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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-Q x
    
    Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2004 oro
    
    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
    
    23-1462070(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code) (215) 657-4000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x  No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x  No o Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes o   No o Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class A
    
    Outstanding at August 2, 2004Common Stock, $.01 par value
    
    9,606,885 shares
 Class B
    
    Outstanding at August 2, 2004Common Stock, $.01 par value
    
    18,152,755 shares




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##### Table of Contents



TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 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
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    47Item 4.
    
    Controls and Procedures
    
    
    47PART II- OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    47Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    48Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    49AGREEMENT RELATING TO FLEET CREDIT CARD SERVICES, L.P. DATED 5/28/04LETTER AGREEMENT DATED JUNE 8, 2004RELOCATION AGREEMENT DATED MAY 20, 2004LETTER AGREEMENT DATED JUNE 8, 2004CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESCERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO PURSUANT TO SECTION 906CERTIFICATION OF CFO PURSUANT TO SECTION 906
 2




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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)
    
    2004
    
    2003ASSETSCash
    
    $
    20,002
    
    
    $
    26,941Federal funds sold
    
    
    288,627
    
    
    
    258,311Restricted interest-bearing deposits
    
    
    2,937
    
    
    
    77,872Investments available for sale
    
    
    208,455
    
    
    
    222,624Receivables, net:Held for sale
    
    
    230,085
    
    
    
    214,664Other
    
    
    295,943
    
    
    
    291,109Total receivables, net
    
    
    526,028
    
    
    
    505,773Accounts receivable from securitizations
    
    
    238,862
    
    
    
    244,337Premises and equipment, net
    
    
    19,847
    
    
    
    20,414Other assets
    
    
    179,131
    
    
    
    278,703Assets of discontinued operations, net
    
    
    31,864
    
    
    
    63,469Total assets
    
    $
    1,515,753
    
    
    $
    1,698,444LIABILITIESDeposits
    
    $
    647,104
    
    
    $
    672,204Debt and other borrowings
    
    
    291,226
    
    
    
    314,817Subordinated debt payable to preferred securities trust
    
    
    103,093
    
    
    
    103,093Other liabilities
    
    
    107,718
    
    
    
    267,123Total liabilities
    
    
    1,149,141
    
    
    
    1,357,237Commitments and contingenciesSTOCKHOLDERS EQUITYClass A preferred stock, $1,000 par value:Authorized,
issued and outstanding  1,010
shares in 2004 and 2003
    
    
    1,010
    
    
    
    1,010Class A voting common stock, $.01 par value:Authorized - 200,000,000 shares; issued - 10,041,017
shares in 2004 and 2003
    
    
    100
    
    
    
    100Class B non-voting common stock, $.01 par value:Authorized - 200,000,000 shares; issued - 21,279,431
shares in 2004 and 20,542,097 shares in 2003
    
    
    213
    
    
    
    206Additional paid-in capital
    
    
    254,898
    
    
    
    245,295Deferred compensation
    
    
    (12,787
    )
    
    
    (13,242
    )Unearned ESOP shares
    
    
    (10,164
    )
    
    
    (10,387
    )Accumulated other comprehensive income (loss)
    
    
    (478
    )
    
    
    63Retained earnings
    
    
    183,295
    
    
    
    167,783Less: Treasury stock at cost, 434,132 Class A common
shares in 2004 and 2003; 3,186,647 Class B common
shares in 2004 and 3,197,614 Class B common shares in
2003
    
    
    (49,475
    )
    
    
    (49,621
    )Total stockholders equity
    
    
    366,612
    
    
    
    341,207Total liabilities and stockholders equity
    
    $
    1,515,753
    
    
    $
    1,698,444
 See Notes to Consolidated Financial Statements 3




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ADVANTA CORP. AND SUBSIDIARIES 
 CONSOLIDATED INCOME STATEMENTS (Unaudited)
 Three Months Ended
    
    Six Months Ended(In thousands, except per share amounts)
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest income:Receivables
    
    $
    19,583
    
    
    $
    18,914
    
    
    $
    36,976
    
    
    $
    36,387Investments
    
    
    1,375
    
    
    
    2,163
    
    
    
    2,791
    
    
    
    4,089Other interest income
    
    
    4,276
    
    
    
    4,373
    
    
    
    8,878
    
    
    
    7,965Total interest income
    
    
    25,234
    
    
    
    25,450
    
    
    
    48,645
    
    
    
    48,441Interest expense:Deposits
    
    
    4,343
    
    
    
    7,419
    
    
    
    8,835
    
    
    
    13,640Debt and other borrowings
    
    
    4,213
    
    
    
    5,692
    
    
    
    8,963
    
    
    
    10,742Subordinated debt payable to
preferred securities trust
    
    
    2,290
    
    
    
    0
    
    
    
    4,579
    
    
    
    0Total interest expense
    
    
    10,846
    
    
    
    13,111
    
    
    
    22,377
    
    
    
    24,382Net interest income
    
    
    14,388
    
    
    
    12,339
    
    
    
    26,268
    
    
    
    24,059Provision for credit losses
    
    
    10,494
    
    
    
    9,265
    
    
    
    20,005
    
    
    
    18,711Net interest income after provision for
credit losses
    
    
    3,894
    
    
    
    3,074
    
    
    
    6,263
    
    
    
    5,348Noninterest revenues:Securitization income
    
    
    32,627
    
    
    
    31,752
    
    
    
    65,167
    
    
    
    61,362Servicing revenues
    
    
    12,499
    
    
    
    9,873
    
    
    
    24,632
    
    
    
    19,900Other revenues, net
    
    
    28,779
    
    
    
    24,929
    
    
    
    55,533
    
    
    
    50,361Total noninterest revenues
    
    
    73,905
    
    
    
    66,554
    
    
    
    145,332
    
    
    
    131,623Expenses:Operating expenses
    
    
    59,896
    
    
    
    57,195
    
    
    
    118,090
    
    
    
    112,717Minority interest in income of
consolidated subsidiary
    
    
    0
    
    
    
    2,220
    
    
    
    0
    
    
    
    4,440Total expenses
    
    
    59,896
    
    
    
    59,415
    
    
    
    118,090
    
    
    
    117,157Income before income taxes
    
    
    17,903
    
    
    
    10,213
    
    
    
    33,505
    
    
    
    19,814Income tax expense
    
    
    7,071
    
    
    
    3,932
    
    
    
    13,234
    
    
    
    7,628Income from continuing operations
    
    
    10,832
    
    
    
    6,281
    
    
    
    20,271
    
    
    
    12,186Gain (loss), net, on discontinuance of
mortgage and leasing businesses, net of
tax
    
    
    160
    
    
    
    (1,968
    )
    
    
    160
    
    
    
    (1,968
    )Net income
    
    $
    10,992
    
    
    $
    4,313
    
    
    $
    20,431
    
    
    $
    10,218Basic income from continuing operations
per common shareClass A
    
    $
    0.42
    
    
    $
    0.25
    
    
    $
    0.78
    
    
    $
    0.47Class B
    
    
    0.44
    
    
    
    0.27
    
    
    
    0.83
    
    
    
    0.52Combined
    
    
    0.43
    
    
    
    0.26
    
    
    
    0.82
    
    
    
    0.50Diluted income from continuing
operations per common shareClass A
    
    $
    0.39
    
    
    $
    0.24
    
    
    $
    0.73
    
    
    $
    0.46Class B
    
    
    0.40
    
    
    
    0.26

    
    
    
    0.76
    
    
    
    0.51Combined
    
    
    0.40
    
    
    
    0.26
    
    
    
    0.75
    
    
    
    0.49Basic net income per common shareClass A
    
    $
    0.42
    
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    0.39Class B
    
    
    0.45
    
    
    
    0.19
    
    
    
    0.84
    
    
    
    0.44Combined
    
    
    0.44
    
    
    
    0.18
    
    
    
    0.82
    
    
    
    0.42Diluted net income per common shareClass A
    
    $
    0.40
    
    
    $
    0.16
    
    
    $
    0.74
    
    
    $
    0.38Class B
    
    
    0.41
    
    
    
    0.18
    
    
    
    0.76
    
    
    
    0.43Combined
    
    
    0.41
    
    
    
    0.18
    
    
    
    0.76
    
    
    
    0.41Basic weighted average common shares
outstandingClass A
    
    
    8,794
    
    
    
    9,151
    
    
    
    8,790
    
    
    
    9,168Class B
    
    
    16,172
    
    
    
    14,893
    
    
    
    15,891
    
    
    
    14,854Combined
    
    
    24,966
    
    
    
    24,044
    
    
    
    24,681
    
    
    
    24,022Diluted weighted average common shares
outstandingClass A
    
    
    8,794
    
    
    
    9,151
    
    
    
    8,790
    
    
    
    9,168Class B
    
    
    18,329
    
    
    
    15,445
    
    
    
    18,046
    
    
    
    15,329Combined
    
    
    27,123
    
    
    
    24,596
    
    
    
    26,836
    
    
    
    24,497
 See 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 B
    
    AdditionalComprehensive
    
    Preferred
    
    Class A
    
    Common
    
    Paid-In($ in thousands)
    
    Income (Loss)
    
    Stock
    
    Common Stock
    
    Stock
    
    CapitalBalance at December 31, 2002
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    204
    
    
    $
    243,910Net income
    
    $
    28,245Other comprehensive income (loss):Change in unrealized
appreciation (depreciation) of
investments, net of tax benefit
(expense) of $66
    
    
    (123
    )Comprehensive income
    
    $
    28,122Preferred and common cash
dividends declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    2,310Stock option exchange program
stock distributionIssuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2,150Amortization of deferred
compensationForfeitures of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (2,976
    )Stock buybackESOP shares committed to be
released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )Balance at December 31, 2003
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    206
    
    
    $
    245,295Net income
    
    $
    20,431Other comprehensive income (loss):Change in unrealized
appreciation (depreciation) of
investments, net of tax benefit
(expense) of $291
    
    
    (541
    )Comprehensive income
    
    $
    19,890Preferred and common cash
dividends declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    5,525Modification of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option exchange program
stock distributionStock-based nonemployee
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Issuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    4,761Amortization of deferred
compensationForfeitures of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1,421
    )ESOP shares committed to be
released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60Balance at June 30, 2004
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    213
    
    
    $
    254,898
 See Notes to Consolidated Financial Statements 5




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Deferred
    
    AccumulatedCompensation
    
    Other
    
    
    
    
    
    
    
    
    
    Total& Unearned
    
    Comprehensive
    
    Retained
    
    Treasury
    
    Stockholders($ in thousands)
    
    ESOP Shares
    
    Income (Loss)
    
    Earnings
    
    Stock
    
    EquityBalance at December 31, 2002
    
    $
    (28,668
    )
    
    $
    186
    
    
    $
    147,205
    
    
    $
    (42,634
    )
    
    $
    321,313Net income
    
    
    
    
    
    
    
    
    
    
    28,245
    
    
    
    
    
    
    
    28,245Other comprehensive income (loss):Change in unrealized appreciation
(depreciation) of investments, net of
tax benefit (expense) of $66
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    (123
    )Comprehensive incomePreferred and common cash dividends
declared
    
    
    
    
    
    
    
    
    
    
    (7,667
    )
    
    
    
    
    
    
    (7,667
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,313Stock option exchange program stock
distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    183Issuance of restricted stock
    
    
    (2,152
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of deferred compensation
    
    
    4,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,105Forfeitures of restricted stock
    
    
    2,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )Stock buyback
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,170
    )
    
    
    (7,170
    )ESOP shares committed to be released
    
    
    443
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    344Balance at December 31, 2003
    
    $
    (23,629
    )
    
    $
    63
    
    
    $
    167,783
    
    
    $
    (49,621
    )
    
    $
    341,207Net income
    
    
    
    
    
    
    
    
    
    
    20,431
    
    
    
    
    
    
    
    20,431Other comprehensive income (loss):Change in unrealized appreciation
(depreciation) of investments, net of
tax benefit (expense) of $291
    
    
    
    
    
    
    (541
    )
    
    
    
    
    
    
    
    
    
    
    (541
    )Comprehensive incomePreferred and common cash dividends
declared
    
    
    
    
    
    
    
    
    
    
    (4,919
    )
    
    
    
    
    
    
    (4,919
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,531Modification of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option exchange program stock
distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    146Stock-based nonemployee compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Issuance of restricted stock
    
    
    (4,764
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of deferred compensation
    
    
    4,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,061Forfeitures of restricted stock
    
    
    1,158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (265
    )ESOP shares committed to be released
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    283Balance at June 30, 2004
    
    $
    (22,951
    )
    
    $
    (478
    )
    
    $
    183,295
    
    
    $
    (49,475
    )
    
    $
    366,612
 See Notes to Consolidated Financial Statements 6




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ADVANTA CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 ($ in thousands)
    
    Six Months EndedJune 30,2004
    
    2003OPERATING
ACTIVITIES  CONTINUING OPERATIONSNet income
    
    $
    20,431
    
    
    $
    10,218Adjustments
to reconcile net income to net cash used in operating activities:(Gain) loss, net, on discontinuance of
mortgage and leasing businesses, net of tax
    
    
    (160
    )
    
    
    1,968Investment securities (gains) losses, net
    
    
    (49
    )
    
    
    1,766Valuation adjustments on other receivables held for sale
    
    
    0
    
    
    
    (450
    )Depreciation and amortization
    
    
    4,948
    
    
    
    4,217Stock-based compensation expense
    
    
    4,474
    
    
    
    1,991Provision for credit losses
    
    
    20,005
    
    
    
    18,711Provision for interest and fee losses
    
    
    4,539
    
    
    
    5,013Change in deferred origination costs, net of deferred fees
    
    
    4,572
    
    
    
    8,546Change in receivables held for sale
    
    
    (110,782
    )
    
    
    (278,811
    )Proceeds from sale of receivables held for sale
    
    
    95,361
    
    
    
    299,376Change in accounts receivable from securitizations
    
    
    5,475
    
    
    
    (632,953
    )Change in other assets and other liabilities
    
    
    (52,313
    )
    
    
    87,762Net cash used in operating activities
    
    
    (3,499
    )
    
    
    (472,646
    )INVESTING
ACTIVITIES  CONTINUING OPERATIONSChange in federal funds sold and restricted interest-bearing
deposits
    
    
    44,619
    
    
    
    52,924Purchase of investments available for sale
    
    
    (370,058
    )
    
    
    (314,625
    )Proceeds from sales of investments available for sale
    
    
    381,461
    
    
    
