 as compared to the rates
at March 31, 2002 are the result of the current composition of the portfolio and
enhancements in the collections area of operations. In June 2000, we ceased
origination of business credit card accounts with Fair, Isaac and Company
("FICO") credit scores of less than 661. We estimate that principal charge-offs
for accounts with FICO credit scores of less than 661 at origination reached
their peak in the first quarter of 2002, based on the average age of that
segment of the portfolio. Although charge-off levels are not always predictable
since they are impacted by the economic environment and other factors beyond our
control, we anticipate principal charge-off rates for the remaining quarters of
2003 will be lower than the comparable periods of 2002. This expectation is
based on the current composition of the portfolio that reflects our strategic
initiative to selectively attract and retain more higher credit quality
customers, enhancements in the collections area of operations made in 2002, and
the current level of delinquencies.
25
In July 2002, the bank regulatory agencies issued draft guidance on account
management and loss allowance for credit card lending. It describes the
agencies' expectations for prudent risk management practices for credit card
activities, particularly with regard to credit line management, over-limit
accounts, and workouts. The draft guidance also addressed income recognition and
loss allowance practices for credit card lending. We completed our evaluation of
the draft guidance in 2002 and did not expect the implementation of the guidance
to have a material adverse effect on our financial condition or our results of
operations. In January 2003, the bank regulatory agencies issued the final
guidance. The guidance includes provisions generally applicable to all credit
card issuers. We are still evaluating any impact the minimum payment provisions
in the final guidance may have on our future delinquencies and charge-offs. Any
impact may depend on the effect of different account management and collection
strategies or other actions we may take to reduce any potentially negative
impact of the change in minimum payments on delinquencies and charge-offs. We do
not expect the other provisions of the final guidance to have a material adverse
effect on our financial condition or our results of operations. However, similar
to other examination guidance, this guidance provides wide discretion to the
bank regulatory agencies in the application to any particular institution.
Accordingly, our bank examiners could require changes in our account management
or loss allowance practices in the future.
26
The following table provides credit quality data as of and for the year-to-date
periods indicated for our on-balance sheet receivable portfolio including a
summary of allowances for receivable losses, nonaccrual receivables, accruing
receivables past due 90 days or more, delinquencies and principal charge-offs.
Consolidated data includes business credit cards and other receivables.
($ in thousands) MARCH 31, DECEMBER 31, MARCH 31,
2003 (1) 2002 (1) 2002
-------- -------- ----
CONSOLIDATED - OWNED
Allowance for receivable losses $ 47,530 $ 46,159 $ 43,372
Receivables 30 days or more delinquent 29,207 25,197 30,154
Receivables 90 days or more delinquent 14,207 12,755 13,968
Nonaccrual receivables 7,385 5,525 18,543
Accruing receivables past due 90 days or more 11,640 10,535 0
As a percentage of gross receivables:
Allowance for receivable losses 9.7% 9.8% 10.2%
Receivables 30 days or more delinquent 6.0 5.4 7.1
Receivables 90 days or more delinquent 2.9 2.7 3.3
Nonaccrual receivables 1.5 1.2 4.4
Accruing receivables past due 90 days or more 2.4 2.2 0.0
Net principal charge-offs $ 8,428 $ 37,416 $ 9,299
As a percentage of average gross receivables:
Net principal charge-offs 6.2% 7.5% 8.7%
BUSINESS CREDIT CARDS - OWNED
Allowance for receivable losses $ 45,818 $ 44,466 $ 42,370
Receivables 30 days or more delinquent 27,846 23,406 28,119
Receivables 90 days or more delinquent 13,403 11,959 13,297
Nonaccrual receivables 6,581 4,729 17,872
Accruing receivables past due 90 days or more 11,640 10,535 0
As a percentage of gross receivables:
Allowance for receivable losses 9.8% 10.0% 10.7%
Receivables 30 days or more delinquent 6.0 5.3 7.1
Receivables 90 days or more delinquent 2.9 2.7 3.4
Nonaccrual receivables 1.4 1.1 4.5
Accruing receivables past due 90 days or more 2.5 2.4 0.0
Net principal charge-offs $ 8,408 $ 37,400 $ 9,299
As a percentage of average gross receivables:
Net principal charge-offs 6.5% 7.9% 9.4%
(1) See Note 4 to the consolidated financial statements for a discussion of
the change in income billing practice effective October 1, 2002.
