##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2009
 or
 o
    
    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.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    23-1462070
(I.R.S. Employer
Identification No.)
 
 
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
   o o
   Class
    
    Outstanding at August 3, 2009Class A Common Stock, $.01 par value per share
    
    14,410,133 sharesClass B Common Stock, $.01 par value per share
    
    29,984,029 shares




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets (Unaudited)
    
    
    3Consolidated Income Statements (Unaudited)
    
    
    4Consolidated Statements of Changes in Stockholders Equity (Unaudited)
    
    
    5-6Consolidated Statements of Cash Flows (Unaudited)
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    60Item 4. Controls and Procedures
    
    
    60PART II- OTHER INFORMATION
    
    
    60Item 1. Legal Proceedings
    
    
    60Item 1A. Risk Factors
    
    
    61Item 4. Submission of Matters to a Vote of Security Holders
    
    
    69Item 5. Other Information
    
    
    69Item 6. Exhibits
    
    
    70Exhibit Index
    
    
    72Exhibit 10.1Exhibit 12Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 ADVANTA CORP. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS (Unaudited)
 June 30,
    
    
    December 31,(In thousands, except share amounts)
    
    2009
    
    
    2008ASSETSCash
    
    $
    24,974
    
    
    $
    31,716Federal funds sold
    
    
    221
    
    
    
    32,277Interest-bearing deposits
    
    
    1,539,423
    
    
    
    1,595,138Investments available for sale
    
    
    402,525
    
    
    
    977,245Receivables, net:Held for sale
    
    
    0
    
    
    
    0Other
    
    
    328,639
    
    
    
    414,844Total receivables, net
    
    
    328,639
    
    
    
    414,844Accounts receivable from securitizations
    
    
    656,749
    
    
    
    301,118Premises and equipment, net
    
    
    12,846
    
    
    
    16,762Other assets
    
    
    163,604
    
    
    
    215,945Total assets
    
    $
    3,128,981
    
    
    $
    3,585,045LIABILITIESDeposits
    
    $
    2,548,073
    
    
    $
    2,541,406Debt
    
    
    168,940
    
    
    
    206,598Other borrowings
    
    
    0
    
    
    
    50,000Subordinated debt payable to preferred securities trust
    
    
    92,290
    
    
    
    103,093Other liabilities
    
    
    222,460
    
    
    
    176,587Total liabilities
    
    
    3,031,763
    
    
    
    3,077,684Commitments and contingenciesSTOCKHOLDERS EQUITYClass A preferred stock, $1,000 par value:Authorized, issued and outstanding  1,010 shares in
2009 and 2008
    
    
    1,010
    
    
    
    1,010Class A voting common stock, $.01 par value:Authorized  200,000,000 shares; issued  14,410,133
shares in 2009 and 2008
    
    
    144
    
    
    
    144Class B non-voting common stock, $.01 par value:Authorized  200,000,000 shares; issued  32,330,069
shares in 2009 and 32,776,722 shares in 2008
    
    
    323
    
    
    
    328Additional paid-in capital
    
    
    248,581
    
    
    
    250,042Unearned ESOP shares
    
    
    (8,195
    )
    
    
    (8,367
    )Accumulated other comprehensive loss
    
    
    (15,127
    )
    
    
    (13,447
    )(Accumulated
deficit) retained earnings
    
    
    (92,040
    )
    
    
    315,072Treasury stock at cost, 1,661,780 Class B common shares
in 2009 and 1,563,736 Class B common shares in 2008
    
    
    (37,478
    )
    
    
    (37,421
    )Total stockholders equity
    
    
    97,218
    
    
    
    507,361Total liabilities and stockholders equity
    
    $
    3,128,981
    
    
    $
    3,585,045
 See accompanying notes to consolidated financial statements.
  3




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ADVANTA CORP. AND SUBSIDIARIES
 
 CONSOLIDATED INCOME STATEMENTS (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands, except per share amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Receivables
    
    $
    18,946
    
    
    $
    37,750
    
    
    $
    34,960
    
    
    $
    66,880Investments
    
    
    3,445
    
    
    
    7,954
    
    
    
    9,550
    
    
    
    17,886Other interest income
    
    
    11,195
    
    
    
    9,565
    
    
    
    23,284
    
    
    
    16,550Total interest income
    
    
    33,586
    
    
    
    55,269
    
    
    
    67,794
    
    
    
    101,316Interest expense:Deposits
    
    
    23,522
    
    
    
    23,600
    
    
    
    49,049
    
    
    
    45,519Debt and other borrowings
    
    
    2,512
    
    
    
    4,120
    
    
    
    5,480
    
    
    
    8,028Subordinated debt payable to
preferred securities trust
    
    
    2,282
    
    
    
    2,317
    
    
    
    4,599
    
    
    
    4,634Total interest expense
    
    
    28,316
    
    
    
    30,037
    
    
    
    59,128
    
    
    
    58,181Net interest income
    
    
    5,270
    
    
    
    25,232
    
    
    
    8,666
    
    
    
    43,135Provision for credit losses
    
    
    35,335
    
    
    
    30,327
    
    
    
    76,612
    
    
    
    58,709Net interest income after provision for
credit losses
    
    
    (30,065
    )
    
    
    (5,095
    )
    
    
    (67,946
    )
    
    
    (15,574
    )Noninterest revenues (losses):Securitization income (loss)
    
    
    (179,017
    )
    
    
    4,608
    
    
    
    (238,924
    )
    
    
    21,605Servicing revenues
    
    
    18,053
    
    
    
    24,365
    
    
    
    38,900
    
    
    
    50,457Gain on extinguishment of debt
    
    
    8,557
    
    
    
    0
    
    
    
    8,557
    
    
    
    0Other revenues, net
    
    
    14,303
    
    
    
    65,350
    
    
    
    49,350
    
    
    
    131,918Total noninterest revenues (losses)
    
    
    (138,104
    )
    
    
    94,323
    
    
    
    (142,117
    )
    
    
    203,980Operating expenses
    
    
    83,344
    
    
    
    81,752
    
    
    
    158,223
    
    
    
    151,240Income (loss) before income taxes
    
    
    (251,513
    )
    
    
    7,476
    
    
    
    (368,286
    )
    
    
    37,166Income tax expense
    
    
    78,556
    
    
    
    3,461
    
    
    
    37,688
    
    
    
    14,789Net income (loss)
    
    $
    (330,069
    )
    
    $
    4,015
    
    
    $
    (405,974
    )
    
    $
    22,377Basic net income (loss) per common shareClass A
    
    $
    (8.14
    )
    
    $
    0.06
    
    
    $
    (10.01
    )
    
    $
    0.47Class B
    
    
    (8.14
    )
    
    
    0.10
    
    
    
    (10.01
    )
    
    
    0.54Diluted net income (loss) per common
shareClass A
    
    $
    (8.14
    )
    
    $
    0.06
    
    
    $
    (10.01
    )
    
    $
    0.47Class B
    
    
    (8.14
    )
    
    
    0.09
    
    
    
    (10.01
    )
    
    
    0.52Basic weighted average common shares
outstandingClass A
    
    
    13,430
    
    
    
    13,380
    
    
    
    13,424
    
    
    
    13,374Class B
    
    
    27,127
    
    
    
    27,142
    
    
    
    27,160
    
    
    
    27,082Nonvested Class B
    
    
    3,599
    
    
    
    3,625
    
    
    
    3,729
    
    
    
    2,571Diluted weighted average common shares
outstandingClass A
    
    
    13,430
    
    
    
    13,380
    
    
    
    13,424
    
    
    
    13,374Class B
    
    
    27,127
    
    
    
    28,267
    
    
    
    27,160
    
    
    
    28,196Nonvested Class B
    
    
    3,599
    
    
    
    3,625
    
    
    
    3,729
    
    
    
    2,571
 See accompanying notes to consolidated financial statements.
  4




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ADVANTA CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
 Class A
    
    
    Class A
    
    
    Class B
    
    
    AdditionalComprehensive
    
    
    Preferred
    
    
    Common
    
    
    Common
    
    
    Paid-In($ in thousands)
    
    Income (Loss)
    
    
    Stock
    
    
    Stock
    
    
    Stock
    
    
    CapitalBalance at December 31, 2007
    
    
    
    
    
    $
    1,010
    
    
    $
    144
    
    
    $
    296
    
    
    $
    238,416Net loss
    
    $
    (43,823
    )Other comprehensive income (loss):Unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense) of $6,172
    
    
    (11,462
    )Actuarial gain (loss), net of
tax benefit (expense) of $161
    
    
    (299
    )Currency translation adjustment
    
    
    (12
    )Comprehensive loss
    
    $
    (55,596
    )Preferred and common cash dividends
declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85Employee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,437Nonemployee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Excess tax benefits from ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341Issuance of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    (34
    )Amortization of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,729Forfeitures of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (27
    )ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99Balance at December 31, 2008
    
    
    
    
    
    $
    1,010
    
    
    $
    144
    
    
    $
    328
    
    
    $
    250,042Net loss
    
    $
    (405,974
    )Other comprehensive income (loss):Unrealized appreciation
(depreciation) of investments:Other-than-temporary
impairment losses for
which a portion has been
recorded in earnings, net
of tax benefit (expense)
of $480
    
    
    (890
    )Other investments, net of
tax benefit (expense) $427
    
    
    (794
    )Currency translation adjustment
    
    
    4Comprehensive loss
    
    $
    (407,654
    )Preferred and common cash dividends
declaredEmployee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,406Excess tax benefits from ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Issuance of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    (5
    )Amortization of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,795
    )Forfeitures of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (136
    )Treasury stock acquiredESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )Balance at June 30, 2009
    
    
    
    
    
    $
    1,010
    
    
    $
    144
    
    
    $
    323
    
    
    $
    248,581
 See accompanying notes to consolidated financial statements.
  5




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ADVANTA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)  continued
 Accumulated
    