    246,686Proceeds from maturing investments available for sale
    
    
    1,983
    
    
    
    36,564Change in receivables not held for sale
    
    
    (33,950
    )
    
    
    (38,078
    )(Purchases) sales of premises and equipment, net
    
    
    (3,788
    )
    
    
    2,820Net cash provided by (used in) investing activities
    
    
    20,267
    
    
    
    (13,709
    )FINANCING
ACTIVITIES  CONTINUING OPERATIONSChange in demand and savings deposits
    
    
    (2,433
    )
    
    
    (3,519
    )Proceeds from issuance of time deposits
    
    
    247,040
    
    
    
    561,659Payments for maturing time deposits
    
    
    (272,702
    )
    
    
    (71,629
    )Proceeds from issuance of debt
    
    
    13,942
    
    
    
    50,621Payments on maturity and redemption of debt
    
    
    (49,430
    )
    
    
    (50,224
    )Change in
other borrowings and cash overdraft
    
    
    5,823
    
    
    
    0Proceeds from exercise of stock options
    
    
    5,531
    
    
    
    850Cash dividends paid
    
    
    (4,919
    )
    
    
    (3,919
    )Stock buyback
    
    
    0
    
    
    
    (4,067
    )Net cash (used in) provided by financing activities
    
    
    (57,148
    )
    
    
    479,772DISCONTINUED OPERATIONSNet cash provided by operating activities
    
    
    33,441
    
    
    
    10,109Net cash provided by investing activities
    
    
    0
    
    
    
    26,559Net cash provided by discontinued operations
    
    
    33,441
    
    
    
    36,668Net (decrease) increase in cash
    
    
    (6,939
    )
    
    
    30,085Cash at beginning of period
    
    
    26,941
    
    
    
    14,834Cash at end of period
    
    $
    20,002
    
    
    $
    44,919
 See 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, 2004
(Unaudited) In these notes to consolidated financial statements, Advanta, we,
us, and our refer to Advanta Corp. and its subsidiaries, unless the
context otherwise requires. Note 1) Basis of Presentation We have prepared the consolidated financial statements included herein pursuant
to the rules and regulations of the Securities and Exchange Commission.
We have condensed or omitted certain information and footnote disclosures
normally included in consolidated financial statements prepared in
accordance with U.S. generally accepted accounting principles pursuant to
such rules and regulations. In the opinion of management, the statements
include all adjustments (which include normal recurring adjustments)
required for a fair statement of financial position, results of
operations and cash flows for the interim periods presented. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in our latest annual report on Form
10-K. The results of operations for the interim periods are not
necessarily indicative of the results for the full year. The preparation of financial
statements in accordance with U.S. generally accepted accounting
principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant changes in the near term relate to the
accounting for the allowance for receivable losses, securitization
income, business credit card rewards programs, litigation contingencies,
income taxes, and discontinued operations. Certain prior period balances have been reclassified to conform to the
current period presentation. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, defines a fair
value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is
usually the vesting period. However, it permits entities to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion
(Opinion) No. 25, Accounting for Stock Issued to Employees, whereby
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. We have elected to continue with
the accounting methodology in Opinion No. 25 and, as a result, have
provided pro forma disclosures of compensation expense for options
granted to employees under our stock option plans, net of related tax
effects, net income and earnings per share, as if the fair value based
method of accounting had been applied. Had compensation cost for 8




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##### Table of Contents



these plans been determined using the fair value method, our compensation
expense for stock option plans, net of related tax effects, net income
and net income per common share would have changed to the following pro
forma amounts: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Stock-based employee compensation
expense for stock option plans,
net of related tax effectsAs reported
    
    $
    196
    
    
    $
    0
    
    
    $
    196
    
    
    $
    0Pro forma
    
    
    763
    
    
    
    603
    
    
    
    1,209
    
    
    
    1,216Net incomeAs reported
    
    $
    10,992
    
    
    $
    4,313
    
    
    $
    20,431
    
    
    $
    10,218Pro forma
    
    
    10,425
    
    
    
    3,710
    
    
    
    19,418
    
    
    
    9,002Basic net income per common shareAs reportedClass A
    
    $
    0.42
    
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    0.39Class B
    
    
    0.45
    
    
    
    0.19
    
    
    
    0.84
    
    
    
    0.44Combined
    
    
    0.44
    
    
    
    0.18
    
    
    
    0.82
    
    
    
    0.42Pro formaClass A
    
    $
    0.40
    
    
    $
    0.14
    
    
    $
    0.75
    
    
    $
    0.34Class B
    
    
    0.43
    
    
    
    0.16
    
    
    
    0.80
    
    
    
    0.39Combined
    
    
    0.42
    
    
    
    0.15
    
    
    
    0.78
    
    
    
    0.37Diluted net income per common shareAs reportedClass A
    
    $
    0.40
    
    
    $
    0.16
    
    
    $
    0.74
    
    
    $
    0.38Class B
    
    
    0.41
    
    
    
    0.18
    
    
    
    0.76
    
    
    
    0.43Combined
    
    
    0.41
    
    
    
    0.18
    
    
    
    0.76
    
    
    
    0.41Pro formaClass A
    
    $
    0.38
    
    
    $
    0.14
    
    
    $
    0.70
    
    
    $
    0.33Class B
    
    
    0.39
    
    
    
    0.16
    
    
    
    0.73
    
    
    
    0.38Combined
    
    
    0.39
    
    
    
    0.15
    
    
    
    0.72
    
    
    
    0.36
 Note 2) Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities  An
Interpretation of ARB No. 51 (FIN 46). This interpretation requires a
company to consolidate a variable interest entity if the company has
variable interests that give it a majority of the expected losses or a
majority of the expected residual returns of the entity. In December
2003, the FASB revised FIN 46 to clarify some of the provisions and
incorporate several FASB staff positions related to FIN 46 that were
already effective. This interpretation, as revised, did not have a
material effect on our financial position or results of operations since
qualifying special-purpose entities, as defined in SFAS No. 140, are
exempt from the consolidation requirements of FIN 46. However, our
adoption of the revised interpretation resulted in the deconsolidation of
the subsidiary trust that issued our company-obligated mandatorily
redeemable preferred securities (the trust preferred securities)
effective December 31, 2003. As a result of the deconsolidation of that
trust, the consolidated balance sheets include subordinated debt payable
to preferred securities trust of $103 million and an equity investment in
the trust of $3 million, rather than $100 million of trust preferred
securities. Also as a result of the deconsolidation of that trust, the
consolidated income statement includes interest expense on subordinated
debt payable to preferred securities trust beginning January 1, 2004, as
compared to periods through December 31, 2003 that included payments on
the trust preferred securities classified as minority interest in income
of consolidated subsidiary. 9




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##### Table of Contents



In June 2003, the FASB issued an exposure draft, Qualifying
Special-Purpose Entities and Isolation of Transferred Assets  An
Amendment of FASB Statement No. 140. The changes and clarifications in
the proposed statement would prevent derecognition by transferors that
may continue to retain effective control of transferred assets by
providing financial support other than a subordinated retained interest
or making decisions about beneficial interests. The changes would also
help to ensure that variable interest entities will not qualify for the
qualifying special-purpose entity exception to FIN 46, as revised, if any
party involved is in a position to enhance or protect the value of its
own subordinated interest by providing financial support for or making
decisions about reissuing beneficial interests. For public entities,
this proposed statement would apply prospectively to transfers of assets
occurring after the beginning of the first interim period after the
issuance of the final statement. In June 2004, the FASB announced plans
to issue a revised exposure draft in the fourth quarter of 2004 and a
final standard in the second quarter of 2005. Management will evaluate
any potential impact of this revised proposed statement when it is
available. In March 2004, the FASB issued an exposure draft, Share-Based Payment -
An Amendment of Statements No. 123 and 95 that addresses the accounting
for equity-based compensation arrangements, including employee stock
options. Upon implementation of the changes proposed in this statement,
entities would no longer be able to account for equity-based compensation
using the intrinsic value method under Opinion No. 25. Entities would be
required to measure the cost of employee services received in exchange
for awards of equity instruments at the grant date of the award using a
fair value based method. The comment period for this proposed statement
ended on June 30, 2004. For public entities, this proposed statement
would apply prospectively for fiscal years beginning after December 15,
2004 as if all equity-based compensation awards granted, modified or
settled after December 15, 1994 had been accounted for using a fair value
based method of accounting. Management is currently evaluating the
potential impact of the proposed statement. Note 3) Restricted Interest-Bearing Deposits and Investments Available
For Sale At December 31, 2003, restricted interest-bearing deposits included
amounts held in escrow in connection with our litigation with Fleet
Financial Group, Inc. (Fleet) of $74.2 million. On February 2, 2004,
the court issued its final judgment and order in the Delaware Chancery
Court litigation with Fleet. In early February 2004, the escrow agent
released $63.8 million from the escrow account to Fleet in satisfaction
of all amounts due to Fleet in connection with this litigation and the
$10.5 million of funds remaining in the escrow account were released and
transferred from the restricted escrow account to an unrestricted cash
account. See Note 8 for further discussion of this litigation. 10




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##### Table of Contents



Investments available for sale consisted of the following: June 30, 2004
    
    December 31, 2003Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    ValueU.S. Treasury & other U.S.
Government securities
    
    $
    80,179
    
    
    $
    79,582
    
    
    $
    28,593
    
    
    $
    28,544State and municipal securities
    
    
    2,361
    
    
    
    2,396
    
    
    
    1,946
    
    
    
    2,014Mortgage-backed securities
    
    
    4,538
    
    
    
    4,497
    
    
    
    4,954
    
    
    
    4,996Corporate bonds
    
    
    9,473
    
    
    
    9,407
    
    
    
    0
    
    
    
    0Equity securities(1)
    
    
    19,894
    
    
    
    19,828
    
    
    
    20,018
    
    
    
    20,053Money market funds(2)
    
    
    92,632
    
    
    
    92,632
    
    
    
    166,875
    
    
    
    166,875Other
    
    
    113
    
    
    
    113
    
    
    
    142
    
    
    
    142Total investments available for sale
    
    $
    209,190
    
    
    $
    208,455
    
    
    $
    222,528
    
    
    $
    222,624
  (1)
    
    Includes venture capital investments of $9.5 million at June 30,
2004 and December 31, 2003. The amount shown as amortized cost
represents fair value for these investments.(2)
    
    As of June 30, 2004, money market funds include investments in the
Reserve Primary Money Market Fund of $48.1 million and the Barclays
Global Investors Prime Money Market Fund of $34.1 million. As of
December 31, 2003, money market funds include an investment in the
Merrill Lynch Premier Institutional Money Market Fund of $163.8
million. Note 4) Receivables Receivables on the balance sheet, including those held for sale,
consisted of the following: June 30,
    
    December 31,2004
    
    2003Business credit card receivables
    
    $
    549,862
    
    
    $
    518,040Other receivables
    
    
    10,858
    
    
    
    16,976Gross receivables
    
    
    560,720
    
    
    
    535,016Add: Deferred origination costs, net of deferred fees
    
    
    14,639
    
    
    
    19,211Less: Allowance for receivable lossesBusiness credit cards
    
    
    (47,981
    )
    
    
    (47,041
    )Other receivables
    
    
    (1,350
    )
    
    
    (1,413
    )Total allowance for receivable losses
    
    
    (49,331
    )
    
    
    (48,454
    )Receivables, net
    
    $
    526,028
    
    
    $
    505,773
 In June 2001, Advanta Corp. provided a mortgage financing loan and a
revolving home equity line of credit to an executive officer as part of a
relocation agreement. Upon the termination of the executive officers
employment in February 2004, a repayment event under the terms of the
agreement occurred. The former executive officer sold the property in
May 2004 and used the net proceeds from the sale to satisfy his loan
obligations in accordance with the terms of the relocation agreement.
The outstanding balances on these loans were included in other
receivables and were $474 thousand at December 31, 2003. We recognized
$91 thousand of compensation expense in the second quarter of 2004
related to loan forgiveness, based on the net proceeds from the sale of
the property. 11




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##### Table of Contents



Note 5) Allowance for Receivable Losses The following table presents activity in the allowance for receivable
losses for the periods presented: Six Months EndedJune 30,2004
    
    2003Beginning balance
    
    $
    48,454
    
    
    $
    46,159Provision for credit losses
    
    
    20,005
    
    
    
    18,711Provision for interest and fee losses
    
    
    4,539
    
    
    
    5,013Gross principal charge-offs:Business credit cards
    
    
    (20,169
    )
    
    
    (19,442
    )Other receivables
    
    
    (3
    )
    
    
    (28
    )Total gross principal charge-offs
    
    
    (20,172
    )
    
    
    (19,470
    )Principal recoveries:Business credit cards
    
    
    1,402
    
    
    
    1,479Other receivables
    
    
    4
    
    
    
    0Total principal recoveries
    
    
    1,406
    
    
    
    1,479Net principal charge-offs
    
    
    (18,766
    )
    
    
    (17,991
    )Interest and fee charge-offs:Business credit cards
    
    
    (4,901
    )
    
    
    (4,566
    )Ending balance
    
    $
    49,331
    
    
    $
    47,326
 Note 6) Securitization Activities Accounts receivable from securitizations consisted of the following: June 30,
    
    December 31,2004
    
    2003Retained interests in business credit card
securitizations
    
    $
    149,998
    
    
    $
    149,998Accrued interest and fees on securitized
business credit card receivables, net(1)
    
    
    53,016
    
    
    
    58,178Amounts due from the trust
    
    
    35,848
    
    
    
    36,161Total accounts receivable from securitizations
    
    $
    238,862
    
    
    $
    244,337
  (1)
    
    Reduced by an estimate for uncollectible interest and fees of $10.8
million at June 30, 2004 and $12.6 million at December 31, 2003. The following represents business credit card securitization data and the
key assumptions used in estimating the fair value of retained interests
in securitizations at the time of each new securitization or
replenishment if quoted market prices were not available. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Average securitized receivables
    
    $
    2,532,885
    
    
    $
    2,290,671
    
    
    $
    2,524,208
    
    
    $
    2,231,572Securitization income
    
    
    32,627
    
    
    
    31,752
    
    
    
    65,167
    
    
    
    61,362Discount accretion
    
    
    4,276
    
    
    
    4,373
    
    
    
    8,878
    
    
    
    7,965Interchange income
    
    
    28,801
    
    
    
    23,521
    
    
    
    54,745
    
    
    
    43,925Servicing revenues
    
    
    12,499
    
    
    