27
SECURITIZATION INCOME
Securitization income was $29.6 million for each of the three-month periods
ended March 31, 2003 and 2002. Increased volume of securitized receivables, a
decrease in the floating interest rates earned by note holders and a decreased
net principal charge-off rate on securitized receivables offset a decrease in
yield on securitized receivables, resulting in consistent levels of
securitization income in both periods. These fluctuations in yields and rates
are similar to those experienced in on-balance sheet business credit card
receivables as discussed in the "Interest Income and Expense" and "Provision and
Allowance for Receivable Losses" sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
MANAGED RECEIVABLE DATA
Performance on a managed receivable portfolio basis is useful and relevant
because we retain interests in the securitized receivables and, therefore, we
have a financial interest in and exposure to the performance of the securitized
receivables. The following tables provide selected information on a managed
business credit card receivable portfolio basis as of March 31 and for the three
months then ended ($ in thousands):
2003 (1)
----------------------------------------
ADJUSTMENTS
TO REVERSE
EFFECTS OF TOTAL
OWNED SECURITIZATIONS MANAGED
----- --------------- -------
Average business credit card receivables $ 515,452 $ 2,171,815 $2,687,267
Ending business credit card receivables $ 465,436 $ 2,278,746 $2,744,182
Number of business credit card accounts 792,626 N/A 792,626
Interest income $ 20,754 $ 87,095 $ 107,849
Interest expense 10,734 9,521 20,255
Net interest income 10,020 77,574 87,594
Noninterest revenues 64,949 (32,099) 32,850
Net principal charge-offs 8,408 45,475 53,883
Risk-adjusted revenues (2) 66,561 0 66,561
Receivables 30 days or more delinquent 27,846 146,570 174,416
Receivables 90 days or more delinquent 13,403 71,255 84,658
Nonaccrual receivables 6,581 35,166 41,747
Accruing receivables past
due 90 days or more 11,640 61,824 73,464
28
2002
-------------------------------------------------
ADJUSTMENTS
TO REVERSE
EFFECTS OF TOTAL
OWNED SECURITIZATIONS MANAGED
----- --------------- -------
Average business credit card receivables $397,447 $1,615,656 $2,013,103
Ending business credit card receivables $395,766 $1,630,309 $2,026,075
Number of business credit card accounts 684,418 N/A 684,418
Interest income $ 22,778 $ 79,643 $ 102,421
Interest expense 8,771 9,059 17,830
Net interest income 14,007 70,584 84,591
Noninterest revenues 58,139 (31,598) 26,541
Net principal charge-offs 9,299 38,986 48,285
Risk-adjusted revenues (2) 62,847 0 62,847
Receivables 30 days or more delinquent 28,119 117,274 145,393
Receivables 90 days or more delinquent 13,297 55,228 68,525
Nonaccrual receivables 17,872 74,364 92,236
Accruing receivables past due 90 days or more 0 0 0
(1) See Note 4 to the consolidated financial statements for a discussion of
the change in income billing practice effective October 1, 2002.
(2) Risk-adjusted revenues represent net interest income and noninterest
revenues, less net principal charge-offs.
SERVICING REVENUES
Servicing revenues were $10.0 million for the three months ended March 31, 2003
and $7.9 million for the three months ended March 31, 2002. The increase in
servicing revenue was due to increased volume of securitized business credit
card receivables.
29
OTHER REVENUES
($ in thousands) THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
---- ----
Interchange income $ 26,138 $ 20,193
Business credit card rewards (4,132) (2,004)
Balance transfer fees 1,351 294
Cash advance fees 755 808
Investment securities losses, net (608) (2,627)
Insurance revenues, net, and other 1,928 1,214
-------- --------
Total other revenues, net $ 25,432 $ 17,878
======== ========
Interchange income includes interchange fees on both owned and securitized
business credit cards. The increase in interchange income in the three months
ended March 31, 2003 as compared to the same period in 2002 was primarily due to
higher purchase volume related to the increase in average business credit card
accounts and receivables. The average interchange rate was 2.1% in each of the
three months ended March 31, 2003 and 2002.