    
    (AccumulatedOther
    
    
    Deficit)
    
    
    
    
    
    
    TotalUnearned
    
    
    Comprehensive
    
    
    Retained
    
    
    Treasury
    
    
    Stockholders($ in thousands)
    
    ESOP Shares
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance at December 31, 2007
    
    $
    (8,785
    )
    
    $
    (1,674
    )
    
    $
    393,795
    
    
    $
    (37,421
    )
    
    $
    585,781Net loss
    
    
    
    
    
    
    
    
    
    
    (43,823
    )
    
    
    
    
    
    
    (43,823
    )Other comprehensive income (loss):Unrealized appreciation
(depreciation) of investments,
net of tax benefit (expense)
of $6,172
    
    
    
    
    
    
    (11,462
    )
    
    
    
    
    
    
    
    
    
    
    (11,462
    )Actuarial gain (loss), net of
tax benefit (expense) of $161
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    (299
    )Currency translation adjustment
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )Comprehensive lossPreferred and common cash
dividends declared
    
    
    
    
    
    
    
    
    
    
    (34,900
    )
    
    
    
    
    
    
    (34,900
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85Employee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,437Nonemployee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Excess tax benefits from ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341Issuance of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,729Forfeitures of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )ESOP shares committed to be
released
    
    
    418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517Balance at December 31, 2008
    
    $
    (8,367
    )
    
    $
    (13,447
    )
    
    $
    315,072
    
    
    $
    (37,421
    )
    
    $
    507,361Net loss
    
    
    
    
    
    
    
    
    
    
    (405,974
    )
    
    
    
    
    
    
    (405,974
    )Other comprehensive income (loss):Unrealized appreciation
(depreciation) of investments:Other-than-temporary
impairment losses for
which a portion has been
recorded in earnings,
net of tax benefit
(expense) of $480
    
    
    
    
    
    
    (890
    )
    
    
    
    
    
    
    
    
    
    
    (890
    )Other investments, net of
tax benefit (expense)
$427
    
    
    
    
    
    
    (794
    )
    
    
    
    
    
    
    
    
    
    
    (794
    )Currency translation adjustment
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Comprehensive lossPreferred and common cash
dividends declared
    
    
    
    
    
    
    
    
    
    
    (1,138
    )
    
    
    
    
    
    
    (1,138
    )Employee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,406Excess tax benefits from ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198Issuance of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,795
    )Forfeitures of nonvested shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146
    )Treasury stock acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    (57
    )ESOP shares committed to be
released
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Balance at June 30, 2009
    
    $
    (8,195
    )
    
    $
    (15,127
    )
    
    $
    (92,040
    )
    
    $
    (37,478
    )
    
    $
    97,218
 See accompanying notes to consolidated financial statements.
  6




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##### Table of Contents



ADVANTA CORP. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months EndedJune 30,($ in thousands)
    
    2009
    
    
    2008OPERATING ACTIVITIES  CONTINUING OPERATIONSNet (loss) income
    
    $
    (405,974
    )
    
    $
    22,377Adjustments to reconcile net (loss) income to net cash used in
operating activities:Investment securities losses (gains), net
    
    
    913
    
    
    
    (32,328
    )Gain on extinguishment of debt
    
    
    (8,557
    )
    
    
    0Amortization of discount on investment securities
    
    
    (2,467
    )
    
    
    (307
    )Depreciation and amortization
    
    
    3,612
    
    
    
    3,284Impairment of assets
    
    
    5,327
    
    
    
    0Other-than-temporary impairment losses on investment securities
    
    
    6,593
    
    
    
    0Stock-based compensation (benefit) expense
    
    
    (1,535
    )
    
    
    7,402Provision for credit losses
    
    
    76,612
    
    
    
    58,709Provision for interest and fee losses
    
    
    20,270
    
    
    
    10,418Change in deferred origination costs, net of deferred fees
    
    
    4,586
    
    
    
    7,251Change in receivables held for sale
    
    
    (125,000
    )
    
    
    (421,647
    )Proceeds from sale of receivables held for sale
    
    
    125,000
    
    
    
    318,025Change in accounts receivable from securitizations
    
    
    (355,631
    )
    
    
    (90,557
    )Change in amounts due to the securitization trust
    
    
    38,576
    
    
    
    (61,415
    )Tax deficiency from stock-based compensation
    
    
    0
    
    
    
    606Change in other assets and other liabilities
    
    
    59,235
    
    
    
    174,610Net cash used in operating activities
    
    
    (558,440
    )
    
    
    (3,572
    )INVESTING ACTIVITIES  CONTINUING OPERATIONSChange in federal funds sold and interest-bearing Deposits
    
    
    87,771
    
    
    
    (188,163
    )Purchase of investments available for sale
    
    
    (609,759
    )
    
    
    (766,585
    )Proceeds from sales of investments available for sale
    
    
    710,753
    
    
    
    392,017Proceeds from sales of other investments
    
    
    0
    
    
    
    32,231Proceeds from maturing investments available for sale
    
    
    495,756
    
    
    
    155,260Change in receivables not held for sale
    
    
    (15,263
    )
    
    
    (17,931
    )Purchases of premises and equipment, net
    
    
    (732
    )
    
    
    (4,368
    )Net cash provided by (used in) investing activities
    
    
    668,526
    
    
    
    (397,539
    )FINANCING ACTIVITIES  CONTINUING OPERATIONSChange in demand and savings deposits
    
    
    5,726
    
    
    
    (1,934
    )Proceeds from issuance of time deposits
    
    
    503,467
    
    
    
    738,926Payments for maturing time deposits
    
    
    (527,208
    )
    
    
    (313,444
    )Proceeds from issuance of debt
    
    
    21,023
    
    
    
    36,740Payments on redemption of debt
    
    
    (59,564
    )
    
    
    (32,629
    )Change in cash overdraft and other borrowings
    
    
    (59,048
    )
    
    
    (10,433
    )Proceeds from exercise of stock options
    
    
    0
    
    
    
    15Cash dividends paid
    
    
    (1,138
    )
    
    
    (17,278
    )Tax deficiency from stock-based compensation
    
    
    0
    
    
    
    (606
    )Treasury stock acquired
    
    
    (57
    )
    
    
    0Net cash (used in) provided by financing activities
    
    
    (116,799
    )
    
    
    399,357Effect of foreign exchange rates on cash
    
    
    4
    
    
    
    0DISCONTINUED OPERATIONSNet cash used in operating activities of discontinued operations
    
    
    (33
    )
    
    
    (1,244
    )Net decrease in cash
    
    
    (6,742
    )
    
    
    (2,998
    )Cash at beginning of period
    
    
    31,716
    
    
    
    90,228Cash at end of period
    
    $
    24,974
    
    
    $
    87,230SUPPLEMENTAL DISCLOSURESIncome taxes paid, net
    
    $
    1,361
    
    
    $
    5,951Interest paid
    
    
    18,800
    
    
    
    17,625
 See accompanying notes to consolidated financial statements.
  7




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##### Table of Contents



ADVANTA CORP. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
 June 30, 2009
(Unaudited)
  Note 1) Basis of Presentation and Current Operating Environment
     8




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9




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Note 2) Recently Issued Accounting Standards
 Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities Earnings Per
Share,
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.
 Recognition and Presentation
of Other-Than-Temporary Impairments
 Interim Disclosure about
Fair Value of Financial Instruments Disclosures
about the Fair Value of Financial Instruments
  10




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##### Table of Contents



Accounting for Transfers of Financial Assets  an
amendment of FASB Statement No. 140, Amendments to FASB
Interpretation No. 46(R)
 Note 3) Interest-Bearing Deposits and Investments Available for Sale
   June 30, 2009
    
    
    December 31, 2008Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueU.S. Treasury and government
agency securities
    
    $
    109,127
    
    
    $
    109,284
    
    
    $
    312,112
    
    
    $
    313,209State and municipal securities
    
    
    16,652
    
    
    
    16,451
    
    
    
    18,015
    
    
    
    17,064Corporate bonds
    
    
    5,000
    
    
    
    4,997
    
    
    
    0
    
    
    
    0Commercial paper
    
    
    0
    
    
    
    0
    
    
    
    8,796
    
    
    
    8,799Asset-backed securities:Credit card asset-backed securities(1)
    
    
    132,518
    
    
    
    116,285
    
    
    
    291,919
    
    
    
    281,601Mortgage and home equity line of credit-backed
securities
    
    
    23,841
    
    
    
    17,076
    
    
    
    32,692
    
    
    
    22,467Equity securities
    
    
    8,116
    
    
    
    8,122
    
    
    
    8,245
    
    
    
    8,191Money market funds(2)
    
    
    129,943
    
    
    
    129,943
    
    
    
    325,548
    
    
    
    325,548Other
    
    
    367
    
    
    
    367
    
    
    
    367
    
    
    
    366Total investments available for sale
    
    $
    425,564
    
    
    $
    402,525
    
    
    $
    997,694
    
    
    $
    977,245
 (1)
    
    Amounts represent AdvantaSeries Class A notes issued in our securitizations and
purchased by one of our bank subsidiaries.(2)
    
    Money market funds at June 30, 2009 include investments in Federated Prime Cash
Obligations Fund of $51.4 million, Dreyfus Cash Management Fund of $39.6 million, and
Blackrock Liquidity Funds TempFund of $34.3 million.       11




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##### Table of Contents



Three Months EndedJune 30, 2009Total other-than-temporary impairment losses (unrealized and realized)
    
    $
    (7,963
    )Portion of pretax (gain) loss recognized in other comprehensive
income(1)
    
    
    1,370Net impairment losses recognized in income(2)
    
    $
    (6,593
    )
 (1)
    