    9,873
    
    
    
    24,632
    
    
    
    19,900Proceeds from new securitizations
    
    
    0
    
    
    
    226,851
    
    
    
    90,000
    
    
    
    299,376Proceeds from collections
reinvested in revolving-period
securitizations
    
    
    1,633,689
    
    
    
    710,553
    
    
    
    3,257,245
    
    
    
    1,768,945Cash flows received on retained
interests
    
    
    68,208
    
    
    
    84,702
    
    
    
    134,890
    
    
    
    133,002
 12




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Key assumptions:Discount rate
    
    
    10.98% - 13.13
    %
    
    
    12.14% - 14.56
    %
    
    
    10.98% - 14.33
    %
    
    
    11.44% - 14.56
    %Monthly payment rate
    
    
    20.63% - 22.25
    %
    
    
    18.79% - 21.00
    %
    
    
    20.63% - 22.25
    %
    
    
    18.79% - 21.00
    %Loss rate
    
    
    6.70% - 8.20
    %
    
    
    8.55% - 9.68
    %
    
    
    6.70% - 8.47
    %
    
    
    8.55% - 10.29
    %Interest yield, net of
interest earned by
noteholders
    
    
    12.36% - 13.47
    %
    
    
    14.26% - 14.95
    %
    
    
    12.36% - 13.84
    %
    
    
    14.26% - 14.95
    %
 There were no purchases of delinquent accounts from the securitization
trust during the three or six months ended June 30, 2004 or 2003. The following assumptions were used in estimating the fair value of
retained interests in business credit card securitizations as of June 30,
2004 and December 31, 2003. The assumptions listed represent weighted
averages of assumptions used for each securitization. June 30,
    
    December 31,2004
    
    2003Discount rate
    
    
    11.15% - 13.13
    %
    
    
    12.44% - 14.33
    %Monthly payment rate
    
    
    20.67% - 22.25
    %
    
    
    20.80% - 22.25
    %Loss rate
    
    
    6.70% -  7.37
    %
    
    
    7.70% -  8.47
    %Interest yield, net of interest earned by
noteholders
    
    
    12.36
    %
    
    
    13.84
    %
 In addition to the assumptions identified above, management also
considered qualitative factors, such as the impact of the current
economic environment on the performance of the business credit card
receivables sold and the potential volatility of the current market for
similar instruments, in assessing the fair value of retained interests in
business credit card securitizations. We have prepared sensitivity analyses of the valuations of retained
interests in securitizations estimated using the assumptions identified
above. The sensitivity analyses show the hypothetical effect on the fair
value of those assets of two unfavorable variations from the expected
levels for each key assumption, independently from any change in another
key assumption. Set forth below are the results of those sensitivity
analyses on the valuation as of June 30, 2004. Effect on fair value of the following
hypothetical changes in key assumptions:Discount rate increased by 2%
    
    $
    (2,256
    )Discount rate increased by 4%
    
    
    (4,444
    )Monthly payment rate at 110% of base assumption
    
    
    (1,618
    )Monthly payment rate at 125% of base assumption
    
    
    (3,647
    )Loss rate at 110% of base assumption
    
    
    (4,075
    )Loss rate at 125% of base assumption
    
    
    (10,188
    )Interest yield, net of interest earned by noteholders,
decreased by 1%
    
    
    (6,082
    )Interest yield, net of interest earned by noteholders,
decreased by 2%
    
    
    (12,164
    )
 The objective of these hypothetical analyses is to measure the
sensitivity of the fair value of the retained interests to changes in
assumptions. The methodology used to calculate the fair value in the
analyses is a discounted cash flow analysis, the same methodology used to
estimate the fair value of the retained interests when quoted market
prices are not available at each reporting date. These estimates do not
factor in the impact of simultaneous changes in other key 13




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##### Table of Contents



assumptions. The above scenarios do not reflect managements expectation
regarding the future direction of these rates, and they depict only
certain possibilities out of a large set of possible scenarios. Managed receivable data Our managed business credit card receivable portfolio is comprised of
both owned and securitized business credit card receivables. Performance
on a managed receivable portfolio basis is useful and relevant because we
retain interests in the securitized receivables and, therefore, we have a
financial interest in and exposure to the performance of the securitized
receivables. Credit quality data on the managed business credit card
receivable portfolio was as follows: June 30,
    
    December 31,
    
    June 30,2004
    
    2003
    
    2003Owned business credit card receivables
    
    $
    549,862
    
    
    $
    518,040
    
    
    $
    442,769Securitized business credit card receivables
    
    
    2,546,777
    
    
    
    2,463,747
    
    
    
    2,365,176Total managed receivables
    
    
    3,096,639
    
    
    
    2,981,787
    
    
    
    2,807,945Receivables 30 days or more delinquent:Owned
    
    
    25,493
    
    
    
    25,301
    
    
    
    25,839Securitized
    
    
    123,123
    
    
    
    148,177
    
    
    
    150,380Total managed
    
    
    148,616
    
    
    
    173,478
    
    
    
    176,219Receivables 90 days or more delinquent:Owned
    
    
    13,309
    
    
    
    12,696
    
    
    
    13,184Securitized
    
    
    63,980
    
    
    
    74,762
    
    
    
    76,459Total managed
    
    
    77,289
    
    
    
    87,458
    
    
    
    89,643Nonaccrual receivables:Owned
    
    
    10,081
    
    
    
    7,866
    
    
    
    7,091Securitized
    
    
    48,966
    
    
    
    47,381
    
    
    
    42,162Total managed
    
    
    59,047
    
    
    
    55,247
    
    
    
    49,253Accruing receivables past due 90 days or more:Owned
    
    
    11,677
    
    
    
    11,320
    
    
    
    11,741Securitized
    
    
    56,111
    
    
    
    66,376
    
    
    
    67,804Total managed
    
    
    67,788
    
    
    
    77,696
    
    
    
    79,545Net principal charge-offs for the
year-to-date period ended June 30 and
December 31:Owned
    
    
    18,767
    
    
    
    43,670
    
    
    
    17,963Securitized
    
    
    90,827
    
    
    
    179,538
    
    
    
    92,060Total managed
    
    
    109,594
    
    
    
    223,208
    
    
    
    110,023
 Note 7) Selected Balance Sheet Information Other assets consisted of the following: June 30,
    
    December 31,2004
    
    2003Deferred income taxes
    
    $
    69,969
    
    
    $
    82,175Investment in Fleet Credit Card Services, L.P.
    
    
    32,453
    
    
    
    35,988Cash surrender value of insurance contracts
    
    
    20,419
    
    
    
    21,792Intangible assets
    
    
    3,875
    
    
    
    4,295Investment in preferred securities trust
    
    
    3,093
    
    
    
    3,093Amounts due from transfer of consumer credit
card business
    
    
    0
    
    
    
    70,545Other assets
    
    
    49,322
    
    
    
    60,815Total other assets
    
    $
    179,131
    
    
    $
    278,703
 14




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##### Table of Contents



Other liabilities consisted of the following: June 30,
    
    December 31,2004
    
    2003Accounts payable and accrued expenses
    
    $
    31,916
    
    
    $
    28,458Business credit card rewards
    
    
    19,431
    
    
    
    24,785Current income taxes
    
    
    12,936
    
    
    
    13,449Accrued interest payable
    
    
    9,783
    
    
    
    4,008Amounts due to the securitization trust
    
    
    3,664
    
    
    
    4,021Other(1)
    
    
    29,988
    
    
    
    192,402Total other liabilities
    
    $
    107,718
    
    
    $
    267,123
  (1)
    
    A substantial portion of other liabilities at December 31, 2003
represented our litigation reserves. In February 2004, the court issued its final judgment and order in the
Delaware Chancery Court litigation with Fleet, and a payment was made to
Fleet in satisfaction of all amounts due in connection with this
litigation. In accordance with the courts February 2004 order, the
payment to Fleet was net of amounts due to Advanta from Fleet. As a
result of the courts order and payment to Fleet in February 2004, there
was a decrease in other assets and other liabilities as of the payment
date. There was no impact to the results of our operations since, based
on the final judgment and order, our reserves at December 31, 2003 were
adequate. In March 2004, we filed a notice of appeal to commence the
appeals process related to this final judgment and order. On May 28,
2004, we reached an agreement with Bank of America Corp. (Bank of
America) to resolve all outstanding litigation, including partnership
tax disputes, between Advanta and FleetBoston Financial Corporation,
which was recently acquired by Bank of America. See Note 8. In
connection with the anticipated combination of Bank of Americas and
Fleets consumer credit card businesses and the May 28, 2004 agreement,
our partnership interest in Fleet Credit Card Services, L.P. would
represent an interest in the combined business. Subsequent to the date
of the agreement, we have accounted for our investment in the partnership
interest in Fleet Credit Card Services, L.P. using the cost method. Eligible cardholders earn cash back rewards or business rewards based on
net purchases charged on their business credit card accounts. The costs
of future reward redemptions are estimated and a liability is recorded at
the time cash back rewards or business rewards are earned by the
cardholder. In each reporting period, we adjust our estimate of the
percentage of earned rewards that will ultimately be redeemed by
cardholders and the cost of rewards based on our experience with each
program. In the three months ended June 30, 2004, we expanded our
business rewards program to include offers of gift certificates and
merchandise, in addition to our traditional travel awards. We anticipate
that the expanded program will have the effect of increasing the volume
of future reward redemptions while decreasing the associated costs per
redemption. In the first quarter of 2003, we changed the redemption
terms of certain business reward programs resulting in a decrease in the
anticipated costs of future reward redemptions. The impact of the
changes in the estimated percentage of earned rewards that will
ultimately be redeemed by cardholders and other changes in anticipated
costs of future period reward redemptions for these programs in the
three and six months ended June 30, 2004 and 2003 was as follows: Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Increase (decrease) in other revenues
    
    $
    (900
    )
    
    $
    (70
    )
    
    $
    (1,400
    )
    
    $
    1,200Increase (decrease) in net income
    
    
    (545
    )
    
    
    (40
    )
    
    
    (850
    )
    
    
    740Amount per combined diluted share
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    0.03
 15




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Note 8) Commitments and Contingencies On May 28, 2004, Advanta Corp. and certain of its subsidiaries and Bank
of America signed an agreement to resolve all outstanding litigation,
including partnership tax disputes, between Advanta and Fleet, which was
recently acquired by Bank of America, relating to the transfer of our
consumer credit card business to Fleet Credit Card Services, L.P. (the
Consumer Credit Card Transaction) in 1998. The agreement is subject to
the Internal Revenue Services (IRS) final approval of the settlement
of the tax disputes, which the IRS is expected to approve. Under the
agreement, Bank of America will pay Advanta $63.8 million in cash which
represents a return of the payments made to Fleet in the Delaware state
court litigation in February 2004, as described below. That payment will
be made following IRS approval of the settlement of the tax disputes. At
that time, Advanta and Fleet will dismiss all outstanding litigation.
Advanta and Bank of America have agreed to resolve the tax disputes
between Advanta and Fleet by allocating approximately $125 million of the
disputed $508 million of partnership deductions to Advanta and by Advanta
recognizing for tax purposes approximately $600 thousand of the disputed
$47 million partnership taxable gain. As a result of the agreement,
Advanta expects to record a net after-tax gain from the settlement of the
litigation of approximately $61 million in the quarter that the IRS
approval is received. The disputes involving Fleet that are described
below would all be resolved under the agreement with Bank of America if
IRS approval of the settlement of the tax disputes is obtained. On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit
against Advanta Corp. and certain of its subsidiaries in Delaware
Chancery Court. Fleets allegations, which we denied, centered around
Fleets assertions that we failed to complete certain post-closing
adjustments to the value of the assets and liabilities we contributed to
Fleet Credit Card Services, L.P. in connection with the Consumer Credit
Card Transaction. We filed an answer to the complaint, and we also filed
a countercomplaint against Fleet for damages we believe have been caused
by certain actions of Fleet. As a result of related litigation with
Fleet, $70.1 million of our reserves in connection with this litigation
were funded in an interest-bearing escrow account in February 2001. On
January 22, 2003, the trial court issued a ruling on all but one of the
remaining issues, and ordered further briefing on the remaining
outstanding issue. Effective December 31, 2002, we recognized a $43.0
million pretax loss on the transfer of our consumer credit card business,
representing the estimated impact of implementing the courts January
2003 decisions. This amount represented the amount in excess of the
reserves we had been carrying for the litigation, which was based on our
expectations of the outcome of the litigation. On November 7, 2003, the
court ruled on the remaining outstanding issue, the method for
calculating the interest to be awarded, and ordered the parties to submit
revised calculations in accordance with this ruling before it issued a
judgment. On February 2, 2004, the court issued its final judgment and
order. In early February 2004, the escrow agent released $63.8 million
from the escrow account to Fleet in satisfaction of all amounts due to
Fleet in connection with this litigation and the $10.5 million of funds
remaining in the escrow account were released and transferred from the
restricted escrow account to an unrestricted cash account. At December
31, 2003, the escrow account was included in restricted interest-bearing
deposits on the consolidated balance sheet. There was no impact to the
results of our operations since, based on the final judgment and order,
our reserves at December 31, 2003 were adequate. On March 1, 2004, we
filed a notice of appeal to commence the appeals process relating to
orders made by the Delaware Chancery Court during the litigation, and on
April 15, 2004, we filed an opening brief with the Supreme Court of
Delaware setting forth the basis for our appeal. Fleet filed its
answering brief with the Supreme Court of Delaware on May 17, 2004, and
we filed our reply brief on June 1, 2004. 16




