10-Q 1 w86454e10vq.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 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.
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