    Represents the non credit component impact of the other-than-temporary impairment losses on
available for sale debt securities.(2)
    
    Represents the credit component of the other-than-temporary impairment losses on
available for sale debt securities.  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2009
    
    
    June 30, 2009Beginning Balance
    
    $
    0
    
    
    $
    0Additions for credit impairments recognized on
securities not previously impaired
    
    
    (6,593
    )
    
    
    (6,593
    )Ending Balance
    
    $
    (6,593
    )
    
    $
    (6,593
    )
   Less Than 12 Months in
    
    
    12 Months or Longer inan Unrealized Loss
    
    
    an Unrealized LossPosition
    
    
    Position
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueU.S. Treasury and government
agency securities
    
    $
    (1
    )
    
    $
    3,254
    
    
    $
    0
    
    
    $
    0
    
    
    $
    (1
    )
    
    $
    3,254State and municipal securities
    
    
    (6
    )
    
    
    1,399
    
    
    
    (313
    )
    
    
    7,346
    
    
    
    (319
    )
    
    
    8,745Corporate bonds
    
    
    (3
    )
    
    
    4,997
    
    
    
    0
    
    
    
    0
    
    
    
    (3
    )
    
    
    4,997Credit card asset-backed security
    
    
    0
    
    
    
    0
    
    
    
    (16,233
    )
    
    
    116,285
    
    
    
    (16,233
    )
    
    
    116,285Mortgage and home equity line of
credit-backed securities
    
    
    (5
    )
    
    
    771
    
    
    
    (8,384
    )
    
    
    12,625
    
    
    
    (8,389
    )
    
    
    13,396Other securities
    
    
    (1
    )
    
    
    35
    
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    35Total
    
    $
    (16
    )
    
    $
    10,456
    
    
    $
    (24,930
    )
    
    $
    136,256
    
    
    $
    (24,946
    )
    
    $
    146,712
  12




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##### Table of Contents



Note 4) Receivables
  June 30,
    
    
    December 31,2009
    
    
    2008Business credit card receivables
    
    $
    403,215
    
    
    $
    505,578Other receivables
    
    
    8,179
    
    
    
    8,583Gross receivables
    
    
    411,394
    
    
    
    514,161Add: Deferred origination costs, net of deferred fees
    
    
    0
    
    
    
    4,586Less: Allowance for receivable lossesBusiness credit cards
    
    
    (81,536
    )
    
    
    (102,700
    )Other receivables
    
    
    (1,219
    )
    
    
    (1,203
    )Total allowance for receivable losses
    
    
    (82,755
    )
    
    
    (103,903
    )Receivables, net
    
    $
    328,639
    
    
    $
    414,844
    13




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##### Table of Contents



Note 5) Allowance for Receivable Losses
  2009
    
    
    2008Balance at January 1
    
    $
    103,903
    
    
    $
    68,540Provision for credit losses
    
    
    76,612
    
    
    
    58,709Provision for interest and fee losses
    
    
    20,270
    
    
    
    10,418Gross principal charge-offs:Business credit cards
    
    
    (97,412
    )
    
    
    (43,272
    )Other receivables
    
    
    (7
    )
    
    
    (2
    )Total gross principal charge-offs
    
    
    (97,419
    )
    
    
    (43,274
    )Principal recoveries:Business credit cards
    
    
    1,881
    
    
    
    1,147Net principal charge-offs
    
    
    (95,538
    )
    
    
    (42,127
    )Interest and fee charge-offs:Business credit cards
    
    
    (22,492
    )
    
    
    (9,727
    )Balance at June 30
    
    $
    82,755
    
    
    $
    85,813
 Uniform Retail Credit Classification and
Account Management Policy
 Note 6) Securitization Activities
    14




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15




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##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008Amounts due from the securitization trust
    
    $
    633,820
    
    
    $
    65,041Accrued interest and fees on securitized
receivables, net(1)
    
    
    17,436
    
    
    
    110,476Retained interests in securitizations
    
    
    5,493
    
    
    
    125,601Total accounts receivable from securitizations
    
    $
    656,749
    
    
    $
    301,118
 (1)
    
    Reduced by an estimate for uncollectible interest and fees of $81.6 million at June
30, 2009 and $31.0 million at December 31, 2008.  16




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Average securitized
receivables
    
    $
    3,852,397
    
    
    $
    5,063,349
    
    
    $
    4,101,319
    
    
    $
    5,206,692Securitization income (loss)
    
    
    (179,017
    )
    
    
    4,608
    
    
    
    (238,924
    )
    
    
    21,605Discount accretion
    
    
    11,195
    
    
    
    9,565
    
    
    
    23,284
    
    
    
    16,550Interchange income
    
    
    31,499
    
    
    
    57,799
    
    
    
    78,682
    
    
    
    113,244Servicing revenues
    
    
    18,053
    
    
    
    24,365
    
    
    
    38,900
    
    
    
    50,457Proceeds from new
securitizations
    
    
    0
    
    
    
    193,325
    
    
    
    125,000
    
    
    
    318,025Proceeds from
collections reinvested in
revolving- period
securitizations
    
    
    1,042,159
    
    
    
    2,581,177
    
    
    
    2,867,245
    
    
    
    5,133,254Cash flows received on
retained
interests(1)
    
    
    60,914
    
    
    
    112,651
    
    
    
    112,496
    
    
    
    192,586Key assumptions:Discount rate
    
    
    63.67%  66.60
    %
    
    
    17.20%  18.70
    %
    
    
    39.33%  66.60
    %
    
    
    12.21%  18.70
    %Monthly payment rate
    
    
    19.17%  19.96
    %
    
    
    18.79%  20.46
    %
    
    
    19.17%  22.20
    %
    
    
    18.79%  20.46
    %Loss rate
    
    
    21.32%  21.96
    %
    
    
    7.85%  10.12
    %
    
    
    14.54%  21.96
    %
    
    
    6.20%  10.12
    %Interest yield, net
of interest earned by
noteholders
    
    
    13.62%  13.87
    %
    
    
    11.36%  12.29
    %
    
    
    13.62%  15.06
    %
    
    
    8.79%  12.29
    %
 (1)
    
    Amounts reported for the three and six months ended June 30, 2009 exclude interest
on AdvantaSeries Class A notes that is classified as interest income on the
consolidated income statements.   17




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##### Table of Contents



Managed business credit card receivable data
  June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Owned business credit card receivables
    
    $
    403,215
    
    
    $
    505,578
    
    
    $
    850,925Securitized business credit card receivables
    
    
    3,322,078
    
    
    
    4,511,650
    
    
    
    5,225,773Total managed receivables
    
    $
    3,725,293
    
    
    $
    5,017,228
    
    
    $
    6,076,698Receivables 30 days or more delinquent(1):Owned
    
    $
    34,723
    
    
    $
    52,997
    
    
    $
    49,894Securitized
    
    
    274,960
    
    
    
    425,271
    
    
    
    294,432Total managed
    
    
    309,683
    
    
    
    478,268
    
    
    
    344,326Receivables 90 days or more delinquent(1):Owned
    
    
    9,373
    
    
    
    24,132
    
    
    
    25,001Securitized
    
    
    74,888
    
    
    
    188,424
    
    
    
    145,715Total managed
    
    
    84,261
    
    
    
    212,556
    
    
    
    170,716Nonaccrual receivables(1):Owned
    
    
    10,172
    
    
    
    9,688
    
    
    
    10,670Securitized
    
    
    87,951
    
    
    
    85,277
    
    
    
    68,719Total managed
    
    
    98,123
    
    
    
    94,965
    
    
    
    79,389Accruing receivables past due 90 days or
more(1):Owned
    
    
    8,172
    
    
    
    22,166
    
    
    
    22,684Securitized
    
    
    64,541
    
    
    
    170,876
    
    
    
    131,977Total managed
    
    
    72,713
    
    
    
    193,042
    
    
    
    154,661Net principal charge-offs for the year-to-date
period ended June 30 and December 31(1):Owned
    
    
    95,531
    
    
    
    89,056
    
    
    
    42,125Securitized
    
    
    477,896
    
    
    
    449,964
    
    
    
    190,391Total managed
    
    
    573,427
    
    
    
    539,020
    
    
    
    232,516Net principal charge-offs for the three months ended
June 30 and December 31(1):Owned
    
    
    68,898
    
    
    
    24,092
    
    
    
    25,819Securitized
    
    
    310,934
    
    
    
    135,270
    
    
    
    104,638Total managed
    
    
    379,832
    
    
    
    159,362
    
    
    
    130,457
 (1)
    
    Effective June 2009, due to the closure of customers accounts to future use, our
charge-off policy for contractually delinquent business credit card accounts changed to
charge-off an unpaid receivable no later than the end of the month in which it becomes
and remains past due 120 cumulative days from the contractual due date. Our previous
policy was to charge-off an unpaid receivable no later than the end of the month in
which it became and remained past due 180 cumulative days from the contractual due
date. We had additional net principal charge-offs associated with the change in
charge-off policy in June 2009 of $25.1 million on owned receivables and $110.2 million
on securitized receivables, for an aggregate of $135.3 million of additional net
principal charge-offs on managed receivables.  18




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##### Table of Contents



Note 7) Other Assets and Liabilities
  June 30,
    
    
    December 31,2009
    
    
    2008Investment in Fleet Credit Card Services, L.P.
    