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##### Table of Contents



Pursuant to the May 28, 2004 agreement between Advanta and Bank of
America described above, Advanta and Fleet filed a joint motion with the
Delaware Supreme Court to stay the appeal and on June 28, 2004 the court
granted the motion and stayed the appeal, pending fulfillment of all
conditions of the agreement. In an ongoing element of Fleets disputes with us, Fleet has claimed $508
million of tax deductions from its partnership with us in connection with
the Consumer Credit Card Transaction, which are required under the law to
be allocated solely to Advanta. As required, we reported these
deductions on our 1998 corporate tax return. However, we have not used
or booked the benefit from most of these deductions because for tax
purposes we have a very substantial net operating loss carryforward. We
have $482 million of net operating loss carryforwards from all sources at
June 30, 2004, and have booked no benefit from approximately $400 million
of these net operating loss carryforwards. If the deductions are
ultimately allocated as claimed by Fleet, the impact on our equity at
June 30, 2004 would be a decrease of approximately $35 million. The
deductions are attributable to deductions for bad debt reserves that we
expensed in computing our book income or loss before the Consumer Credit
Card Transaction, but which were not deductible by Advanta for tax
purposes until after the closing of the transaction in 1998. The tax law
requires built in losses like these to be deducted by the party who
contributed the assets to the partnership, in this case, Advanta. The
Internal Revenue Service agents who have examined the returns at issue
have to ensure that both parties do not obtain the deductions and
therefore, following standard practice, proposed to disallow the
deductions to both parties until there is a final resolution. The
deductions, as well as the allocation of a gain from the sale of a
partnership asset of approximately $47 million, were before the IRS
Regional Office of Appeals. If the conditions of the May 28, 2004
agreement between Advanta and Bank of America are fulfilled, this matter
would also be resolved in accordance with the terms of the agreement. On January 15, 2003, Fleet filed a complaint in Rhode Island Superior
Court seeking a declaratory judgment that we indemnify Fleet under the
applicable partnership agreement for any damage Fleet incurs by not being
entitled to the $508 million of tax deductions. Fleet is also seeking a
declaratory judgment that it should not indemnify us for any damages that
we incur due to any allocation to Advanta of the $47 million gain on the
sale of a partnership asset. On February 28, 2003, we filed a motion to
dismiss the complaint. On August 13, 2003, the court denied the motion
to dismiss on procedural grounds. We answered the complaint and filed a
counterclaim against Fleet on September 19, 2003. The discovery phase of
the case has concluded. We believe that the indemnification provision in
the partnership agreement does not indemnify Fleet for damages incurred
related to the tax deductions and that the lawsuit is frivolous, having
no legal basis whatsoever and therefore, we do not have any reserves for
this litigation. If the conditions of the May 28, 2004 agreement between
Advanta and Bank of America are fulfilled, this matter would also be
resolved in accordance with the terms of the agreement. Although the IRS is expected to approve the settlement of the tax
disputes, in the event the settlement is not consummated, management does
not expect the lawsuits or the tax disputes with Fleet, described above,
to have a material adverse effect on our financial condition or results
of operations. On July 26, 2001, Chase Manhattan Mortgage Corporation (Chase) filed a
complaint against Advanta Corp. and certain of its subsidiaries in the
United States District Court for the District of Delaware alleging, among
other things, that we breached our contract with Chase in connection with
the Mortgage Transaction. Chase claims that we misled Chase concerning
the value of certain of the assets sold to Chase and claims damages of
approximately $70 million. In September 2001, we filed an answer to the
complaint in which we denied all of the substantive allegations of 17




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##### Table of Contents



the complaint and asserted a counterclaim against Chase for breach of
contract relating to funds owed by Chase to us in connection with the
transaction. The trial was originally scheduled to begin in January
2004. In the second quarter of 2003, the parties extended the discovery
period and the court delayed the scheduled trial date to April 2004. In
September 2003, we filed a motion for summary judgment with the court
with respect to all claims raised in Chases complaint and Chase filed a
motion for partial summary judgment with respect to certain of its
claims. On March 4, 2004, the court denied both parties motions for
summary judgment. On April 26, 2004, a non-jury trial commenced; at
trial, Chase asserted damages totaling approximately $88 million. The
trial concluded on May 26, 2004, and the court has ordered the parties to
make certain post-trial filings with the court. Post-trial filings were
filed on July 30, 2004 and additional filings are expected to be made on
September 17, 2004. We believe that the lawsuit is without merit and
will vigorously defend Advanta in this litigation and therefore, we do
not have any reserves for future judgments or rulings in this litigation.
However, since this litigation relates to a discontinued operation, we
have established reserves for estimated future litigation costs. We do
not expect this lawsuit to have any impact on our continuing business
and, based on the complete lack of merit, we do not anticipate that the
lawsuit will have a material adverse effect on our financial condition or
results of operations. On February 13, 2004, Advanta Corp. filed a Writ of Summons against Chase
in Montgomery County, Pennsylvania Court of Common Pleas, which was
amended on March 4, 2004; and on March 8, 2004, Advanta Corp. and certain
of its subsidiaries filed a Second Amended Writ of Summons and a
Complaint against Chase in Montgomery County, Pennsylvania Court of
Common Pleas seeking damages of at least $17.7 million. In May 2004,
Chase filed an answer to the complaint and asserted a new matter and
counterclaims seeking damages of at least $5 million. On August 2, 2004,
we filed our reply to Chases new matter and counterclaims. On February
23, 2004 and June 4, 2004, Chase filed a complaint and a first amended
complaint against us in the United States District Court for the District
of Delaware seeking damages of at least $7 million. These filings relate
to contractual claims under the purchase and sale agreement governing the
Mortgage Transaction and are a continuation of the ongoing dispute
associated with the Mortgage Transaction. We do not expect the lawsuit
filed by Chase on February 23, 2004, as amended on June 4, 2004, or
Chases new matter and counterclaims in the action brought by us in the
Pennsylvania Court of Common Pleas to have a material adverse effect on
our financial condition or results of operations. Advanta Mortgage Corp. USA (AMCUSA) and Advanta Mortgage Conduit
Services, Inc. (AMCSI), subsidiaries of Advanta Corp., have been
involved in arbitration before the American Arbitration Association with
Goodrich & Pennington Mortgage Fund, Inc. (GPMF), a participant in one
of the programs of our former mortgage business. The arbitration process
commenced June 28, 2001 in San Francisco, California with GPMF serving a
demand for arbitration relating to alleged failure to provide information
and documentation under the former mortgage program. On September 5,
2001, AMCUSA and AMCSI filed an answer to the Demand for Arbitration, and
from December 2001, have provided information and documentation
responsive to the program participants requests in the arbitration
proceeding. In February and June 2004, GPMF filed additional Statements
of Claim, each alleging contractual and other related claims. The amount
of damages sought by GPMF is not known because at this time no damage
amount has been specified in its pleadings. Discovery in this matter is
ongoing and more recently, since June 2004, the parties have filed a
number of motions and briefs with the Arbitrator in anticipation of the
arbitration hearing which is presently scheduled to commence on November
2, 2004. We do not expect this arbitration to have a material adverse
effect on our financial condition or results of operations. However,
since this arbitration relates to a 18




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##### Table of Contents



discontinued operation, we have established reserves for estimated future
legal costs. In addition to the cases described above, Advanta Corp. and its
subsidiaries are involved in class action lawsuits, other litigation,
claims and legal proceedings arising in the ordinary course of business
or discontinued operations, including litigation arising from our
operation of the mortgage business prior to our exit from that business
in the first quarter of 2001. Management believes that the aggregate loss, if any, resulting from
existing litigation, claims and other legal proceedings will not have a
material adverse effect on our financial position or results of our
operations based on the level of litigation reserves we have established
and our current expectations regarding the ultimate resolutions of these
existing actions. We estimate our litigation reserves based on the
status of litigation and our assessment of the ultimate resolution of
each action after consultation with our attorneys. However, due to the
inherent uncertainty in litigation and since the ultimate resolutions of
our litigation, claims and other legal proceedings are influenced by
factors outside of our control, it is reasonably possible that our
estimated liability under these proceedings may change or that actual
results will differ from our estimates. Note 9) Capital Stock In 2001 and 2002, the Board of Directors of Advanta Corp. authorized
management to purchase up to an aggregate 3.0 million shares of Advanta
Corp. common stock. In 2003, we repurchased 434 thousand shares of our
Class A Common Stock and 315 thousand shares of our Class B Common Stock,
which substantially completed our purchases under the authorizations. Cash dividends per share of common stock declared were as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Class A Common Stock
    
    $
    0.095
    
    
    $
    0.063
    
    
    $
    0.158
    
    
    $
    0.126Class B Common Stock
    
    
    0.113
    
    
    
    0.076
    
    
    
    0.189
    
    
    
    0.151
 19




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##### Table of Contents



Note 10) Segment Information Advanta Business
    
    VentureCards
    
    Capital
    
    Other(1)
    
    TotalThree months ended June 30, 2004Interest income
    
    $
    23,735
    
    
    $
    0
    
    
    $
    1,499
    
    
    $
    25,234Interest expense
    
    
    8,590
    
    
    
    86
    
    
    
    2,170
    
    
    
    10,846Noninterest revenues
    
    
    73,115
    
    
    
    0
    
    
    
    790
    
    
    
    73,905Pretax income (loss) from continuing
operations
    
    
    17,998
    
    
    
    (95
    )
    
    
    0
    
    
    
    17,903Total assets at end of period
    
    
    780,492
    
    
    
    10,518
    
    
    
    724,743
    
    
    
    1,515,753Three months ended June 30, 2003Interest income
    
    $
    23,007
    
    
    $
    1
    
    
    $
    2,442
    
    
    $
    25,450Interest expense
    
    
    11,269
    
    
    
    135
    
    
    
    1,707
    
    
    
    13,111Noninterest revenues (losses)
    
    
    66,283
    
    
    
    (1,242
    )
    
    
    1,513
    
    
    
    66,554Pretax income (loss) from continuing
operations
    
    
    12,647
    
    
    
    (2,434
    )
    
    
    0
    
    
    
    10,213Total assets at end of period
    
    
    1,329,072
    
    
    
    12,695
    
    
    
    938,709
    
    
    
    2,280,476Six months ended June 30, 2004Interest income
    
    $
    45,584
    
    
    $
    0
    
    
    $
    3,061
    
    
    $
    48,645Interest expense
    
    
    17,713
    
    
    
    174
    
    
    
    4,490
    
    
    
    22,377Noninterest revenues
    
    
    143,377
    
    
    
    32
    
    
    
    1,923
    
    
    
    145,332Pretax income (loss) from continuing
operations
    
    
    34,663
    
    
    
    (1,158
    )
    
    
    0
    
    
    
    33,505Six months ended June 30, 2003Interest income
    
    $
    43,761
    
    
    $
    1
    
    
    $
    4,679
    
    
    $
    48,441Interest expense
    
    
    22,003
    
    
    
    275
    
    
    
    2,104
    
    
    
    24,382Noninterest revenues (losses)
    
    
    131,232
    
    
    
    (1,852
    )
    
    
    2,243
    
    
    
    131,623Pretax income (loss) from continuing
operations
    
    
    23,624
    
    
    
    (3,810
    )
    
    
    0
    
    
    
    19,814
  (1)
    
    Other includes investment and other activities not attributable to reportable
segments. Total assets in the Other segment include assets of discontinued
operations. 20




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##### Table of Contents



Note 11) Income Taxes Income tax expense (benefit) was as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income tax expense (benefit)
attributable to:Continuing operations
    
    $
    7,071
    
    
    $
    3,932
    
    
    $
    13,234
    
    
    $
    7,628Discontinued operations
    
    
    105
    
    
    
    (1,232
    )
    
    
    105
    
    
    
    (1,232
    )Total income tax expense
    
    $
    7,176
    
    
    $
    2,700
    
    
    $
    13,339
    
    
    $
    6,396
 Income tax expense (benefit) on income from continuing operations
consisted of the following components: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Current:Federal
    
    $
    0
    
    
    $
    (860
    )
    
    $
    0
    
    
    $
    0State
    
    
    379
    
    
    
    31
    
    
    
    899
    
    
    
    565Total current
    
    
    379
    
    
    
    (829
    )
    
    
    899
    
    
    
    565Deferred:Federal
    
    
    6,488
    
    
    
    4,710
    
    
    
    11,940
    
    
    
    7,007State
    
    
    204
    
    
    
    51
    
    
    
    395
    
    
    
    56Total deferred
    
    
    6,692
    
    
    
    4,761
    
    
    
    12,335
    
    
    
    7,063Income tax expense
attributable
to continuing operations
    
    $
    7,071
    
    
    $
    3,932
    
    
    $
    13,234
    
    
    $
    7,628
 The reconciliation of the statutory federal income tax to income tax
expense on income from continuing operations is as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Statutory federal income tax
    
    $
    6,266
    
    
    $
    3,575
    
    
    $
    11,727
    
    
    $
    6,935State income taxes, net of
federal income tax benefit
    
    
    379
    
    
    
    53
    
    
    
    841
    
    
    
    404Nondeductible expenses
    
    
    165
    
    
    
    158
    
    
    
    333
    
    
    
    270Compensation limitation
    
    
    126
    
    
    
    49
    
    
    
    175
    
    
    
    98Other
    
    
    135
    
    
    
    97
    
    
    
    158
    
    
    
    (79
    )Income tax expense attributable
to continuing operations
    
    $
    7,071
    
    
    $
    3,932
    
    
    $
    13,234
    
    
    $
    7,628
 Our effective tax rate was 39.5% for the three and six months ended June
30, 2004 and 38.5% for the three and six months ended June 30, 2003. Our
effective tax rate increased in 2004 due to higher state income taxes. We provide deferred taxes to reflect the estimated future tax effects of
the differences between the financial statement and tax bases of assets
and liabilities and currently enacted tax laws. The net deferred tax
asset is comprised of the following:  21




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##### Table of Contents



June 30,
    
    December 31,2004
    
    2003Deferred tax assets
    
    $
    84,438
    
    
    $
    107,329Deferred tax
liabilities
    
    
    (14,469
    )
    
    
    (25,154
    )Net deferred tax asset
    
    $
    69,969
    
    
    $
    82,175
 A summary of deferred tax assets and liabilities follows: June 30,
    
    December 31,2004
    
    2003Net operating loss carryforwards
    
    $
    168,601
    
    
    $
    191,308Valuation allowance
    
    
    (139,783
    )
    
    
    (139,783
    )Allowance for receivable losses
    
    
    17,166
    
    
    
    17,759Rewards programs
    
    
    6,865
    
    
    
    8,769Deferred origination fees and costs
    
    
    (5,459
    )
    
    
    (7,096
    )Deferred compensation
    
    
    4,306
    
    
    
    4,618Capital loss carryforwards
    
    
    4,025
    
    
    
    2,275Securitization income
    
    
    (1,818
    )
    
    
    (1,818
    )Other
    
    
    16,066
    
    
    
    6,143Net deferred tax asset
    
    $
    69,969
    
    
    $
    82,175
 At June 30, 2004, net operating loss carryforwards were $482 million.
The scheduled expirations of these net operating loss carryforwards were
as follows at June 30, 2004: Year Ended December 31,2018
    