The increase in business credit card rewards in the three months ended March 31,
2003, as compared to 2002, was due to the increase in average owned and
securitized business credit card accounts in the rewards programs and the
corresponding purchase activity in those accounts, partially offset by a change
in redemption terms of certain reward programs in 2003 that decreased the
anticipated costs of future reward redemptions in those programs by
approximately $867 thousand.
Balance transfer fees have increased in the three months ended March 31, 2003 as
compared to the same period of 2002 due to higher volume of balance transfers in
2003 associated with an increase in the volume of balance transfer promotional
offers included in our marketing campaigns in 2003. In 2002 and 2003, our
marketing campaigns have included a broad array of competitively-priced
offerings and products, including balance transfer promotions, promotional
pricing and rewards programs, geared specifically toward attracting more higher
credit quality customers.
Investment securities losses for both the three months ended March 31, 2003 and
2002 are comprised primarily of decreases in valuations of venture capital
investments reflecting the market conditions for the investments in those
periods.
In the three months ended March 31, 2003, insurance revenues, net, and other
includes an estimate of the earnings allocable to our partnership interest in
Fleet Credit Card Services, L.P.
30
OPERATING EXPENSES
($ in thousands) THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
------- -------
Salaries and employee benefits $17,991 $17,131
Amortization of deferred origination costs, net 14,184 12,022
External processing 4,620 4,177
Professional fees 3,434 3,835
Equipment 3,394 2,601
Marketing 2,927 1,911
Occupancy 1,789 1,611
Credit 1,185 1,673
Telephone 1,074 627
Fraud 915 741
Postage 902 791
Other 3,107 1,838
------- -------
Total operating expenses $55,522 $48,958
======= =======
Salaries and employee benefits, external processing, occupancy, telephone,
fraud, postage and other expenses have increased in the three months ended March
31, 2003 as compared to the same period of 2002 due primarily to growth in owned
and securitized business credit card receivables.
The increase in amortization of deferred origination costs, net is attributable
to an increase in the number and timing of new account originations. We
originated a significant volume of new accounts in the fourth quarter of 2002,
and expect to have increased amortization expense through the third quarter of
2003 as those costs amortize over the privilege period of one year.
Equipment expense increased in the three months ended March 31, 2003 as compared
to the same period of 2002 due to an increase in technology costs, including a
licensing fee, and the growth in owned and securitized business credit card
receivables.
The increase in marketing expense in the three months ended March 31, 2003 as
compared to the same period of 2002 was primarily attributable to our
initiatives to enhance and maintain our relationships with existing high credit
quality customers including marketing programs to stimulate usage, enhance
customer loyalty and retain existing accounts, and the development of programs
to acquire new customers.
Credit expense decreased in the three months ended March 31, 2003 as compared to
the same period of 2002 due to a shift in the types of recoveries. There was an
increase in the proportion of total recoveries collected through sales of pools
of charged-off accounts and a decrease in the proportion collected through
outsourced individual account recovery efforts.
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 our exit from that business in the
first quarter of 2001. See discussion in Note 8 to the consolidated financial
statements. Management believes that the aggregate loss, if any, resulting from
these actions will not have a material adverse effect on our financial position
or results of our operations based on the level of litigation reserves we have
established and our
31
current expectations regarding the ultimate resolutions of these existing
actions. Our litigation reserves are estimated based on the status of litigation
and our assessment of the ultimate resolution of each action after consultation
with our attorneys. 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.
INCOME TAXES
Income tax expense was $3.7 million for the three months ended March 31, 2003
and $2.7 million for the same period of 2002. Our effective tax rate was 38.5%
for both periods. See Note 8 to the consolidated financial statements for a
discussion of tax matters currently before the Internal Revenue Service Regional
Office of Appeals.
MARKET RISK SENSITIVITY
As of March 31, 2003, there were no material changes in our market risk
exposures that affect the quantitative and qualitative market risk disclosures
presented as of December 31, 2002 in our Form 10-K.