    $
    32,095
    
    
    $
    32,095Current income taxes receivable
    
    
    31,837
    
    
    
    4,962Net deferred tax asset
    
    
    8,064
    
    
    
    71,219Investment in preferred securities trust
    
    
    3,232
    
    
    
    3,093Securities sold receivable
    
    
    2,280
    
    
    
    33,620Other
    
    
    86,096
    
    
    
    70,956Total other assets
    
    $
    163,604
    
    
    $
    215,945
    19




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##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008Accounts payable and accrued expenses
    
    $
    47,183
    
    
    $
    31,781Amounts due to the securitization trust
    
    
    44,019
    
    
    
    5,443Liability for unrecognized tax benefits
    
    
    37,552
    
    
    
    38,659Cash back rewards liability
    
    
    23,096
    
    
    
    23,174Business rewards liability
    
    
    18,073
    
    
    
    30,563Cash overdraft
    
    
    3,236
    
    
    
    12,284Liabilities of discontinued operations
    
    
    1,602
    
    
    
    1,635Current income taxes payable
    
    
    731
    
    
    
    681Other
    
    
    46,968
    
    
    
    32,367Total other liabilities
    
    $
    222,460
    
    
    $
    176,587
  CumulativeDecember 31,
    
    
    Six Months Ended
    
    
    June 30,
    
    
    Costs2008
    
    
    June 30,2009
    
    
    2009
    
    
    IncurredAccrual
    
    
    Costs
    
    
    
    
    
    
    Accrual
    
    
    as of JuneBalance
    
    
    Incurred(1)
    
    
    Payments
    
    
    Balance
    
    
    30, 2009Outsourcing of
business processes
    
    $
    418
    
    
    $
    2,271
    
    
    $
    1,947
    
    
    $
    742
    
    
    $
    3,184First quarter of
2009 reduction in
workforce
    
    
    0
    
    
    
    10,012
    
    
    
    7,720
    
    
    
    2,292
    
    
    
    10,012Total
    
    $
    418
    
    
    $
    12,283
    
    
    $
    9,667
    
    
    $
    3,034
    
    
    $
    13,196
 (1)
    
    Costs incurred are net of reductions in cost estimates in the three months ended
June 30, 2009 of $311 thousand for the outsourcing of business processes and $277
thousand for the first quarter of 2009 workforce reduction.   20




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##### Table of Contents



Note 8) Debt and Other Borrowings
  June 30,
    
    
    December 31,2009
    
    
    2008RediReserve variable rate demand certificates (4.60%-4.65%)
    
    $
    7,774
    
    
    $
    10,76991 day retail notes, fixed (7.23%)
    
    
    2,846
    
    
    
    1,8626 month retail notes, fixed (6.30%-7.70%)
    
    
    4,212
    
    
    
    4,47912 month retail notes, fixed (5.83%-8.16%)
    
    
    29,291
    
    
    
    40,11714 month retail notes, fixed (10.44%)
    
    
    1,364
    
    
    
    018 month retail notes, fixed (5.40%-8.39%)
    
    
    5,279
    
    
    
    6,62024 month retail notes, fixed (5.45%-9.53%)
    
    
    20,552
    
    
    
    19,00030 month retail notes, fixed (5.50%-8.85%)
    
    
    4,097
    
    
    
    4,92936 month retail notes, fixed (5.59%-9.08%)
    
    
    9,598
    
    
    
    11,25748 month retail notes, fixed (5.12%-9.35%)
    
    
    6,436
    
    
    
    8,55860 month retail notes, fixed (5.59%-9.53%)
    
    
    46,105
    
    
    
    63,90284 month retail notes, fixed (6.30%-9.99%)
    
    
    4,604
    
    
    
    6,167120 month retail notes, fixed (6.77%-10.44%)
    
    
    25,721
    
    
    
    27,075Other retail notes, fixed (5.12%-9.53%)
    
    
    1,061
    
    
    
    1,863Total debt
    
    $
    168,940
    
    
    $
    206,598
   Year Ending December 31,2009
    
    $
    48,0852010
    
    
    39,3502011
    
    
    23,0262012
    
    
    13,5072013 and thereafter
    
    
    44,972
  Note 9) Commitments and Contingencies
   21




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##### Table of Contents



Note 10) Capital Stock
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Class A Common Stock
    
    $
    0.0000
    
    
    $
    0.1771
    
    
    $
    0.0200
    
    
    $
    0.3542Class B Common Stock
    
    
    0.0000
    
    
    
    0.2125
    
    
    
    0.0250
    
    
    $
    0.4250
    22




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##### Table of Contents



Note 11) Stock-Based Compensation
   WeightedAverage GrantNumber of
    
    
    Date Fair(Shares in thousands)
    
    Shares
    
    
    ValueOutstanding at January 1
    
    
    4,052
    
    
    $
    9.95Granted
    
    
    500
    
    
    
    1.19Forfeited
    
    
    (946
    )
    
    
    9.68Outstanding at June 30
    
    
    3,606
    
    
    $
    8.80
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Compensation expense (benefit)
    
    $
    (6
    )
    
    $
    3,398
    
    
    $
    (3,941
    )
    
    $
    4,480Income tax benefit (expense)
    
    
    (2
    )
    
    
    1,573
    
    
    
    (1,379
    )
    
    
    1,782
  WeightedWeighted
    
    
    
    
    
    
    AverageAverage
    
    
    Aggregate
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    Intrinsic
    
    
    Contractual(Shares in thousands)
    
    Options
    
    
    Price
    
    
    Value
    
    
    LifeOutstanding at January 1
    
    
    9,393
    
    
    $
    12.89Granted
    
    
    95
    
    
    
    3.36Forfeited
    
    
    (923
    )
    
    
    17.59Outstanding at June 30
    
    
    8,565
    
    
    $
    12.27
    
    
    $
    0
    
    
    6.9 yearsOptions exercisable at June 30
    
    
    6,581
    
    
    $
    11.11
    
    
    $
    0
    
    
    6.5 years
   23




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Compensation expense
    
    $
    1,194
    
    
    $
    1,501
    
    
    $
    2,406
    
    
    $
    2,922Income tax benefit
    
    
    418
    
    
    
    695
    
    
    
    842
    
    
    
    1,162Weighted average fair
value of options
granted
    
    
    N/A
    
    
    $
    2.00
    
    
    $
    0.14
    
    
    $
    1.96
 Note 12) Regulatory Developments
    24




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##### Table of Contents



Note 13) Segment Information
  Note 14) Gain on Extinguishment of Debt
  Note 15) Income Taxes
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Current:Federal
    
    $
    (10,875
    )
    
    $
    7,678
    
    
    $
    (26,686
    )
    
    $
    10,274State
    
    
    760
    
    
    
    381
    
    
    
    312
    
    
    
    810Total current
    
    
    (10,115
    )
    
    
    8,059
    
    
    
    (26,374
    )
    
    
    11,084Deferred:Federal
    
    
    85,090
    
    
    
    (4,587
    )
    
    
    62,491
    
    
    
    3,668State
    
    
    3,581
    
    
    
    (11
    )
    
    
    1,571
    
    
    
    37Total deferred
    
    
    88,671
    
    
    
    (4,598
    )
    
    
    64,062
    
    
    
    3,705Income tax expense
    
    $
    78,556
    
    
    $
    3,461
    
    
    $
    37,688
    
    
    $
    14,789
  25




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Statutory federal income tax
    
    $
    (88,030
    )
    
    $
    2,616
    
    
    $
    (128,900
    )
    
    $
    13,008State income taxes, net of
federal income tax benefit
    
    
    (2,480
    )
    
    
    405
    
    
    
    (4,118
    )
    
    
    703Valuation allowance
    
    
    167,749
    
    
    
    0
    
    
    
    167,749
    
    
    
    0Difference in estimated
full year rate and
year-to-date actual rate
    
    
    1,137
    
    
    
    0
    
    
    
    2,403
    
    
    
    0Compensation limitation
    
    
    44
    
    
    
    299
    
    
    
    88
    
    
    
    398Nondeductible expenses
    
    
    168
    
    
    
    512
    
    
    
    319
    
    
    
    652Other
    
    
    (32
    )
    
    
    (371
    )
    
    
    147
    
    
    
    28Income tax expense
    
    $
    78,556
    
    
    $
    3,461
    
    
    $
    37,688
    
    
    $
    14,789
   June 30,
    
    
    December 31,2009
    
    
    2008Deferred tax assets
    
    $
    219,886
    
    
    $
    90,373Deferred tax liabilities
    
    
    (44,073
    )
    
    
    (19,154
    )Net deferred tax asset before valuation allowance
    
    
    175,813
    
    
    
    71,219Valuation allowance
    
    
    (167,749
    )
    
    
    0Net deferred tax asset
    
    $
    8,064
    
    
    $
    71,219
  June 30,
    
    
    December 31,2009
    
    
    2008Receivable losses
    
    $
    50,537
    
    
    $
    6,892Net operating loss carryforwards
    
    
    42,279
    
    
    
    0Alternative minimum tax credit carryforwards
    
    
    21,077
    
    
    
    0Rewards programs
    
    
    14,409
    
    
    
    18,796Federal tax benefit of state tax positions
    
    
    10,517
    
    
    
    10,982Incentive and deferred compensation
    
    
    8,485
    
    
    
    8,388Deferred revenue
    
    
    (8,385
    )
    
    
    (14,519
    )Unrealized investment losses
    
    
    8,064
    
    
    
    7,157Cancellation of indebtedness income, net
    
    
    (6,821
    )
    
    
    0Pricing
strategies restitution
    
    
    6,650
    
    
    
    0Visa indemnification
    
    
    2,062
    
    
    
    2,062Securitization income
    
    
    1,053
    
    
    
    21,590Deferred origination costs, net of deferred fees
    
    
    0
    
    
    
    (1,652
    )Other
    
    
    25,886
    
    
    
    11,523Net deferred tax asset before valuation allowance
    
    
    175,813
    
    
    
    71,219Valuation allowance
    
    
    (167,749
    )
    
    
    0Net deferred tax asset
    
    $
    8,064
    
    
    $
    71,219
  26




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##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008Balance at January 1
    
    $
    16,106
    
    
    $
    17,732Additions based on tax positions related to the
current year
    
    
    0
    
    
    