    $
    231,4802019
    
    
    33,4372020
    
    
    1,4272021
    
    
    215,374
 We utilized net operating loss carryforwards of $57.8 million in the six
months ended June 30, 2004 and $44.0 million in the same period of 2003. At June 30, 2004, capital loss carryforwards were $11.5 million, of which
$6.5 million are scheduled to expire in the year ended December 31, 2007
and $5.0 million are scheduled to expire in the year ended December 31,
2009. See Note 8 for a discussion of tax matters currently before the Internal
Revenue Service Regional Office of Appeals. As more fully described in
Note 8, on May 28, 2004, we reached an agreement with Bank of America to
resolve all outstanding litigation, including partnership tax disputes,
between Advanta and Fleet, which was recently acquired by Bank of
America. Advanta and Bank of America have agreed to resolve the tax
disputes between Advanta and Fleet by allocating approximately $125
million of the disputed $508 million of partnership deductions to Advanta
and by Advanta recognizing for tax purposes approximately $600 thousand
of the disputed $47 million partnership taxable gain. The agreement is
subject to the IRS final approval of the settlement of the tax disputes,
which the IRS is expected to approve. The agreement would result in an
approximate $134 million reduction in both the net operating loss
carryforward and valuation allowance components of our deferred tax
asset. Upon receiving the IRS approval, management will evaluate the
remaining valuation allowance. In connection with the agreement, Bank of
America would pay Advanta $63.8 million in cash which represents a return
of the payments made to Fleet in the Delaware state court litigation in
February 2004. A substantial portion of this payment will not be taxable
since the gain associated with the original transfer of assets to the
partnership in the 1998 Consumer Credit Card Transaction was not subject
to income tax. After receipt of this payment, the 22




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##### Table of Contents



cumulative Consumer Credit Card Transaction gain would be approximately
$600 million, for which no deferred taxes will have been provided as the
transaction structure remains non-taxable under current tax law. The net deferred tax asset is included in other assets on the
consolidated balance sheets. Note 12) Discontinued Operations The components of the gain (loss) on discontinuance of our mortgage and
leasing businesses for the three and six months ended June 30, 2004 and
2003 were as follows: Three and Six Months EndedJune 30, 2004
    
    June 30, 2003AdvantaAdvanta
    
    Advanta
    
    Advanta
    
    LeasingMortgage
    
    Leasing Services
    
    Mortgage
    
    ServicesPretax gain (loss) on
discontinuance of mortgage
and leasing businesses
    
    $
    (2,770
    )
    
    $
    3,035
    
    
    $
    (2,600
    )
    
    $
    (600
    )Income tax (expense) benefit
    
    
    1,094
    
    
    
    (1,199
    )
    
    
    1,001
    
    
    
    231Gain (loss) on
discontinuance of mortgage
and leasing businesses, net
of tax
    
    $
    (1,676
    )
    
    $
    1,836
    
    
    $
    (1,599
    )
    
    $
    (369
    )
 In the three months ended June 30, 2004, we recorded a $2.8 million
pretax loss on discontinuance of the mortgage business representing an
increase in our estimated future costs of mortgage business-related
contingent liabilities, due primarily to recent litigation with Chase and
disputes related to one of our former mortgage programs. In the three months ended June 30, 2004, we adjusted our estimate of
operating results of the leasing segment over the remaining life of the
lease portfolio and recorded a $3.0 million pretax gain on leasing
discontinuance. The increase in estimated operating results was
principally associated with favorable performance in revenues and an
insurance settlement, partially offset by increased operating expenses
due to a lengthening of the anticipated timeframe over which we expect to
incur certain operating expenses related to the lease portfolio. In the three months ended June 30, 2003, we recorded a $2.6 million
pretax loss on discontinuance of the mortgage business for an increase in
our estimated future costs of mortgage business-related contingent
liabilities, due primarily to a lengthening of the anticipated timeframe
of the resolution for those contingent liabilities, which included an
extension of the discovery process and a delay in the scheduled trial
date in the original litigation with Chase. In the three months ended June 30, 2003, we adjusted our estimate of
operating results of the leasing segment over the remaining life of the
lease portfolio and recorded a $600 thousand pretax loss on leasing
discontinuance. The decrease in estimated operating results of the
leasing segment was primarily associated with an unfavorable sales tax
assessment, partially offset by favorable credit performance on the
leasing portfolio. 23




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##### Table of Contents



Per share data was as follows: Three and Six Months Ended June 30,Advanta
    
    Advanta LeasingMortgage
    
    Services2004
    
    2003
    
    2004
    
    2003Basic gain (loss), net, on discontinuance of mortgage and leasing
businesses, net of tax, per common shareClass A
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    0.07
    
    
    $
    (0.02
    )Class B
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    0.07
    
    
    
    (0.02
    )Combined
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    0.07
    
    
    
    (0.02
    )Diluted gain (loss), net, on discontinuance of mortgage and leasing
businesses, net of tax, per common shareClass A
    
    $
    (0.06
    )
    
    $
    (0.07
    )
    
    $
    0.07
    
    
    $
    (0.02
    )Class B
    
    
    (0.06
    )
    
    
    (0.07
    )
    
    
    0.07
    
    
    
    (0.02
    )Combined
    
    
    (0.06
    )
    
    
    (0.07
    )
    
    
    0.07
    
    
    
    (0.02
    )
 The components of assets of discontinued operations, net, were as follows: June 30,
    
    December 31,2004
    
    2003Lease receivables, net
    
    $
    35,843
    
    
    $
    68,860Other assets
    
    
    1,424
    
    
    
    1,719Liabilities
    
    
    (5,403
    )
    
    
    (7,110
    )Assets of discontinued operations, net
    
    $
    31,864
    
    
    $
    63,469
 We are continuing to service the existing lease portfolio. Based on the
terms of the remaining leases, we expect assets of discontinued operations
to be less than $10 million by June 2005 and the wind down of the lease
portfolio to be complete by January 2007. 24




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##### Table of Contents



Note 13) Calculation of Earnings Per Share The following table shows the calculation of basic earnings per common
share and diluted earnings per common share. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income from continuing operations
    
    $
    10,832
    
    
    $
    6,281
    
    
    $
    20,271
    
    
    $
    12,186Less: Preferred A dividends
    
    
    0
    
    
    
    0
    
    
    
    (141
    )
    
    
    (141
    )Income from continuing operations
available to common stockholders
    
    
    10,832
    
    
    
    6,281
    
    
    
    20,130
    
    
    
    12,045Gain (loss), net, on discontinuance
of mortgage and leasing businesses,
net of tax
    
    
    160
    
    
    
    (1,968
    )
    
    
    160
    
    
    
    (1,968
    )Net income available to common
stockholders
    
    
    10,992
    
    
    
    4,313
    
    
    
    20,290
    
    
    
    10,077Less: Class A dividends declared
    
    
    (856
    )
    
    
    (579
    )
    
    
    (1,407
    )
    
    
    (1,155
    )Less: Class B dividends declared
    
    
    (2,028
    )
    
    
    (1,303
    )
    
    
    (3,371
    )
    
    
    (2,623
    )Undistributed net income
    
    $
    8,108
    
    
    $
    2,431
    
    
    $
    15,512
    
    
    $
    6,299Basic income from continuing
operations per common shareClass A
    
    $
    0.42
    
    
    $
    0.25
    
    
    $
    0.78
    
    
    $
    0.47Class B
    
    
    0.44
    
    
    
    0.27
    
    
    
    0.83
    
    
    
    0.52Combined(1)
    
    
    0.43
    
    
    
    0.26
    
    
    
    0.82
    
    
    
    0.50Diluted income from continuing
operations per common shareClass A
    
    $
    0.39
    
    
    $
    0.24
    
    
    $
    0.73
    
    
    $
    0.46Class B
    
    
    0.40
    
    
    
    0.26
    
    
    
    0.76
    
    
    
    0.51Combined(1)
    
    
    0.40
    
    
    
    0.26
    
    
    
    0.75
    
    
    
    0.49Basic net income per common shareClass A
    
    $
    0.42
    
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    0.39Class B
    
    
    0.45
    
    
    
    0.19
    
    
    
    0.84
    
    
    
    0.44Combined(1)
    
    
    0.44
    
    
    
    0.18
    
    
    
    0.82
    
    
    
    0.42Diluted net income per common shareClass A
    
    $
    0.40
    
    
    $
    0.16
    
    
    $
    0.74
    
    
    $
    0.38Class B
    
    
    0.41
    
    
    
    0.18
    
    
    
    0.76
    
    
    
    0.43Combined(1)
    
    
    0.41
    
    
    
    0.18
    
    
    
    0.76
    
    
    
    0.41Basic
weighted average common shares outstandingClass A
    
    
    8,794
    
    
    
    9,151
    
    
    
    8,790
    
    
    
    9,168Class B
    
    
    16,172
    
    
    
    14,893
    
    
    
    15,891
    
    
    
    14,854Combined
    
    
    24,966
    
    
    
    24,044
    
    
    
    24,681
    
    
    
    24,022Dilutive effect ofOptions Class B
    
    
    1,339
    
    
    
    218
    
    
    
    1,282
    
    
    
    168Restricted stock Class B
    
    
    818
    
    
    
    334
    
    
    
    873
    
    
    
    307Diluted weighted average common
shares outstandingClass A
    
    
    8,794
    
    
    
    9,151
    
    
    
    8,790
    
    
    
    9,168Class B
    
    
    18,329
    
    
    
    15,445
    
    
    
    18,046
    
    
    
    15,329Combined
    
    
    27,123
    
    
    
    24,596
    
    
    
    26,836
    
    
    
    24,497Antidilutive sharesOptions Class B
    
    
    239
    
    
    
    1,663
    
    
    
    244
    
    
    
    2,197Restricted stock Class B
    
    
    0
    
    
    
    113
    
    
    
    0
    
    
    
    127
  (1)
    
    Combined represents income available to common stockholders divided
by the combined total of Class A and Class B weighted
average common shares outstanding. 25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this Form 10-Q, Advanta, we, us, and our refer to Advanta
Corp. and its subsidiaries, unless the context otherwise requires. OVERVIEW Income from continuing operations includes the following business segment
results: Three Months Ended
    
    Six Months Ended($ in thousands)
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Pretax income (loss):Advanta Business Cards
    
    $
    17,998
    
    
    $
    12,647
    
    
    $
    34,663
    
    
    $
    23,624Venture Capital
    
    
    (95
    )
    
    
    (2,434
    )
    
    
    (1,158
    )
    
    
    (3,810
    )Total pretax income
    
    
    17,903
    
    
    
    10,213
    
    
    
    33,505
    
    
    
    19,814Income tax expense
    
    
    (7,071
    )
    
    
    (3,932
    )
    
    
    (13,234
    )
    
    
    (7,628
    )Income from continuing
operations
    
    $
    10,832
    
    
    $
    6,281
    
    
    $
    20,271
    
    
    $
    12,186Per combined common share,
assuming dilution
    
    $
    0.40
    
    
    $
    0.26
    
    
    $
    0.75
    
    
    $
    0.49
 Advanta Business Cards pretax income increased for the three and six
months ended June 30, 2004 as compared to the same periods of 2003 due
primarily to growth in both owned and securitized receivables, a decrease
in cost of funds and net principal charge-off rates and a decrease in
operating expenses as a percentage of owned and securitized receivables,
partially offset by a decline in yields. The decrease in yields reflects
our array of competitively-priced offerings and products, including
promotional pricing and rewards, designed to selectively attract and
retain more high credit quality customers and to respond to the
competitive environment. We anticipate that these types of customers
will have lower credit losses in future periods. Although there may be
month-to-month or quarterly variations, we expect yields on our business
credit cards to decline modestly for the remainder of 2004 as compared to
2003, because we anticipate the continued transition of the portfolio to
higher credit quality customers. Venture Capital pretax loss in the six months ended June 30, 2004
includes $807 thousand of expenses relating to lease commitments and
severance costs associated with the closure of an operational location of
our Venture Capital segment in the first quarter of 2004. Venture
Capital segment results include pretax investment gains of $32 thousand
in the six months ended June 30, 2004 and net pretax investment losses of
$1.2 million in the three months ended June 30, 2003 and $1.9 million in
the six months ended June 30, 2003, which reflect the market conditions
for our venture capital investments in those periods. For the three months ended June 30, 2004, we recorded a net after-tax
gain on the discontinuance of our mortgage and leasing businesses of $160
thousand, or $0.01 per combined diluted common share. For the three
months ended June 30, 2003, we recorded a net after-tax loss on the
discontinuance of our mortgage and leasing businesses of $2.0 million, or
$0.08 per combined diluted common share. See Discontinued Operations
in Managements Discussion and Analysis of Financial Condition and
Results of Operations for further discussion. 26




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. We have identified accounting for allowance for receivable
losses, securitization transactions, business credit card rewards
programs, litigation contingencies, income taxes, and discontinued
operations as our most critical accounting policies and estimates because
they require managements most difficult, subjective or complex judgments
as a result of the need to make estimates about the effect of matters
that are inherently uncertain. Estimates are inherently subjective and
are susceptible to significant revision as more information becomes
available. Changes in such estimates could have a material impact on our
financial condition or results of operations. These accounting policies
are described in our Annual Report on Form 10-K for the year ended
December 31, 2003. ADVANTA BUSINESS CARDS Advanta Business Cards originates new accounts directly and through the
use of third parties. The following table provides key statistical
information on our business credit card portfolio for the three and six
months ended June 30. Credit quality statistics for the business credit
card portfolio are included in the Provision and Allowance for
Receivable Losses section of this Managements Discussion and Analysis
of Financial Condition and Results of Operations. Three Months Ended
    
    Six Months Ended($ in thousands)
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Average owned receivables
    
    $
    583,581
    
    
    $
    506,200
    
    
    $
    567,617
    
    
    $
    510,800Average securitized receivables
    
    $
    2,532,885
    
    
    $
    2,290,671
    
    
    $
    2,524,208
    
    
    $
    2,231,572Cardholder transaction volume
    
    $
    1,994,647
    
    
    $
    1,677,804
    
    
    $
    3,916,580
    
    
    $
    3,280,302New account originations
    
    
    26,187
    
    
    
    36,162
    
    
    
    65,322
    
    
    
    90,093Average
number of active accounts(1)
    
    
    585,519
    
    
    
    585,780
    
    
    
    588,063
    
    
    
    582,542Ending number of accounts at June 30
    
    
    780,415
    
    
    
    788,470
    
    
    
    780,415
    
    
    
    788,470
  (1)
    