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, 2003. At March 31, 2003, we had $368 million of federal
funds sold, $182 million of receivables held for sale, and $115 million of
investments, which could be sold to generate additional liquidity. Components of
funding were as follows ($ in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
-------------------------- ----------------------
AMOUNT % AMOUNT %
------ - ------ -
Off-balance sheet securitized receivables (1) $2,226,117 57% $2,172,266 60%
Deposits 930,404 24 714,028 19
Debt and other borrowings 318,490 8 315,886 9
Capital securities 100,000 3 100,000 3
Equity 323,435 8 321,313 9
---------- --- ---------- ---
Total $3,898,446 100% $3,623,493 100%
========== === ========== ===
(1) Includes both off-balance sheet business credit card receivables and
off-balance sheet lease receivables related to discontinued operations.
Excludes our ownership interest in the investor principal balance of
securitizations (subordinated trust assets) that are held on-balance sheet
and classified as retained interests in securitizations or assets of
discontinued operations.
At March 31, 2003, we had a $280 million committed commercial paper conduit
facility, through which $55 million of business credit card receivables were
securitized at March 31, 2003. Upon the expiration of the $280 million
commercial paper conduit facility in June 2003, management expects to obtain the
appropriate level of replacement funding under similar terms and conditions.
When a business credit card securitization series is in its revolving period,
principal collections on securitized receivables allocated to that series are
used
32
to purchase additional receivables to replenish receivables that have been
repaid. In contrast, when a series of our securitization trust starts its
amortization period, principal collections are held in the trust until the
payment date of the notes. Our $157 million Series 2000-A business credit card
securitization started its scheduled amortization period in February 2003 and
our $600 million Series 2000-B business credit card securitization started its
scheduled amortization period in April 2003. As principal is collected on
securitized receivables in those series during their amortization periods, we
need to replace that amount of funding. Balances of accounts receivable from
securitizations and amounts due to the securitization trust have increased at
March 31, 2003, as compared to December 31, 2002, primarily as a result of
principal collections of receivables allocated to Series 2000-A during its
amortization period. The increases in these assets were primarily funded through
an increase in deposits. Series 2000-A completed its scheduled amortization
period in March 2003 and the note holders were paid in full in April 2003. We
expect Series 2000-B to complete its scheduled amortization period in June 2003
and the note holders to be paid in full by July 2003. Management expects future
funding needs related to amortization periods to be met through a combination of
increased deposits and private and public securitization transactions under
similar terms and conditions as our current private and public securitizations.
However, based on recent trends in market rates for asset-backed securities
issued by certain other credit card companies and our recent experience, we
expect the costs of our securitization transactions in 2003 to be higher than
what we experienced in 2002.
We continue to offer unsecured debt securities of Advanta Corp., in the form of
RediReserve Certificates and Investment Notes, to retail investors through our
retail note program. We change the interest rates we offer frequently, depending
on market conditions and our funding needs. The rates also vary depending on the
size of each investment. At March 31, 2003, $318 million of RediReserve
Certificates and Investment Notes were outstanding with interest rates ranging
from 1.98% to 11.56%. In 2002, we began to lengthen the maturities of our
unsecured debt securities to take advantage of the low interest rate
environment. Debt maturing in one year or less totaled $181 million at March 31,
2003, as compared to $207 million at December 31, 2002 and $227 million at March
31, 2002.
The Board of Directors of Advanta Corp. has authorized management to purchase up
to 3.0 million shares of Advanta Corp. common stock. As of December 31, 2002, we
had repurchased 2,248,059 shares of our Class B Common Stock. In the three
months ended March 31, 2003, we repurchased 279,250 shares of our Class B Common
Stock. We intend to continue to make purchases under the remaining unused
authorization when we believe it is prudent to do so while we analyze evolving
capital requirements.
Our bank subsidiaries are subject to regulatory capital requirements and other
regulatory provisions that restrict their ability to lend and/or pay dividends
to Advanta Corp. and its affiliates. Advanta Bank Corp issues and funds our
business credit cards and is the servicer of our discontinued leasing business.
Prior to our exit from the mortgage business in the first quarter of 2001,
Advanta National Bank issued and funded a large portion of our mortgage
business. Advanta National Bank's operations are currently not material to our
consolidated operating results. Our insurance subsidiaries are also subject to
certain capital and dividend rules and regulations as prescribed by state
jurisdictions in which they are authorized to operate. Management believes that
these restrictions, for both bank and insurance subsidiaries, will not have an
adverse effect on Advanta Corp.'s ability to meet its cash obligations due to
the current levels of liquidity and diversity of funding sources.