    714Additions for tax positions of prior years
    
    
    950
    
    
    
    104Reductions for tax positions of prior years
    
    
    (847
    )
    
    
    (1,989
    )Settlements
    
    
    (1,123
    )
    
    
    (455
    )Unrecognized tax benefits
    
    $
    15,086
    
    
    $
    16,106
      27




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##### Table of Contents



Note 16) Calculation of Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    (330,069
    )
    
    $
    4,015
    
    
    $
    (405,974
    )
    
    $
    22,377Less: Preferred A dividends
    
    
    0
    
    
    
    0
    
    
    
    (141
    )
    
    
    (141
    )Net income (loss) allocable to common
stockholders
    
    
    (330,069
    )
    
    
    4,015
    
    
    
    (406,115
    )
    
    
    22,236Less: Class A dividends declared
    
    
    0
    
    
    
    (2,369
    )
    
    
    (269
    )
    
    
    (4,737
    )Less: Class B dividends declared
    
    
    0
    
    
    
    (5,789
    )
    
    
    (684
    )
    
    
    (11,532
    )Less: Nonvested Class B
dividends declared
    
    
    0
    
    
    
    (619
    )
    
    
    (44
    )
    
    
    (868
    )Undistributed net income (loss)
    
    $
    (330,069
    )
    
    $
    (4,762
    )
    
    $
    (407,112
    )
    
    $
    5,099Basic net income (loss) per common shareClass A
    
    $
    (8.14
    )
    
    $
    0.06
    
    
    $
    (10.01
    )
    
    $
    0.47Class B
    
    
    (8.14
    )
    
    
    0.10
    
    
    
    (10.01
    )
    
    
    0.54Diluted net income (loss) per common
shareClass A
    
    $
    (8.14
    )
    
    $
    0.06
    
    
    $
    (10.01
    )
    
    $
    0.47Class B
    
    
    (8.14
    )
    
    
    0.09
    
    
    
    (10.01
    )
    
    
    0.52Basic weighted average common shares
outstandingClass A
    
    
    13,430
    
    
    
    13,380
    
    
    
    13,424
    
    
    
    13,374Class B
    
    
    27,127
    
    
    
    27,142
    
    
    
    27,160
    
    
    
    27,082Nonvested Class B
    
    
    3,599
    
    
    
    3,625
    
    
    
    3,729
    
    
    
    2,571Dilutive effect of
Options Class B
    
    
    0
    
    
    
    1,125
    
    
    
    0
    
    
    
    1,114Diluted weighted average common shares
outstandingClass A
    
    
    13,430
    
    
    
    13,380
    
    
    
    13,424
    
    
    
    13,374Class B
    
    
    27,127
    
    
    
    28,267
    
    
    
    27,160
    
    
    
    28,196Nonvested Class B
    
    
    3,599
    
    
    
    3,625
    
    
    
    3,729
    
    
    
    2,571Antidilutive shares
Options Class B
    
    
    8,583
    
    
    
    4,955
    
    
    
    8,812
    
    
    
    4,437
  28




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##### Table of Contents



Note 17) Fair Value of Financial Instruments
  June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash
    
    $
    24,974
    
    
    $
    24,974
    
    
    $
    31,716
    
    
    $
    31,716Federal funds sold
    
    
    221
    
    
    
    221
    
    
    
    32,277
    
    
    
    32,277Interest-bearing deposits
    
    
    1,539,423
    
    
    
    1,539,423
    
    
    
    1,595,138
    
    
    
    1,595,138Investments available for sale
    
    
    402,525
    
    
    
    402,525
    
    
    
    977,245
    
    
    
    977,245Receivables, net
    
    
    328,639
    
    
    
    330,237
    
    
    
    414,844
    
    
    
    498,468Accounts receivable from
securitizations
    
    
    656,749
    
    
    
    656,749
    
    
    
    301,118
    
    
    
    301,118Accrued interest receivable
    
    
    3,725
    
    
    
    3,725
    
    
    
    5,353
    
    
    
    5,353Financial liabilities:Demand and savings deposits
    
    $
    91,103
    
    
    $
    91,103
    
    
    $
    85,378
    
    
    $
    85,378Time deposits
    
    
    2,456,970
    
    
    
    2,512,488
    
    
    
    2,456,028
    
    
    
    2,493,258Debt
    
    
    168,940
    
    
    
    161,622
    
    
    
    206,598
    
    
    
    203,077Other borrowings
    
    
    0
    
    
    
    0
    
    
    
    50,000
    
    
    
    50,000Subordinated debt payable to
preferred securities trust
    
    
    92,290
    
    
    
    17,904
    
    
    
    103,093
    
    
    
    5,656Accrued interest payable
    
    
    29,138
    
    
    
    29,138
    
    
    
    15,472
    
    
    
    15,472
  Fair Value Hierarchy
  
    
    Level 1  Quoted prices for identical instruments in active markets accessible at
the measurement date.
 
    
    Level 2  Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and valuations
in which all significant inputs are observable in active markets. Inputs are
observable for substantially the full term of the financial instrument.
 
    
    Level 3  Valuations derived from one or more significant inputs that are unobservable.
  29




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##### Table of Contents



Determination of Fair Value
   Cash, Federal Funds Sold, Interest-Bearing Deposits, Accrued Interest Receivable, Other Borrowings
and Accrued Interest Payable
  Investments Available for Sale
  Cost Method Investments
  Receivables, Net
   30




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##### Table of Contents



Accounts Receivable from Securitizations
   Demand and Savings Deposits
  Time Deposits
  Debt
  Subordinated Debt Payable to Preferred Securities Trust
   31




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##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Recurring Basis
  June 30, 2009QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalInvestments available for sale:U.S. Treasury and government
agency securities
    
    $
    109,284
    
    
    $
    0
    
    
    $
    0
    
    
    $
    109,284State and municipal securities
    
    
    0
    
    
    
    16,451
    
    
    
    0
    
    
    
    16,451Corporate bonds
    
    
    0
    
    
    
    4,997
    
    
    
    0
    
    
    
    4,997Asset-backed securities:Credit card asset-backed securities
    
    
    0
    
    
    
    0
    
    
    
    116,285
    
    
    
    116,285Mortgage and home equity line of
credit-backed securities
    
    
    0
    
    
    
    4,451
    
    
    
    12,625
    
    
    
    17,076Equity securities
    
    
    8,076
    
    
    
    0
    
    
    
    46
    
    
    
    8,122Money market funds
    
    
    129,943
    
    
    
    0
    
    
    
    0
    
    
    
    129,943Other
    
    
    0
    
    
    
    367
    
    
    
    0
    
    
    
    367Retained interests in securitizations
    
    
    0
    
    
    
    0
    
    
    
    5,493
    
    
    
    5,493Total assets measured at fair value
    
    $
    247,303
    
    
    $
    26,266
    
    
    $
    134,449
    
    
    $
    408,018
 December 31, 2008QuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalInvestments available for sale:U.S. Treasury and government
agency securities
    
    $
    306,309
    
    
    $
    6,900
    
    
    $
    0
    
    
    $
    313,209State and municipal securities
    
    
    0
    
    
    
    17,064
    
    
    
    0
    
    
    
    17,064Commercial paper
    
    
    0
    
    
    
    8,799
    
    
    
    0
    
    
    
    8,799Asset-backed securities:Credit card asset-backed securities
    
    
    0
    
    
    
    0
    
    
    
    281,601
    
    
    
    281,601Mortgage and home equity line of
credit-backed securities
    
    
    0
    
    
    
    5,065
    
    
    
    17,402
    
    
    
    22,467Equity securities
    
    
    8,068
    
    
    
    0
    
    
    
    123
    
    
    
    8,191Money market funds
    
    
    325,548
    
    
    
    0
    
    
    
    0
    
    
    
    325,548Other
    
    
    0
    
    
    
    366
    
    
    
    0
    
    
    
    366Retained interests in securitizations
    
    
    0
    
    
    
    0
    
    
    
    125,601
    
    
    
    125,601Total assets measured at fair value
    
    $
    639,925
    
    
    $
    38,194
    
    
    $
    424,727
    
    
    $
    1,102,846
  32




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##### Table of Contents



Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
 Mortgage andHome Equity Line
    
    
    Credit Card
    
    
    
    
    
    
    Retainedof Credit-Backed
    
    
    Asset-Backed
    
    
    Equity
    
    
    Interests inSecurities
    
    
    Securities
    
    
    Securities
    
    
    Securitizations
    
    
    TotalFair value at January 1, 2009
    
    $
    17,402
    
    
    $
    281,601
    
    
    $
    123
    
    
    $
    125,601
    
    
    $
    424,727Discount accretion
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    23,284
    
    
    
    23,284Realized loss(1)(2)
    
    
    (6,593
    )
    
    
    0
    
    
    
    0
    
    
    
    (139,197
    )
    
    
    (145,790
    )Unrealized gain (loss)(2)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    35,392
    
    
    
    35,392Unrealized loss in other
comprehensive income (loss)
    
    
    3,458
    
    
    
    (5,916
    )
    
    
    (53
    )
    
    
    0
    
    
    
    (2,511
    )Purchases, sales, issuances,
settlements, net
    
    
    (1,642
    )
    
    
    (159,400
    )
    
    
    (24
    )
    
    
    (39,587
    )
    
    
    (200,653
    )Transfers in and/or out of Level 3
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Fair value at June 30, 2009
    
    $
    12,625
    
    
    $
    116,285
    
    
    $
    46
    
    
    $
    5,493
    
    
    $
    134,449
 (1)
    
    Realized loss includes $6.6 million of other-than-temporary impairment losses on
mortgage and home equity line of credit-backed securities.(2)
    
    Realized or unrealized gains or losses on retained interests in securitizations
are included in securitization income (loss) on the consolidated income statements.   33