    Active accounts are defined as accounts with a balance at
month-end. Active account statistics do not include charged-off
accounts. The statistic reported above is the average number of
active accounts for the three and six months ended June 30. In the second quarter of 2003, we enhanced our targeting and decision
models used in identifying prospective customers. We have also expanded
our activities to identify and establish strategic relationships with
organizations focused on certain business owners, executives and small
businesses. We expect that our targeted approach will result in
acquiring more engaged customers, but may result in somewhat lower
account growth rates. We also plan to strengthen and deepen our
relationships with our existing customers by providing value based on
factors other than pricing in order to build lasting, profitable
relationships. The decrease in new account originations in the three and
six months ended June 30, 2004 as compared to the same period of 2003 is
due primarily to refinements that increased the selectivity of our
customer acquisition targeting. We expect the volume of new account
originations in the second half of 2004 to be higher than the volume of
new 27




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##### Table of Contents



account originations in the first half of 2004 and comparable to the
volume in the second half of 2003, based on the number and timing of
planned marketing campaigns. We estimate that managed receivables growth
for the year ended December 31, 2004 will be approximately 10%. We also
anticipate increasing the percentage of receivables that are held
on-balance sheet to between 20% and 25% of managed receivables in the
second half of 2004, as compared to 18% in the six months ended June 30,
2004 in order to further diversify our sources of funding. The following
is a reconciliation of projected estimated owned business credit card
receivable growth to managed business credit card receivable growth: ProjectedActual at
    
    Estimate atDecember 31,
    
    December 31,
    
    Percentage($ in thousands)
    
    2003
    
    2004
    
    IncreaseOwned receivables
    
    $
    518,040
    
    
    $
    738,000
    
    
    
    42.5
    %Securitized
receivables
    
    
    2,463,747
    
    
    
    2,542,000
    
    
    
    3.2
    %Managed receivables
    
    $
    2,981,787
    
    
    $
    3,280,000
    
    
    
    10.0
    %
 The components of pretax income for Advanta Business Cards are as
follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net interest income on owned
interest-earning assets
    
    $
    15,145
    
    
    $
    11,738
    
    
    $
    27,871
    
    
    $
    21,758Noninterest revenues
    
    
    73,115
    
    
    
    66,283
    
    
    
    143,377
    
    
    
    131,232Provision for credit losses
    
    
    (10,654
    )
    
    
    (9,555
    )
    
    
    (20,067
    )
    
    
    (18,963
    )Operating expenses
    
    
    (59,608
    )
    
    
    (55,819
    )
    
    
    (116,518
    )
    
    
    (110,403
    )Pretax income
    
    $
    17,998
    
    
    $
    12,647
    
    
    $
    34,663
    
    
    $
    23,624
 Net interest income on owned interest-earning assets increased by $3.4
million for the three months ended June 30, 2004 as compared to the same
period of 2003 and increased by $6.1 million for the six months ended
June 30, 2004 as compared to the same period in 2003. The increases were
due primarily to decreases in our cost of funds and increases in average
owned business credit card receivables of $77.4 million for the three
months ended June 30, 2004 and $56.8 for the six months ended June 30,
2004, partially offset by decreases in the average yields earned on our
business credit card receivables. The decrease in yields is a result of
our competitively-priced offerings and products. Average owned business
credit card receivables increased in the three and six months ended June
30, 2004 as compared to the same period of 2003 due to growth and the
level of securitization activity. Noninterest revenues include securitization income, interchange income,
business credit card rewards costs and other fee revenues. The increases
in noninterest revenues in the three and six months ended June 30, 2004
as compared to the same period of 2003 are due primarily to higher
transaction volume that yielded higher interchange income and the
increased volume of securitized business credit card receivables that
produced higher servicing fees and securitization income. Noninterest
revenues also include the impact of changes in estimated costs of future
reward redemptions in all periods. See further discussion in the Other
Revenues section of this Managements Discussion and Analysis of
Financial Condition and Results of Operations. The increases in provision for credit losses in the three and six months
ended June 30, 2004 as compared to the same periods of 2003 primarily
reflect the increases in average owned business credit card receivables,
partially offset by a reduction in the estimate of losses inherent in the
portfolio based on the delinquency and 28




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##### Table of Contents



principal charge-off trends and the current composition of the portfolio
as compared to the same periods of 2003. The increases in operating expenses in the three and six months ended
June 30, 2004 as compared to the same periods of 2003 were due primarily
to an increase in salaries and employee benefits expense including higher
incentive compensation expense resulting from improved earnings and
collections performance, and personnel hired in connection with
initiatives to originate and retain relationships with high credit
quality customers. In addition, salaries and
employee benefits expenses in the six months ended June 30, 2004 include executive compensation expense
incurred related to changes in senior management. Marketing expenses
also increased in the three and six months ended June 30, 2004 as
compared to the same periods of 2003 due primarily to costs incurred
related to our development of alliances with other organizations serving
segments of the small business market and amortization expense on
marketing rights related to certain of these alliances, as well as
increased marketing activity in response to the competitive environment.
Operating expenses reflect decreases in the amortization of deferred
origination costs, due to the number and timing of new account
originations in prior periods. VENTURE CAPITAL The components of pretax loss for our Venture Capital segment are as
follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net interest expense
    
    $
    (86
    )
    
    $
    (134
    )
    
    $
    (174
    )
    
    $
    (274
    )Realized gains
    
    
    0
    
    
    
    197
    
    
    
    0
    
    
    
    197Unrealized gains (losses), net
    
    
    0
    
    
    
    (1,439
    )
    
    
    32
    
    
    
    (2,049
    )Operating expenses
    
    
    (9
    )
    
    
    (1,058
    )
    
    
    (1,016
    )
    
    
    (1,684
    )Pretax loss
    
    $
    (95
    )
    
    $
    (2,434
    )
    
    $
    (1,158
    )
    
    $
    (3,810
    )
 The estimated fair value of our venture capital investments was $9.5
million as of June 30, 2004 and December 31, 2003. Unrealized gains
(losses) on our venture capital investments reflect the market conditions
for those investments in each respective period. In recent years, we have limited our new venture capital investment
activity and we presently do not expect to make significant additional
investments. Operating expenses for the six months ended June 30, 2004
include expenses associated with the closure of an operational location
of our Venture Capital segment in the first quarter of 2004, consisting
of $571 thousand of expense relating to lease commitments and $236
thousand of severance costs. Due to the closure of the operational
location, we expect to incur minimal operating expenses in the Venture
Capital segment in future periods. Operating expenses for the three and
six months ended June 30, 2003 include approximately $410 thousand of
lease termination costs paid in June 2003. INTEREST INCOME AND EXPENSE Interest income decreased $216 thousand to $25.2 million for the three
months ended June 30, 2004 as compared to the same period of 2003 and
increased $204 thousand to $48.6 million for the six months ended June
30, 2004 as compared to the same period of 2003. Interest income was
impacted by decreases in average balances of investments and the average
yields earned on our investments. Average investments decreased $223
million in the three months ended June 30, 2004 and decreased $150 29




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##### Table of Contents



million in the six months ended June 30, 2004 as compared to the same
periods of 2003. Interest income was also impacted by decreases in the
average yield earned on our business credit card receivables as a result
of our competitively-priced offerings and products. The impact of lower
yields on business credit card receivables was more than offset by
increases in average business credit card receivables of $77.4 million to
$584 million in the three months ended June 30, 2004 and $56.8 million to
$568 million in the six months ended June 30, 2004 as compared to the
same periods of 2003. Interest income was also impacted by an increase in
average balances and the average yield on retained interests in
securitizations in the six months ended June 30, 2004. The increase in
average balances of retained interests in securitizations is due to
additional securitizations completed since June 30, 2003. The increase
in average yield on retained interests in securitization to 11.84% for
the six months ended June 30, 2004 as compared to 10.91% for the same
period of 2003 is due primarily to the composition of retained interests
in the respective periods. Retained interests in securitizations in the
six months ended June 30, 2003 included an investment-grade subordinated
trust asset with a lower effective yield than our other retained
interests in securitizations. Interest expense includes $2.3 million for the three months ended June
30, 2004 and $4.6 million for the six months ended June 30, 2004 of
interest expense on subordinated debt payable to preferred securities
trust. Our adoption of FIN 46, as revised, resulted in the
deconsolidation of the subsidiary trust that issued our trust preferred
securities effective December 31, 2003. As a result of the
deconsolidation of that trust, the consolidated income statement includes
interest expense on subordinated debt payable to preferred securities
trust beginning January 1, 2004, as compared to periods through December
31, 2003 that included payments on the trust preferred securities
classified as minority interest in income of consolidated subsidiary. Interest expense decreased $2.3 million to $10.8 million for the three
months ended June 30, 2004 and decreased $2.0 million to $22.4 million
for the six months ended June 30, 2004 as compared to the same periods of
2003. The decrease in interest expense is due primarily to decreases in
our average deposits and debt and decreases in our average cost of funds,
partially offset by the $2.3 million for the three months ended June 30,
2004 and $4.6 million for the six months ended June 30, 2004 of interest
expense on subordinated debt payable to preferred securities trust
described above. Average balances of deposits and debt outstanding
decreased $469 million in the three months ended June 30, 2004 and $313
million in the six months ended June 30, 2004 as compared to the same
periods of 2003. Average debt and deposits in the three and six months
ended June 30, 2003 reflected the funding of higher levels of on-balance
sheet assets as a result of principal collections of receivables
allocated to the Series 2000-B securitization during its amortization
period in 2003. The decrease in our average cost of funding debt and
deposits was due to the prevailing interest rate environment and our
ability to lower interest rates offered on senior debt resulting from our
liquidity position. The following tables provide an analysis of interest income and expense
data, average balance sheet data, net interest spread and net interest
margin for both continuing and discontinued operations. The net interest
spread represents the difference between the yield on interest-earning
assets and the average rate paid on interest-bearing liabilities. The
net interest margin represents the difference between the yield on
interest-earning assets and the average rate paid to fund
interest-earning assets. Interest income includes late fees on business
credit card receivables. 30




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INTEREST RATE ANALYSIS AND AVERAGE BALANCES Three Months Ended June 30,2004
    
    2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateOwned receivables:Business credit
cards(1)
    
    $
    583,581
    
    
    $
    19,459
    
    
    
    13.41
    %
    
    $
    506,200
    
    
    $
    18,634
    
    
    
    14.76
    %Other receivables
    
    
    11,073
    
    
    
    124
    
    
    
    4.51
    
    
    
    23,448
    
    
    
    281
    
    
    
    4.81Total owned receivables
    
    
    594,654
    
    
    
    19,583
    
    
    
    13.25
    
    
    
    529,648
    
    
    
    18,915
    
    
    
    14.32Investments(2)
    
    
    438,478
    
    
    
    1,378
    
    
    
    1.25
    
    
    
    660,999
    
    
    
    2,170
    
    
    
    1.31Retained interests in
securitizations
    
    
    149,998
    
    
    
    4,276
    
    
    
    11.40
    
    
    
    157,801
    
    
    
    4,373
    
    
    
    11.08Interest-earning assets of
discontinued operations
    
    
    45,629
    
    
    
    1,142
    
    
    
    10.01
    
    
    
    39,043
    
    
    
    1,412
    
    
    
    14.47Total interest-earning
assets(3)
    
    
    1,228,759
    
    
    $
    26,379
    
    
    
    8.62
    %
    
    
    1,387,491
    
    
    $
    26,870
    
    
    
    7.76
    %Noninterest-earning assets
    
    
    280,109
    
    
    
    
    
    
    
    
    
    
    
    739,807Total assets
    
    $
    1,508,868
    
    
    
    
    
    
    
    
    
    
    $
    2,127,298Deposits
    
    $
    639,793
    
    
    $
    4,526
    
    
    
    2.85
    %
    
    $
    1,076,572
    
    
    $
    7,836
    
    
    
    2.92
    %Debt
    
    
    286,473
    
    
    
    4,389
    
    
    
    6.16
    
    
    
    318,368
    
    
    
    5,059
    
    
    
    6.37Subordinated debt payable
to preferred securities
trust
    
    
    103,093
    
    
    
    2,290
    
    
    
    8.88
    
    
    
    0
    
    
    
    0
    
    
    
    0.00Other borrowings
    
    
    324
    
    
    
    1
    
    
    
    1.30
    
    
    
    55
    
    
    
    0
    
    
    
    1.62Total interest-bearing
liabilities(4)
    
    
    1,029,683
    
    
    $
    11,206
    
    
    
    4.37
    %
    
    
    1,394,995
    
    
    $
    12,895
    
    
    
    3.71
    %Noninterest-bearing
liabilities
    
    
    118,143
    
    
    
    
    
    
    
    
    
    
    
    306,032Total liabilities
    
    
    1,147,826
    
    
    
    
    
    
    
    
    
    
    
    1,701,027Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely subordinated
debentures of Advanta
Corp. (trust preferred
securities)
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    100,000Stockholders equity
    
    
    361,042
    
    
    
    
    
    
    
    
    
    
    
    326,271Total liabilities and
stockholders equity
    
    $
    1,508,868
    
    
    
    
    
    
    
    
    
    
    $
    2,127,298Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.25
    %
    
    
    
    
    
    
    
    
    
    
    4.05
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.97
    %
    
    
    
    
    
    
    
    
    
    
    4.04
    %
   (1)
    
    Interest income includes late fees for owned business credit cards
receivables of $1.4 million for the three months ended June 30, 2004
and $1.5 million for the three months ended June 30, 2003.(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.(4)
    
    Includes funding of assets for both continuing and discontinued
operations. 31




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateOwned receivables:Business credit
cards(1)
    
    $
    567,617
    
    
    $
    36,706
    
    
    
    13.00
    %
    
    $
    510,800
    
    
    $
    35,796
    
    
    
    14.13
    %Other receivables
    
    
    12,481
    
    
    
    270
    
    
    
    4.36
    
    
    
    24,150
    
    
    
    592
    
    
    
    4.94Total owned receivables
    
    
    580,098
    
    
    
    36,976
    
    
    
    12.82
    
    
    
    534,950
    
    
    
    36,388
    
    
    
    13.72Investments(2)
    
    
    468,020
    
    
    
    2,797
    
    
    
    1.19
    
    
    
    618,286
    
    
    
    4,102
    
    
    
    1.33Retained interests in
securitizations
    
    
    149,998
    
    
    
    8,878
    
    
    
    11.84
    
    
    
    145,969
    
    
    
    7,965
    
    
    
    10.91Interest-earning assets of
discontinued operations
    
    
    54,338
    
    
    
    2,668
    
    
    