In 2000, Advanta Bank Corp. entered into agreements with its bank regulatory
agencies, primarily relating to the bank's subprime lending operations. These
33
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. In
connection with removing the agreements, Advanta Bank Corp. reached an
understanding with its regulators, reflecting continued progress in our ongoing
efforts to enhance Advanta Bank Corp.'s practices and procedures. Effective
October 2002, the understanding was revised. The revised understanding replaces
the provisions of the prior understanding and provides for the bank to enhance
certain of its internal planning and monitoring processes. The revised
understanding is consistent with the manner in which Advanta Bank Corp. is
currently operating its business and includes no restrictions expected to have
any impact on our financial results.
At March 31, 2003, Advanta Bank Corp.'s combined total capital ratio (combined
Tier I and Tier II capital to risk-weighted assets) was 14.46% as compared to
18.46% at December 31, 2002. In each case, Advanta Bank Corp. had capital in
excess of levels a bank is required to maintain to be classified as
"well-capitalized" under the regulatory framework for prompt corrective action.
We expect Advanta Bank Corp's capital to remain at "well-capitalized" levels
throughout the remainder of 2003. However, we expect its combined total capital
ratio at June 30, 2003 to be lower than the ratio at March 31, 2003 due to the
amortization of the 2000-B securitization discussed above and the corresponding
increase in on-balance sheet assets.
Assets of discontinued operations include two buildings formerly used in our
mortgage business that are under contract for sale at March 31, 2003. The
proceeds from the sale of the buildings in May 2003 will be approximately $27
million, which is expected to increase our liquidity position.
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 our exit from that business in the
first quarter of 2001. Management believes that the aggregate loss, if any,
resulting from existing litigation, claims and other legal proceedings will not
have a material adverse effect on our liquidity or capital resources based on
our current expectations regarding the ultimate resolutions of these actions and
amounts held in escrow in connection with certain litigation. 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 the estimated cash flow related to these proceedings
may change or that actual results will differ from our estimates.
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."
34
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any disclosure controls and
procedures, no matter how well designed and operated, can provide only
reasonable, rather than absolute, assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Within the 90 days prior to the filing of this quarterly report, an evaluation
was performed under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The legal proceedings and claims described under the heading captioned
"Contingencies" in Note 8 of the Notes to Consolidated Financial Statements set
forth in Part I, Item 1 of this Quarterly Report are hereby incorporated by
reference.
35
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 AT&T Master Custom Agreement, dated February 10, 2003, between Advanta
Shared Services Corp. and AT&T Corp.
12 Consolidated Computation of Ratio of Earnings to Fixed Charges
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
(b)(1) A Current Report on Form 8-K, dated January 17, 2003, was filed by
Advanta announcing that Fleet filed a complaint seeking a
declaratory judgment for indemnification of damages incurred by not
being entitled to the tax deduction arising from Fleet's purchase of
Advanta's consumer credit card business in 1998.
(b)(2) A Current Report on Form 8-K, dated January 22, 2003, was filed by
Advanta announcing that the trial court issued a decision ruling on
all but one of the remaining issues on the lawsuit filed by Fleet on
January 22, 1999.
(b)(3) A Current Report on Form 8-K, dated January 23, 2003, was filed by
Advanta setting forth the financial highlights of Advanta's results
of operations for the year ended December 31, 2002.
36
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 14, 2003 By /s/Philip M. Browne
-------------------
Senior Vice President and
Chief Financial Officer
May 14, 2003 By /s/David B. Weinstock
---------------------
Vice President and
Chief Accounting Officer
37
CERTIFICATIONS
I, Dennis Alter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanta Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Dennis Alter
- -----------------------
Dennis Alter
Chief Executive Officer
May 14, 2003
38
I, Philip M. Browne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanta Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Philip M. Browne
- ------------------------
Philip M. Browne
Chief Financial Officer
May 14, 2003
39
EXHIBIT INDEX
MANNER OF
EXHIBIT DESCRIPTION FILING
10 AT&T Master Custom Agreement, dated February 10, 2003, between *
Advanta Shared Services Corp. and AT&T Corp.
12 Consolidated Computation of Ratio of Earnings to Fixed Charges *
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted *
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted *
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed electronically herewith.
40