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   OVERVIEW
   Three Months Ended
    
    
    Six Months Ended($ in thousands, except per
    
    June 30,
    
    
    June 30,share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Pretax income (loss)
    
    $
    (251,513
    )
    
    $
    7,476
    
    
    $
    (368,286
    )
    
    $
    37,166Income tax expense
    
    
    78,556
    
    
    
    3,461
    
    
    
    37,688
    
    
    
    14,789Net income (loss)
    
    $
    (330,069
    )
    
    $
    4,015
    
    
    $
    (405,974
    )
    
    $
    22,377Diluted net income (loss)
per common share:Class A
    
    $
    (8.14
    )
    
    $
    0.06
    
    
    $
    (10.01
    )
    
    $
    0.47Class B
    
    $
    (8.14
    )
    
    $
    0.09
    
    
    $
    (10.01
    )
    
    $
    0.52
   34




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##### Table of Contents



Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities Earnings Per
Share,
  35




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  RESULTS OF OPERATIONS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net interest income
    
    $
    5,270
    
    
    $
    25,232
    
    
    $
    8,666
    
    
    $
    43,135Noninterest revenues (losses)
    
    
    (138,104
    )
    
    
    94,323
    
    
    
    (142,117
    )
    
    
    203,980Provision for credit losses
    
    
    (35,335
    )
    
    
    (30,327
    )
    
    
    (76,612
    )
    
    
    (58,709
    )Operating expenses
    
    
    (83,344
    )
    
    
    (81,752
    )
    
    
    (158,223
    )
    
    
    (151,240
    )Pretax income (loss)
    
    $
    (251,513
    )
    
    $
    7,476
    
    
    $
    (368,286
    )
    
    $
    37,166
     36




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Average owned receivables
    
    $
    705,710
    
    
    $
    1,164,748
    
    
    $
    618,798
    
    
    $
    1,081,939Average securitized receivables
    
    $
    3,852,397
    
    
    $
    5,063,349
    
    
    $
    4,101,319
    
    
    $
    5,206,692Customer transaction volume:Merchandise sales
    
    $
    1,586,985
    
    
    $
    3,055,484
    
    
    $
    3,847,796
    
    
    $
    5,894,978Balance transfers
    
    
    43,392
    
    
    
    121,752
    
    
    
    108,647
    
    
    
    360,089Cash usage
    
    
    200,152
    
    
    
    294,475
    
    
    
    409,741
    
    
    
    654,757Total customer transaction
volume
    
    $
    1,830,529
    
    
    $
    3,471,711
    
    
    $
    4,366,184
    
    
    $
    6,909,824New account originations
    
    
    548
    
    
    
    26,269
    
    
    
    4,509
    
    
    
    93,363Average number of active
accounts(1)
    
    
    686,007
    
    
    
    939,700
    
    
    
    730,515
    
    
    
    947,042Ending number of accounts at
June 30
    
    
    535,281
    
    
    
    1,305,288
    
    
    
    535,281
    
    
    
    1,305,288
 (1)
    
    Active accounts are defined as accounts with a balance at month-end. Active account
statistics do not include charged-off accounts. The statistics reported above are the
average number of active accounts for the three and six months ended June 30.   37




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##### Table of Contents



INTEREST INCOME AND EXPENSE
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest income
    
    $
    33,586
    
    
    $
    55,269
    
    
    $
    67,794
    
    
    $
    101,316Interest expense
    
    
    28,316
    
    
    
    30,037
    
    
    
    59,128
    
    
    
    58,181
     38




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##### Table of Contents



INTEREST RATE ANALYSIS AND AVERAGE BALANCES
 Three Months Ended June 30,2009
    
    
    2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Owned receivables:Business credit cards(1)
    
    $
    705,710
    
    
    $
    18,872
    
    
    
    10.73
    %
    
    $
    1,164,748
    
    
    $
    37,662
    
    
    
    13.01
    %Other receivables
    
    
    7,910
    
    
    
    74
    
    
    
    3.76
    
    
    
    7,739
    
    
    
    88
    
    
    
    4.55Total receivables
    
    
    713,620
    
    
    
    18,946
    
    
    
    10.65
    
    
    
    1,172,487
    
    
    
    37,750
    
    
    
    12.95Investments(2)
    
    
    1,997,662
    
    
    
    3,445
    
    
    
    0.68
    
    
    
    1,361,904
    
    
    
    7,956
    
    
    
    2.31Retained interests in
securitizations
    
    
    68,142
    
    
    
    11,195
    
    
    
    65.72
    
    
    
    217,629
    
    
    
    9,565
    
    
    
    17.58Total interest-earning
assets(3)
    
    
    2,779,424
    
    
    $
    33,586
    
    
    
    4.84
    %
    
    
    2,752,020
    
    
    $
    55,271
    
    
    
    8.05
    %Noninterest-earning assets
    
    
    541,558
    
    
    
    
    
    
    
    
    
    
    
    463,773Total assets
    
    $
    3,320,982
    
    
    
    
    
    
    
    
    
    
    $
    3,215,793Interest-bearing liabilities:Deposits
    
    $
    2,491,526
    
    
    $
    23,522
    
    
    
    3.79
    %
    
    $
    2,058,064
    
    
    $
    23,600
    
    
    
    4.61
    %Debt
    
    
    177,802
    
    
    
    2,511
    
    
    
    5.66
    
    
    
    220,235
    
    
    
    3,482
    
    
    
    6.36Subordinated debt
payable to preferred
securities trust
    
    
    101,550
    
    
    
    2,282
    
    
    
    8.99
    
    
    
    103,093
    
    
    
    2,317
    
    
    
    8.99Other borrowings
    
    
    1,018
    
    
    
    1
    
    
    
    0.51
    
    
    
    26,543
    
    
    
    638
    
    
    
    9.51Total interest-bearing
liabilities
    
    
    2,771,896
    
    
    $
    28,316
    
    
    
    4.10
    %
    
    
    2,407,935
    
    
    $
    30,037
    
    
    
    5.01
    %Noninterest-bearing
liabilities
    
    
    227,911
    
    
    
    
    
    
    
    
    
    
    
    208,683Total liabilities
    
    
    2,999,807
    
    
    
    
    
    
    
    
    
    
    
    2,616,618Stockholders equity
    
    
    321,175
    
    
    
    
    
    
    
    
    
    
    
    599,175Total liabilities and
stockholders equity
    
    $
    3,320,982
    
    
    
    
    
    
    
    
    
    
    $
    3,215,793Net interest spread
    
    
    
    
    
    
    
    
    
    
    0.74
    %
    
    
    
    
    
    
    
    
    
    
    3.04
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    0.76
    %
    
    
    
    
    
    
    
    
    
    
    3.69
    %
 (1)
    
    Interest income includes late fees for owned business credit card receivables of
$1.3 million for the three months ended June 30, 2009 and $2.1 million for the same
period of 2008.(2)
    
    Includes federal funds sold, interest-bearing deposits and investments available for
sale. Interest and average rate for tax-free securities are computed on a tax
equivalent basis using a statutory rate of 35%.(3)
    
    Includes assets held and available for sale and nonaccrual receivables.  39




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##### Table of Contents



Six Months Ended June 30,2009
    
    
    2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Owned receivables:Business credit cards(1)
    
    $
    618,798
    
    
    $
    34,795
    
    
    
    11.34
    %
    
    $
    1,081,939
    
    
    $
    66,693
    
    
    
    12.40
    %Other receivables
    
    
    8,180
    
    
    
    165
    
    
    
    4.06
    
    
    
    7,535
    
    
    
    187
    
    
    
    4.98Total receivables
    
    
    626,978
    
    
    
    34,960
    
    
    
    11.24
    
    
    
    1,089,474
    
    
    
    66,880
    
    
    
    12.34Investments(2)
    
    
    2,159,091
    
    
    
    9,550
    
    
    
    0.88
    
    
    
    1,283,034
    
    
    
    17,890
    
    
    
    2.76Retained interests in
securitizations
    
    
    94,931
    
    
    
    23,284
    
    
    
    49.06
    
    
    
    219,315
    
    
    
    16,550
    
    
    
    15.09Total interest-earning
assets(3)
    
    
    2,881,000
    
    
    $
    67,794
    
    
    
    4.72
    %
    
    
    2,591,823
    
    
    $
    101,320
    
    
    
    7.83
    %Noninterest-earning assets
    
    
    534,716
    
    
    
    
    
    
    
    
    
    
    
    483,092Total assets
    
    $
    3,415,716
    
    
    
    
    
    
    
    
    
    
    $
    3,074,915Interest-bearing liabilities:Deposits
    
    $
    2,476,066
    
    
    $
    49,049
    
    
    
    3.99
    %
    
    $
    1,914,739
    
    
    $
    45,519
    
    
    
    4.78
    %Debt
    
    
    185,452
    
    
    
    4,926
    
    
    
    5.36
    
    
    
    217,955
    
    
    
    6,923
    
    
    
    6.39Subordinated debt
payable to preferred
securities trust
    
    
    102,317
    
    
    
    4,599
    
    
    
    8.99
    
    
    
    103,093
    
    
    
    4,634
    
    
    
    8.99Other borrowings
    
    
    31,611
    
    
    
    554
    
    
    
    3.49
    
    
    
    25,881
    
    
    
    1,105
    
    
    
    8.45Total interest-bearing
liabilities
    
    
    2,795,446
    
    
    $
    59,128
    
    
    
    4.26
    %
    
    
    2,261,668
    
    
    $
    58,181
    
    
    
    5.17
    %Noninterest-bearing
liabilities
    
    
    226,832
    
    
    
    
    
    
    
    
    
    
    
    218,033Total liabilities
    
    
    3,022,278
    
    
    
    
    
    
    
    
    
    
    
    2,479,701Stockholders equity
    
    
    393,438
    
    
    