    9.82
    
    
    
    40,407
    
    
    
    2,689
    
    
    
    13.31Total interest-earning
assets(3)
    
    
    1,252,454
    
    
    $
    51,319
    
    
    
    8.22
    %
    
    
    1,339,612
    
    
    $
    51,144
    
    
    
    7.68
    %Noninterest-earning assets
    
    
    314,715
    
    
    
    
    
    
    
    
    
    
    
    631,373Total assets
    
    $
    1,567,169
    
    
    
    
    
    
    
    
    
    
    $
    1,970,985Deposits
    
    $
    653,032
    
    
    $
    9,208
    
    
    
    2.84
    %
    
    $
    942,634
    
    
    $
    14,444
    
    
    
    3.09
    %Debt
    
    
    295,161
    
    
    
    9,021
    
    
    
    6.15
    
    
    
    318,322
    
    
    
    10,124
    
    
    
    6.41Subordinated debt payable
to preferred securities
trust
    
    
    103,093
    
    
    
    4,579
    
    
    
    8.88
    
    
    
    0
    
    
    
    0
    
    
    
    0.00Other borrowings
    
    
    162
    
    
    
    1
    
    
    
    1.30
    
    
    
    139
    
    
    
    1
    
    
    
    1.67Total interest-bearing
liabilities(4)
    
    
    1,051,448
    
    
    $
    22,809
    
    
    
    4.36
    %
    
    
    1,261,095
    
    
    $
    24,569
    
    
    
    3.93
    %Noninterest-bearing
liabilities
    
    
    161,544
    
    
    
    
    
    
    
    
    
    
    
    285,793Total liabilities
    
    
    1,212,992
    
    
    
    
    
    
    
    
    
    
    
    1,546,888Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely subordinated
debentures of Advanta
Corp. (trust preferred
securities)
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    100,000Stockholders equity
    
    
    354,177
    
    
    
    
    
    
    
    
    
    
    
    324,097Total liabilities and
stockholders equity
    
    $
    1,567,169
    
    
    
    
    
    
    
    
    
    
    $
    1,970,985Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.86
    %
    
    
    
    
    
    
    
    
    
    
    3.75
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.58
    %
    
    
    
    
    
    
    
    
    
    
    4.00
    %
   (1)
    
    Interest income includes late fees for owned business credit cards
receivables of $2.8 million for the six months ended June 30, 2004
and $3.0 million for the six months ended June 30, 2003.(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.(4)
    
    Includes funding of assets for both continuing and discontinued
operations. 32




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##### Table of Contents



PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES For the three months ended June 30, 2004, provision for credit losses on
a consolidated basis was $10.5 million as compared to $9.3 million for
the same period of 2003. For the six months ended June 30, 2004,
provision for credit losses on a consolidated basis was $20.0 million as
compared to $18.7 million for the same period of 2003. Average owned
business credit card receivables increased by $77.4 million in the three
months ended June 30, 2004 and $56.8 million in the six months ended June
30, 2004 as compared to the same periods of 2003. The impact of the
increases in average owned business credit card receivables on provision
for credit losses in both periods was partially offset by a reduction in
the estimate of losses inherent in the portfolio based on delinquency and
principal charge-off trends and the current composition of the portfolio
that included more high credit quality customers as compared to the same
period of 2003. In addition, we have refined and enhanced our procedures
and tools used in the risk management of existing customers, which has
helped to reduce credit risk in the portfolio. For the three months ended June 30, 2004, the provision for interest and
fee losses, which is recorded as a direct reduction to interest and fee
income, decreased by $39 thousand to $2.4 million as compared to the same
period of 2003. For the six months ended June 30, 2004, the provision
for interest and fee losses decreased by $474 thousand to $4.5 million as
compared to the same period of 2003. The decrease was due to a reduction
in the estimate of losses inherent in the portfolio based on improved
delinquency and charge-off trends and the current composition of the
portfolio as compared to the same periods of 2003, partially offset by
growth in average owned business credit card receivables. The allowance for receivable losses on business credit card receivables
was $48.0 million as of June 30, 2004, or 8.73% of owned receivables,
which was lower as a percentage of owned receivables than the allowance
of $47.0 million, or 9.08% of owned receivables, as of December 31, 2003.
The decrease in allowance as a percentage of receivables is due to a
reduction in the estimate of losses inherent in the portfolio based on
delinquency and principal charge-off trends and the current composition
of the portfolio that included more high credit quality customers as
compared to the same period of 2003. Although charge-off levels are not always predictable since they are
impacted by the economic environment and other factors beyond our
control, and there may be month-to-month or quarterly variations in
losses or delinquencies, we anticipate that the owned and managed net
principal charge-off rates for the second half of 2004 will be lower than
those experienced for the same period of 2003 and lower than those experienced for the first half of 2004. This
expectation is based upon the level of receivables 90 days or more
delinquent at June 30, 2004 and the current composition of the portfolio
that reflects our strategic initiative to selectively attract and retain
more high credit quality customers. The following table provides credit quality data as of and for the
year-to-date periods indicated for our owned receivable portfolio
including a summary of allowances for receivable losses, delinquencies,
nonaccrual receivables, accruing receivables past due 90 days or more,
and net principal charge-offs. Consolidated data includes business
credit cards and other receivables. 33




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##### Table of Contents



June 30,
    
    December 31,
    
    June 30,($ in thousands)
    
    2004
    
    2003
    
    2003CONSOLIDATED  OWNEDAllowance for receivable losses
    
    $
    49,331
    
    
    $
    48,454
    
    
    $
    47,326Receivables 30 days or more delinquent
    
    
    25,605
    
    
    
    25,413
    
    
    
    27,228Receivables 90 days or more delinquent
    
    
    13,421
    
    
    
    12,808
    
    
    
    13,953Nonaccrual receivables
    
    
    10,193
    
    
    
    7,978
    
    
    
    7,860Accruing receivables past due 90 days or more
    
    
    11,677
    
    
    
    11,320
    
    
    
    11,741As a percentage of gross receivables:Allowance for receivable losses
    
    
    8.80
    %
    
    
    9.06
    %
    
    
    10.15
    %Receivables 30 days or more delinquent
    
    
    4.57
    
    
    
    4.75
    
    
    
    5.84Receivables 90 days or more delinquent
    
    
    2.39
    
    
    
    2.39
    
    
    
    2.99Nonaccrual receivables
    
    
    1.82
    
    
    
    1.49
    
    
    
    1.69Accruing receivables past due 90 days or more
    
    
    2.08
    
    
    
    2.12
    
    
    
    2.52Net principal charge-offs for the year-to-date
period ended June 30 and December 31
    
    $
    18,766
    
    
    $
    43,704
    
    
    $
    17,991Net principal charge-offs for the three months
ended June 30 and December 31
    
    
    9,857
    
    
    
    10,169
    
    
    
    9,563As a percentage of average gross receivables
(annualized):Net principal charge-offs for the year-to-date
period ended June 30 and December 31
    
    
    6.47
    %
    
    
    7.18
    %
    
    
    6.73
    %Net principal charge-offs for the three months
ended June 30 and December 31
    
    
    6.63
    
    
    
    6.66
    
    
    
    7.22BUSINESS CREDIT CARDS  OWNEDAllowance for receivable losses
    
    $
    47,981
    
    
    $
    47,041
    
    
    $
    45,914Receivables 30 days or more delinquent
    
    
    25,493
    
    
    
    25,301
    
    
    
    25,839Receivables 90 days or more delinquent
    
    
    13,309
    
    
    
    12,696
    
    
    
    13,184Nonaccrual receivables
    
    
    10,081
    
    
    
    7,866
    
    
    
    7,091Accruing receivables past due 90 days or more
    
    
    11,677
    
    
    
    11,320
    
    
    
    11,741As a percentage of gross receivables:Allowance for receivable losses
    
    
    8.73
    %
    
    
    9.08
    %
    
    
    10.37
    %Receivables 30 days or more delinquent
    
    
    4.64
    
    
    
    4.88
    
    
    
    5.84Receivables 90 days or more delinquent
    
    
    2.42
    
    
    
    2.45
    
    
    
    2.98Nonaccrual receivables
    
    
    1.83
    
    
    
    1.52
    
    
    
    1.60Accruing receivables past due 90 days or more
    
    
    2.12
    
    
    
    2.19
    
    
    
    2.65Net principal charge-offs for the year-to-date
period ended June 30 and December 31
    
    $
    18,767
    
    
    $
    43,670
    
    
    $
    17,963Net principal charge-offs for the three months
ended June 30 and December 31
    
    
    9,854
    
    
    
    10,163
    
    
    
    9,555As a percentage of average gross receivables
(annualized):Net principal charge-offs for the year-to-date
period ended June 30 and December 31
    
    
    6.61
    %
    
    
    7.42
    %
    
    
    7.03
    %Net principal charge-offs for the three months
ended June 30 and December 31
    
    
    6.75
    
    
    
    6.84
    
    
    
    7.55
 SECURITIZATION INCOME Advanta Business Cards recognized securitization income as follows: ($ in thousands)
    
    2004
    
    2003Three months ended June 30
    
    $
    32,627
    
    
    $
    31,752Six months ended June 30
    
    
    65,167
    
    
    
    61,362
 Securitization income for the three and six months ended June 30, 2004
increased as compared to the same periods of 2003, due to the positive
impacts from increased volume of securitized receivables and a decrease
in the net principal charge-off rate on securitized receivables,
partially offset by a decrease in yield on securitized receivables.
These fluctuations in yields and rates are similar to those experienced
in owned business credit card receivables as discussed in the 34




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##### Table of Contents



Interest Income and Expense and Provision and Allowance for Receivable
Losses sections of this Managements Discussion and Analysis of
Financial Condition and Results of Operations. Managed Receivable Data In addition to evaluating the financial performance of the Advanta
Business Cards segment under generally accepted accounting principles
(GAAP), we evaluate Advanta Business Cards performance on a managed
basis. Our managed business credit card receivable portfolio is
comprised of both owned and securitized business credit card receivables.
We sell business credit card receivables through securitizations
accounted for as sales under GAAP. We continue to own and service the
accounts that generate the securitized receivables. Managed data
presents performance as if the securitized receivables had not been sold.
We believe that performance on a managed basis provides useful
supplemental information because we retain interests in the securitized
receivables and, therefore, we have a financial interest in and exposure
to the performance of the securitized receivables. Revenue and credit
data on the managed portfolio provides additional information useful in
understanding the performance of the retained interests in
securitizations. The following tables provide managed data for Advanta
Business Cards and a reconciliation of the managed data to the most
directly comparable GAAP financial measures: INCOME STATEMENT MEASURES AND STATISTICS AdvantaAdvanta
    
    
    
    
    
    
    
    
    
    BusinessBusiness
    
    GAAP
    
    Securitization
    
    Cards
    
    Managed($ in thousands)
    
    Cards GAAP
    
    Ratio(3)
    
    Adjustments
    
    Managed
    
    Ratio(3)Three Months Ended June 30, 2004:Interest income
    
    $
    23,735
    
    
    
    12.94
    %
    
    $
    92,046
    
    
    $
    115,781
    
    
    
    14.86
    %Interest expense
    
    
    8,590
    
    
    
    4.68
    
    
    
    11,373
    
    
    
    19,963
    
    
    
    2.56Net interest income
    
    
    15,145
    
    
    
    8.26
    
    
    
    80,673
    
    
    
    95,818
    
    
    
    12.30Noninterest revenues
    
    
    73,115
    
    
    
    39.87
    
    
    
    (36,033
    )
    
    
    37,082
    
    
    
    4.76Provision for credit losses
    
    
    10,654
    
    
    
    5.81
    
    
    
    44,640
    (2)
    
    
    55,294
    
    
    
    7.10Risk-adjusted revenues(1)
    
    
    77,606
    
    
    
    42.32
    
    
    
    0
    
    
    
    77,606
    
    
    
    9.96Average business credit
card interest-earning
assets
    
    
    733,579
    
    
    
    
    
    
    
    2,382,887
    
    
    
    3,116,466Average business credit
card receivables
    
    
    583,581
    
    
    
    
    
    
    
    2,532,885
    
    
    
    3,116,466Net principal charge-offs
    
    
    9,854
    
    
    
    6.75
    
    
    
    44,640
    
    
    
    54,494
    
    
    
    6.99Three Months Ended June 30, 2003:Interest income
    
    $
    23,007
    
    
    
    13.86
    %
    
    $
    89,819
    
    
    $
    112,826
    
    
    
    16.14
    %Interest expense
    
    
    11,269
    
    
    
    6.79
    
    
    
    9,684
    
    
    
    20,953
    
    
    
    3.00Net interest income
    
    
    11,738
    
    
    
    7.07
    
    
    
    80,135
    
    
    
    91,873
    
    
    
    13.14Noninterest revenues
    
    
    66,283
    
    
    
    39.93
    
    
    
    (33,550
    )
    
    
    32,733
    
    
    
    4.68Provision for credit losses
    
    
    9,555
    
    
    
    5.76
    
    
    
    46,585
    (2)
    
    
    56,140
    
    
    
    8.03Risk-adjusted revenues(1)
    
    
    68,466
    
    
    
    41.24
    
    
    
    0
    
    
    
    68,466
    
    
    
    9.79Average business credit
card interest-earning
assets
    
    
    664,001
    
    
    
    
    
    
    
    2,132,870
    
    
    
    2,796,871Average business credit
card receivables
    
    
    506,200
    
    
    
    
    
    
    
    2,290,671
    
    
    
    2,796,871Net principal charge-offs
    
    
    9,555
    
    
    
    7.55
    
    
    
    46,585
    
    
    
    56,140
    
    
    
    8.03
 35




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##### Table of Contents



INCOME STATEMENT MEASURES AND STATISTICS AdvantaAdvanta
    
    
    
    
    
    
    
    
    
    BusinessBusiness
    
    GAAP
    
    Securitization
    
    Cards
    
    Managed($ in thousands)
    
    Cards GAAP
    
    Ratio(3)
    
    Adjustments
    
    Managed
    
    Ratio(3)Six
Months Ended June 30, 2004:Interest income
    
    $
    45,584
    
    
    
    12.70
    %
    
    $
    185,153
    
    
    $
    230,737
    
    
    
    14.93
    %Interest expense
    
    
    17,713
    
    
    
    4.93
    
    
    
    22,707
    
    
    
    40,420
    
    
    
    2.62Net interest income
    
    
    27,871
    
    
    
    7.77
    
    
    
    162,446
    
    
    