    
    
    
    
    
    
    
    
    595,214Total liabilities and
stockholders equity
    
    $
    3,415,716
    
    
    
    
    
    
    
    
    
    
    $
    3,074,915Net interest spread
    
    
    
    
    
    
    
    
    
    
    0.46
    %
    
    
    
    
    
    
    
    
    
    
    2.66
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    0.61
    %
    
    
    
    
    
    
    
    
    
    
    3.35
    %
 (1)
    
    Interest income includes late fees for owned business credit card receivables of
$2.3 million for the six months ended June 30, 2009 and $3.9 million for the same
period of 2008.(2)
    
    Interest and average rate for tax-free securities are computed on a tax equivalent
basis using a statutory rate of 35%.(3)
    
    Includes assets held and available for sale and nonaccrual receivables.  40




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##### Table of Contents



PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Provision for credit losses
    
    $
    35,335
    
    
    $
    30,327
    
    
    $
    76,612
    
    
    $
    58,709Provision for interest and fee losses
    
    
    12,505
    
    
    
    6,057
    
    
    
    20,270
    
    
    
    10,418
   Uniform
Retail Credit Classification and Account Management Policy Credit Card
Lending Guidance Uniform Retail Credit Classification and
Account Management Policy
   41




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##### Table of Contents



June 30,
    
    
    December 31,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2008Allowance for receivable losses
    
    $
    81,536
    
    
    $
    102,700
    
    
    $
    84,611Receivables 30 days or more delinquent
    
    
    34,723
    
    
    
    52,997
    
    
    
    49,894Receivables 90 days or more delinquent
    
    
    9,373
    
    
    
    24,132
    
    
    
    25,001Nonaccrual receivables
    
    
    10,172
    
    
    
    9,688
    
    
    
    10,670Accruing receivables past due 90 days or more
    
    
    8,172
    
    
    
    22,166
    
    
    
    22,684As a percentage of receivables:Allowance for receivable losses
    
    
    20.22
    %
    
    
    20.31
    %
    
    
    9.94
    %Receivables 30 days or more delinquent
    
    
    8.61
    
    
    
    10.48
    
    
    
    5.86Receivables 90 days or more delinquent
    
    
    2.32
    
    
    
    4.77
    
    
    
    2.94Nonaccrual receivables
    
    
    2.52
    
    
    
    1.92
    
    
    
    1.25Accruing receivables past due 90 days or more
    
    
    2.03
    
    
    
    4.38
    
    
    
    2.67Net principal charge-offs for the year-to-date
period ended June 30 and December 31
    
    $
    95,531
    
    
    $
    89,056
    
    
    $
    42,125As a percentage of average receivables
(annualized)
    
    
    30.88
    %
    
    
    9.62
    %
    
    
    7.79
    %Net principal charge-offs for the three months
ended June 30 and December 31
    
    $
    68,898
    
    
    $
    24,092
    
    
    $
    25,819As a percentage of average receivables
(annualized)
    
    
    39.05
    %
    
    
    14.09
    %
    
    
    8.87
    %
 SECURITIZATION INCOME (LOSS)
   42




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Apr. 2009
    
    
    May 2009
    
    
    Jun. 2009
    
    
    Apr. 2008
    
    
    May 2008
    
    
    Jun. 2008Monthly excess
spread percentages
    
    
    (0.46
    )%
    
    
    (6.09
    )%
    
    
    (44.42
    )%(1)
    
    
    4.79
    %
    
    
    5.75
    %
    
    
    4.09
    %
 (1)
    
    Reflects the impact of the change in charge-off policy discussed in the
Provision and Allowance for Receivable Losses section of Managements Discussion
and Analysis of Financial Condition and Results of Operations.   ($ in thousands)
    
    2009
    
    
    2008Three months ended June 30
    
    $
    (179,017
    )
    
    $
    4,608Six months ended June 30
    
    
    (238,924
    )
    
    
    21,605
   43




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##### Table of Contents



SERVICING REVENUES
  ($ in thousands)
    
    2009
    
    
    2008Three months ended June 30
    
    $
    18,053
    
    
    $
    24,365Six months ended June 30
    
    
    38,900
    
    
    
    50,457
  GAIN ON EXTINGUISHMENT OF DEBT
  OTHER REVENUES
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interchange income
    
    $
    36,478
    
    
    $
    70,627
    
    
    $
    89,004
    
    
    $
    136,275Cash back rewards
    
    
    (10,950
    )
    
    
    (16,082
    )
    
    
    (22,391
    )
    
    
    (30,665
    )Business rewards
    
    
    (7,393
    )
    
    
    (6,944
    )
    
    
    (13,891
    )
    
    
    (13,526
    )Investment
securities gains (losses), net:Other-than-temporary
impairment losses
    
    
    (6,593
    )
    
    
    0
    
    
    
    (6,593
    )
    
    
    0The Reserve Primary Fund
    
    
    0
    
    
    
    0
    
    
    
    (860
    )
    
    
    0Visa Inc.
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    13,408MasterCard Incorporated
    
    
    0
    
    
    
    14,216
    
    
    
    0
    
    
    
    18,823Venture capital investments
    
    
    (53
    )
    
    
    0
    
    
    
    (53
    )
    
    
    (2
    )Other
    
    
    0
    
    
    
    99
    
    
    
    0
    
    
    
    99Investment
securities gains (losses), net
    
    
    (6,646
    )
    
    
    14,315
    
    
    
    (7,506
    )
    
    
    32,328Customer referral fees
    
    
    1,057
    
    
    
    0
    
    
    
    1,057
    
    
    
    0Balance transfer and cash
usage fees
    
    
    737
    
    
    
    1,858
    
    
    
    1,488
    
    
    
    4,864Other business credit card fees
    
    
    490
    
    
    
    1,196
    
    
    
    808
    
    
    
    2,105Other, net
    
    
    530
    
    
    
    380
    
    
    
    781
    
    
    
    537Total other revenues, net
    
    $
    14,303
    
    
    $
    65,350
    
    
    $
    49,350
    
    
    $
    131,918
   44




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45




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OPERATING EXPENSES
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Salaries and employee benefits
    
    $
    17,487
    
    
    $
    31,118
    
    
    $
    47,270
    
    
    $
    59,646External processing
    
    
    9,051
    
    
    
    9,220
    
    
    
    17,972
    
    
    
    17,465Credit
    
    
    6,142
    
    
    
    3,425
    
    
    
    12,440
    
    
    
    5,452Impairment of assets
    
    
    5,328
    
    
    
    0
    
    
    
    5,328
    
    
    
    0Marketing
    
    
    5,140
    
    
    
    8,165
    
    
    
    11,714
    
    
    
    13,401Insurance
    
    
    4,071
    
    
    
    1,104
    
    
    
    5,644
    
    
    
    2,003Professional fees
    
    
    3,446
    
    
    
    6,058
    
    
    
    8,787
    
    
    
    11,649Equipment
    
    
    3,201
    
    
    
    3,729
    
    
    
    7,796
    
    
    
    6,961Occupancy
    
    
    2,455
    
    
    
    2,578
    
    
    
    5,024
    
    
    
    5,049Fraud
    
    
    2,453
    
    
    
    1,525
    
    
    
    3,950
    
    
    
    3,557Postage
    
    
    1,574
    
    
    
    1,522
    
    
    
    2,978
    
    
    
    3,129Amortization of deferred
origination costs, net
    
    
    1,005
    
    
    
    9,247
    
    
    
    3,728
    
    
    
    20,191Telephone
    
    
    1,002
    
    
    
    752
    
    
    
    2,186
    
    
    
    1,731Travel and entertainment
    
    
    674
    
    
    
    1,084
    
    
    
    1,672
    
    
    
    1,863Visa indemnification
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (5,501
    )Restitution associated with
pricing strategies
    
    
    19,000
    
    
    
    0
    
    
    
    19,000
    
    
    
    0Other
    
    
    1,315
    
    
    
    2,225
    
    
    
    2,734
    
    
    
    4,644Total operating expenses
    
    $
    83,344
    
    
    $
    81,752
    
    
    $
    158,223
    
    
    $
    151,240
      46




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CONTINGENCIES
   47




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INCOME TAXES
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Income tax expense
    
    $
    78,556
    
    
    $
    3,461
    
    
    $
    37,688
    
    
    $
    14,789Effective tax expense rate
    
    
    31.2
    %
    
    
    46.3
    %
    
    
    10.2
    %
    
    
    39.8
    %
   48




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OFF-BALANCE SHEET ARRANGEMENTS
    49




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Average securitized receivables
    
    $
    3,852,397
    
    
    $
    5,063,349
    
    
    $
    4,101,319
    
    
    $
    5,206,692Securitization income (loss)
    
    
    (179,017
    )
    
    
    4,608
    
    
    
    (238,924
    )
    
    
    21,605Discount accretion
    
    
    11,195
    
    
    
    9,565
    
    
    
    23,284
    
    
    
    16,550Interchange income
    
    
    31,499
    
    
    
    57,799
    
    
    
    78,682
    
    
    
    113,244Servicing revenues
    
    
    18,053
    
    
    
    24,365
    
    
    
    38,900
    
    
    
    50,457Proceeds from new securitizations
    
    
    0
    
    
    
    193,325
    
    
    
    125,000
    
    
    
    318,025Proceeds from collections reinvested
in revolving-period securitizations
    
    
    1,042,159
    
    
    
    2,581,177
    
    
    
    2,867,245
    
    
    
    5,133,254Cash flows received on retained
interests
    
    
    60,914
    
    
    
    112,651
    
    
    
    112,496
    
    
    
    192,586
  50




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Accounting for Transfers of Financial Assets  an
amendment of FASB Statement No. 140, Amendments to FASB
Interpretation No. 46(R)
  MARKET RISK SENSITIVITY
  June 30,
    
    
    December 31,2009
    
    
    2008Estimated percentage increase in net interest
income on owned assets:Assuming 200 basis point increase
    
    
    28
    %
    
    
    334
    %Assuming 200 basis point decrease
    
    
    (5
    )%
    
    
    62
    %
    51




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LIQUIDITY, CAPITAL RESOURCES AND ANALYSIS OF FINANCIAL CONDITION
     June 30, 2009
    
    
    December 31, 2008($ in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Deposits
    
    $
    2,548,073
    
    
    
    88
    
    
    $
    2,541,406
    
    
    
    75Debt
    
    
    168,940
    
    
    
    6
    
    
    
    206,598
    
    
    
    6Other borrowings
    
    
    0
    
    
    
    0
    
    
    
    50,000
    
    
    
    1Subordinated debt
payable to
preferred
securities trust
    
    
    92,290
    
    
    
    3
    
    
    
    103,093
    
    
    
    3Equity
    
    
    97,218
    
    
    
    3
    
    
    
    507,361
    
    
    
    15Total
    
    $
    2,906,521
    
    
    
    100
    %
    
    $
    3,408,458
    
    
    
    100
    %
   52




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53




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VALUATION OF FINANCIAL INSTRUMENTS
 Fair Value Measurements
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.
 Recognition and Presentation
of Other-Than-Temporary Impairments
  54




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55




---



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56




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CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
   57




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(1)
    
    our ability to comply with the cease and desist orders and regulatory
agreements;(2)
    
    our ability to implement new business opportunities and become
profitable and, if applicable, obtain regulatory approval for future
business activities and opportunities;(3)
    
    political conditions, social conditions, monetary and fiscal policies
and general economic and other environmental conditions, including
the impact of the ongoing disruption in the capital markets and
deterioration of the U.S. economy, as well as the potential for
further deterioration and disruption, and the impact of these factors
on delinquencies, charge-offs, the value of and ability to realize
expected returns on our investments, our future business
opportunities and other results of operations;(4)
    
    the impact of early amortization and closing of our customers
accounts on delinquencies, charge-offs and cash flows from receivables;(5)
    
    interest rate and credit spread fluctuations;(6)
    
    our ability to achieve our expected level of operating cost
reductions;(7)
    
    factors affecting our level of liquidity, including our ability to
access adequate sources of funding and our ability to monetize our
investments;(8)
    
    factors affecting our plan to limit our credit loss exposure and
maximize our capital and our liquidity measures;(9)
    
    government regulation of banking and finance businesses, including
the effects of and changes in the level of scrutiny, regulatory
requirements and regulatory initiatives, certain mandatory and
possibly discretionary actions by state and federal regulators,
restrictions and limitations imposed by banking laws, regulators,
examinations and reviews, and the effects of, and changes in,
regulatory policies, guidance, interpretations and initiatives and
agreements between us and our regulators;(10)
    
    effect of, and changes in, tax laws, rates, regulations and policies;(11)
    
    effect of legal and regulatory developments relating to the
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legality of certain business methods, practices and policies of credit card
issuers and the ultimate resolution of industry-related judicial
proceedings relating to the legality of certain interchange rates;(12)
    
    relationships with customers, significant vendors and business
partners;(13)
    
    our ability to identify, develop and implement new business
opportunities and activities, including difficulties or delays in the
development, acquisition, production, testing and marketing of
products and services, the ability and cost to obtain intellectual
property rights or a failure to implement new products or services
when anticipated;(14)
    
    factors affecting our net interest income;(15)
    
    the amount and cost of financing available to us;(16)
    
    the effects of changes in accounting policies or practices as may be
required by changes in U.S. generally accepted accounting principles;(17)
    
    the impact of litigation and legal, regulatory, administrative or
other claims, investigations or proceedings including judgments,
settlements and actual or anticipated insurance recoveries for costs
or judgments; and(18)
    
    the proper design and operation of our disclosure controls and
procedures.
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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
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ITEM 1A.
    
    RISK FACTORS
  Our ability to continue as a going concern may depend on our ability to develop and
successfully implement a plan for new business opportunities and become profitable in the
future.
 Advanta Bank Corp. recently entered into two agreements with the FDIC that place
restrictions on its operations and activities and may limit our ability to pursue new business
opportunities through Advanta Bank Corp.
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We have incurred net losses in recent quarterly periods and expect to incur losses in future
periods.
 Negative trends and developments in economic conditions and the financial markets have
adversely impacted our business, results of operations and financial condition.
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Legislative, regulatory and other legal developments may affect our business operations and
our results of operations.
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We are subject to regulation by a number of different regulatory agencies and authorities,
including bank regulatory authorities, which have broad discretion to take actions that
could affect the manner in which we conduct our business, and could adversely affect our
results of operations and our financial condition.
   We have recently stopped originating new business credit card accounts and receivables.
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Market conditions and other factors beyond our control could negatively impact the
availability and cost of funding for our operations.
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Certain rules adopted by federal bank regulators could, if applicable to us, impact our
business practices and have a negative impact on our business and our results of operations.
 Our earnings may not be sufficient to cover our fixed charges which may impact our ability
to make future principal and interest payments on our indebtedness.
 Our Class A Common Stock and Class B Common Stock could be delisted if we fail to satisfy
the NASDAQ listing rules and requirements. If our stock is delisted from
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NASDAQ, our ability to fund our operations by selling our registered Debt Securities may be
more difficult in the future.
    Recent changes in our organization, including a significant reduction in our workforce, could
impact the effectiveness of our internal control system
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ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    Advanta Corp. held its Annual Meeting of Stockholders on June 11, 2009.
 (b)
    
    Not required.
 (c)
    
    The following proposals were submitted to a vote of stockholders.
 The election of three directors to hold office until the 2012 Annual Meeting of Stockholders.
 NOMINEES
    
    VOTES FOR
    
    
    VOTES WITHHELDOlaf Olafsson
    
    
    9,070,160
    
    
    
    2,569,596William A. Rosoff
    
    
    9,040,108
    
    
    
    2,599,648Michael A. Stolper
    
    
    9,099,438
    
    
    
    2,540,318
 The proposal to ratify the appointment by the Board of Directors of KPMG LLP as the Companys
independent registered public accounting firm for the fiscal year ending December 31, 2009:
 FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER NON-VOTES11,106,234
    
    231,264
    
    302,258
    
    0
 (d)
    
    Not required.
 
 Item 5.
    
    OTHER INFORMATION
   
    
    The Board of Directors approved the pro rata vesting of a portion of Mr. Olafssons
unvested options. With respect to each stock option, the portion that will vest upon
the effective date of resignation will be calculated based on an amount equal to
1/12th of the option shares that would have become vested on the next
anniversary of the date of grant of the option, for each full 30 day period which
elapsed between the most recent anniversary of the date of grant and the effective
date of Mr. Olafssons resignation.
 
    
    The Board of Directors approved extending the exercise period for Mr. Olafssons
vested stock options for a period that will expire on the earlier of the
expiration date of each such option and two years from the effective date of
resignation.
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ITEM 6.
    
    EXHIBITS
  ExhibitNumber
    
    Description of Document10.1
    
    
    Agreement, effective June 4, 2009, between American Express Travel Related Services
Company, Inc. and Advanta Bank Corp., as amended10.2
    
    
    Stipulation and Consent to the issuance of an Order to Cease and Desist, effective
June 30, 2009, between the Federal Deposit Insurance Corporation and Advanta Bank
Corp. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on July 1, 2009).10.3
    
    
    Order to Cease and Desist, effective June 30, 2009 between the Federal Deposit
Insurance Corporation and Advanta Bank Corp. (incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on July 1, 2009).10.4
    
    
    Stipulation and Consent to the issuance of an Order to Cease and Desist, Order for
Restitution and Order to Pay, effective June 30, 2009, between the Federal Insurance
Corporation and Advanta Bank Corp. (incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed on July 1, 2009).10.5
    
    
    Order to Cease and Desist, Order for Restitution and Order to Pay, effective June
30, 2009 between the Federal Insurance Corporation and Advanta Bank Corp.
(incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K
filed on July 1, 2009).12
    
    
    Computation of Ratio of Earnings to Fixed Charges31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  Advanta Corp.
(Registrant)By

/s/ Philip M. BrownePhilip M. BrowneSenior Vice President and
Chief Financial OfficerAugust 10, 2009By

/s/ David B. WeinstockDavid B. WeinstockVice President and
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EXHIBIT INDEX
 Manner ofExhibit
    
    Description
    
    Filing10.1
    
    
    Agreement, effective June 4, 2009, between American Express
Travel Related Services Company, Inc. and Advanta Bank Corp., as
amended
    
    *10.2
    
    
    Stipulation and Consent to the issuance of an Order to Cease and Desist, effective
June 30, 2009, between the Federal Deposit Insurance Corporation and Advanta Bank Corp.
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on July 1, 2009).10.3
    
    
    Order to Cease and Desist, effective June 30, 2009 between the Federal Deposit
Insurance Corporation and Advanta Bank Corp. (incorporated by reference to Exhibit 10.2
to the Companys Current Report on Form 8-K filed on July 1, 2009).10.4
    
    
    Stipulation and Consent to the issuance of an Order to Cease and Desist, Order for
Restitution and Order to Pay, effective June 30, 2009, between the Federal Insurance
Corporation and Advanta Bank Corp. (incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed on July 1, 2009).10.5
    
    
    Order to Cease and Desist, Order for Restitution and Order to Pay, effective June 30,
2009 between the Federal Insurance Corporation and Advanta Bank Corp. (incorporated by
reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on July 1,
2009).12
    
    
    Computation of Ratio of Earnings to Fixed Charges
    
    *31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    *31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    *32.1
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    *32.2
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    *
 
 *
    
    Filed electronically herewith.  72