    190,317
    
    
    
    12.31Noninterest revenues
    
    
    143,377
    
    
    
    39.96
    
    
    
    (71,619
    )
    
    
    71,758
    
    
    
    4.64Provision for credit losses
    
    
    20,067
    
    
    
    5.60
    
    
    
    90,827
    (2)
    
    
    110,894
    
    
    
    7.17Risk-adjusted revenues(1)
    
    
    151,181
    
    
    
    42.13
    
    
    
    0
    
    
    
    151,181
    
    
    
    9.78Average business credit
card interest-earning
assets
    
    
    717,615
    
    
    
    
    
    
    
    2,374,210
    
    
    
    3,091,825Average business credit
card receivables
    
    
    567,617
    
    
    
    
    
    
    
    2,524,208
    
    
    
    3,091,825Net principal charge-offs
    
    
    18,767
    
    
    
    6.61
    
    
    
    90,827
    
    
    
    109,594
    
    
    
    7.09Six Months Ended June 30, 2003:Interest income
    
    $
    43,761
    
    
    
    13.33
    %
    
    $
    176,914
    
    
    $
    220,675
    
    
    
    16.09
    %Interest expense
    
    
    22,003
    
    
    
    6.70
    
    
    
    19,205
    
    
    
    41,208
    
    
    
    3.00Net interest income
    
    
    21,758
    
    
    
    6.63
    
    
    
    157,709
    
    
    
    179,467
    
    
    
    13.09Noninterest revenues
    
    
    131,232
    
    
    
    39.96
    
    
    
    (65,649
    )
    
    
    65,583
    
    
    
    4.78Provision for credit losses
    
    
    18,963
    
    
    
    5.78
    
    
    
    92,060
    (2)
    
    
    111,023
    
    
    
    8.10Risk-adjusted revenues(1)
    
    
    134,027
    
    
    
    40.81
    
    
    
    0
    
    
    
    134,027
    
    
    
    9.77Average business credit
card interest-earning
assets
    
    
    656,769
    
    
    
    
    
    
    
    2,085,603
    
    
    
    2,742,372Average business credit
card receivables
    
    
    510,800
    
    
    
    
    
    
    
    2,231,572
    
    
    
    2,742,372Net principal charge-offs
    
    
    17,963
    
    
    
    7.03
    
    
    
    92,060
    
    
    
    110,023
    
    
    
    8.02
  (1)
    
    Risk-adjusted revenues represent net interest income and
noninterest revenues, less provision for credit losses.(2)
    
    Includes the amount by which the credit losses would have been
higher had the securitized receivables remained as owned and the
provision for credit losses on securitized receivables been equal to
actual reported charge-offs.(3)
    
    Ratios are as a percentage of average business credit card
interest-earning assets except net principal charge-off ratios,
which are as a percentage of average business credit card
receivables. 36




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##### Table of Contents



BALANCE SHEET MEASURES AND STATISTICS Advanta
    
    
    
    
    
    
    
    
    
    AdvantaBusiness
    
    GAAP
    
    Securitization
    
    Business
    
    Managed($ in thousands)
    
    Cards GAAP
    
    Ratio(1)
    
    Adjustments
    
    Cards Managed
    
    Ratio(1)As of June 30, 2004Number of business
credit card accounts
    
    
    780,415
    
    
    
    
    
    
    
    N/A
    
    
    
    780,415Ending business credit
card receivables
    
    $
    549,862
    
    
    
    
    
    
    $
    2,546,777
    
    
    $
    3,096,639Receivables 30 days or
more delinquent
    
    
    25,493
    
    
    
    4.64
    %
    
    
    123,123
    
    
    
    148,616
    
    
    
    4.80
    %Receivables 90 days or
more delinquent
    
    
    13,309
    
    
    
    2.42
    
    
    
    63,980
    
    
    
    77,289
    
    
    
    2.50Nonaccrual receivables
    
    
    10,081
    
    
    
    1.83
    
    
    
    48,966
    
    
    
    59,047
    
    
    
    1.91Accruing receivables past
due 90 days or more
    
    
    11,677
    
    
    
    2.12
    
    
    
    56,111
    
    
    
    67,788
    
    
    
    2.19As of December 31, 2003Number of business
credit card accounts
    
    
    786,700
    
    
    
    
    
    
    
    N/A
    
    
    
    786,700Ending business credit
card receivables
    
    $
    518,040
    
    
    
    
    
    
    $
    2,463,747
    
    
    $
    2,981,787Receivables 30 days or
more delinquent
    
    
    25,301
    
    
    
    4.88
    %
    
    
    148,177
    
    
    
    173,478
    
    
    
    5.82
    %Receivables 90 days or
more delinquent
    
    
    12,696
    
    
    
    2.45
    
    
    
    74,762
    
    
    
    87,458
    
    
    
    2.93Nonaccrual receivables
    
    
    7,866
    
    
    
    1.52
    
    
    
    47,381
    
    
    
    55,247
    
    
    
    1.85Accruing receivables past
due 90 days or more
    
    
    11,320
    
    
    
    2.19
    
    
    
    66,376
    
    
    
    77,696
    
    
    
    2.61As of June 30, 2003Number of business
credit card accounts
    
    
    788,470
    
    
    
    
    
    
    
    N/A
    
    
    
    788,470Ending business credit
card receivables
    
    $
    442,769
    
    
    
    
    
    
    $
    2,365,176
    
    
    $
    2,807,945Receivables 30 days or
more delinquent
    
    
    25,839
    
    
    
    5.84
    %
    
    
    150,380
    
    
    
    176,219
    
    
    
    6.28
    %Receivables 90 days or
more delinquent
    
    
    13,184
    
    
    
    2.98
    
    
    
    76,459
    
    
    
    89,643
    
    
    
    3.19Nonaccrual receivables
    
    
    7,091
    
    
    
    1.60
    
    
    
    42,162
    
    
    
    49,253
    
    
    
    1.75Accruing receivables past
due 90 days or more
    
    
    11,741
    
    
    
    2.65
    
    
    
    67,804
    
    
    
    79,545
    
    
    
    2.83
  (1)
    
    Ratios are as a percentage of ending business credit card
receivables. 37




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##### Table of Contents



SERVICING REVENUES Advanta Business Cards recognized servicing revenue as follows: ($ in thousands)
    
    2004
    
    2003Three months ended June 30
    
    $
    12,499
    
    
    $
    9,873Six months ended June 30
    
    
    24,632
    
    
    
    19,900
 The increase in servicing revenue in both the three and six months ended
June 30, 2004 as compared to the same periods of 2003 was due to
increased volume of securitized business credit card receivables. OTHER REVENUES Three Months Ended
    
    Six Months Ended($ in thousands)
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interchange income
    
    $
    35,513
    
    
    $
    29,289
    
    
    $
    67,088
    
    
    $
    55,427Business credit cards cash back rewards
    
    
    (5,933
    )
    
    
    (4,349
    )
    
    
    (11,684
    )
    
    
    (6,775
    )Business credit cards business rewards
    
    
    (4,295
    )
    
    
    (3,185
    )
    
    
    (7,765
    )
    
    
    (4,891
    )Balance transfer fees
    
    
    962
    
    
    
    865
    
    
    
    2,389
    
    
    
    2,216Cash usage fees
    
    
    805
    
    
    
    616
    
    
    
    1,568
    
    
    
    1,371Other fee revenues
    
    
    1,182
    
    
    
    1,644
    
    
    
    2,471
    
    
    
    3,047Earnings allocable to partnership interest
    
    
    400
    
    
    
    500
    
    
    
    1,000
    
    
    
    1,000Investment securities gains (losses), net
    
    
    0
    
    
    
    (1,158
    )
    
    
    49
    
    
    
    (1,766
    )Valuation adjustments on other receivables
held for sale
    
    
    0
    
    
    
    555
    
    
    
    0
    
    
    
    450Other
    
    
    145
    
    
    
    152
    
    
    
    417
    
    
    
    282Total other revenues, net
    
    $
    28,779
    
    
    $
    24,929
    
    
    $
    55,533
    
    
    $
    50,361
 Interchange income includes interchange fees on both owned and
securitized business credit cards. The increases in interchange income
in the three and six months ended June 30, 2004 as compared to the same
periods of 2003 were due primarily to higher transaction volume. In the
three months ended June 30, 2004, the increase in interchange income also
includes the impact of increased interchange rates established by
MasterCard®* in April 2004. The average interchange rate was 2.2% in the
three month period ended June 30, 2004 as compared to 2.1% in the three
month period ended June 30, 2003 and in each of the six month periods
ended June 30, 2004 and 2003. The increases in business credit cards cash back rewards in the three and
six months ended June 30, 2004 as compared to the same periods of 2003
were due primarily to the increase in average business credit card
accounts in the cash back rewards programs. * MasterCard® is a federally registered service mark of MasterCard
International, Inc. 38




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##### Table of Contents



The increases in business credit cards business rewards in the three and
six months ended June 30, 2004 as compared to the same periods of 2003
were due primarily to changes in estimate of anticipated costs of future
rewards redemptions. Business credit cards business rewards included a
$900 thousand increase in estimated costs in the three months ended June
30, 2004, a $1.4 million increase in the six months ended June 30, 2004,
a $179 thousand increase in the three months ended June 30, 2003 and a
$1.1 million decrease in the six months ended June 30, 2003. See Note 7
to the consolidated financial statements for further discussion. In the three months ended June 30, 2004, we recognized an estimated $400
thousand of earnings allocable to our partnership interest in Fleet
Credit Card Services, L.P., as compared to $500 thousand in the same
period of 2003. In the six months ended June 30, 2004 and 2003, we
recognized an estimated $1.0 million of earnings allocable to our
partnership interest in Fleet Credit Card Services, L.P. In connection
with the anticipated combination of Bank of Americas and Fleets
consumer credit card businesses and our May 28, 2004 agreement with Bank
of America, our partnership interest in Fleet Credit Card Services, L.P.
would represent an interest in the combined business. See Note 8 to the
consolidated financial statements. Subsequent to the date of the
agreement, we have accounted for our investment in the partnership
interest in Fleet Credit Card Services, L.P. using the cost method. Investment securities gains (losses), net, primarily represent increases
(decreases) in valuations of venture capital investments reflecting the
market conditions for the investments. OPERATING EXPENSES Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Salaries and employee benefits
    
    $
    23,276
    
    
    $
    18,891
    
    
    $
    45,707
    
    
    $
    36,882Amortization of deferred
origination costs, net
    
    
    8,796
    
    
    
    12,973
    
    
    
    18,133
    
    
    
    27,157Marketing
    
    
    6,209
    
    
    
    4,444
    
    
    
    9,470
    
    
    
    7,371External processing
    
    
    5,137
    
    
    
    5,410
    
    
    
    10,356
    
    
    
    10,268Professional fees
    
    
    3,675
    
    
    
    2,879
    
    
    
    7,923
    
    
    
    6,075Equipment
    
    
    2,738
    
    
    
    2,533
    
    
    
    5,726
    
    
    
    5,927Occupancy
    
    
    1,996
    
    
    
    2,473
    
    
    
    4,577
    
    
    
    4,262Credit
    
    
    1,481
    
    
    
    997
    
    
    
    3,072
    
    
    
    2,182Insurance
    
    
    1,095
    
    
    
    976
    
    
    
    2,179
    
    
    
    1,727Fraud
    
    
    902
    
    
    
    1,036
    
    
    
    1,856
    
    
    
    1,951Postage
    
    
    833
    
    
    
    902
    
    
    
    1,807
    
    
    
    1,804Telephone
    
    
    656
    
    
    
    772
    
    
    
    1,581
    
    
    
    1,846Other
    
    
    3,102
    
    
    
    2,909
    
    
    
    5,703
    
    
    
    5,265Total operating expenses
    
    $
    59,896
    
    
    $
    57,195
    
    
    $
    118,090
    
    
    $
    112,717
 Salaries and employee benefits increased in the three and six months
ended June 30, 2004 as compared to the same periods of 2003 due to higher
incentive compensation expense resulting from improved earnings and
collections performance and personnel hired in connection with
initiatives to originate and retain relationships with high credit
quality customers. In addition, salaries and employee benefits in the
six months ended June 30, 2004 include $1.6 million of expense associated
with executive compensation expense incurred in connection with changes
in senior management and Venture Capital segment severance costs. 39




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Amounts paid to third parties to acquire business credit card accounts
and certain other origination costs are deferred and netted against any
related business credit card origination fee, and the net amount is
amortized on a straight-line basis over the privilege period of one year.
Amortization of deferred origination costs, net, decreased in the three
and six months ended June 30, 2004 as compared to the same periods of
2003 due primarily to the number and timing of new account originations
in prior periods. We originated a significant volume of new accounts in
the fourth quarter of 2002, and the costs to originate those accounts
increased amortization expense throughout most of 2003. We expect
amortization of business credit card deferred origination costs to be
lower in each of the remaining quarters of 2004, as compared to the same
periods of 2003, based on the level of deferred origination costs and the
timing of new accounts during prior periods. Marketing expense increased in the three and six months ended June 30,
2004 as compared to the same periods of 2003 due primarily to costs
incurred related to our development of alliances with other organizations
serving segments of the small business market and amortization expense on
marketing rights related to certain of these alliances, as well as
increased marketing activity in response to the competitive environment. Professional fees increased in the three and six months ended June 30,
2004 as compared to the same periods of 2003 due primarily to an
increase in the use of external consultants for certain initiatives to
originate and retain relationships with high credit quality customers
and other corporate matters, partially offset by a reduction in legal
expenses. Occupancy expense decreased in the three months ended June 30, 2004 as
compared to the same period of 2003 due to $410 thousand of lease
termination costs paid in June 2003 related to office space formerly used
in our venture capital operations. Occupancy expense increased in the
six months ended June 30, 2004 as compared to the same period of 2003 due
to additional office space that we began leasing in March 2003,
partially offset by
the impact of the lease termination costs discussed above. In addition, occupancy
expense in the six months ended June 30, 2004 includes approximately $571
thousand of expense relating to lease commitments associated with the
closure of an operational location of our Venture Capital segment in
the first quarter of 2004. Credit expense increased in the three and six months ended June 30,
2004 as compared to the same periods of 2003 due in part to a shift in
the types of our recoveries. There was an increase in the dollar
volume of charged-off accounts collected through outsourced individual
account recovery efforts. Credit expense also increased in the three
and six months due to the utilization of additional services from
credit information service providers. Insurance expense increased in the three and six months ended June 30,
2004 as compared to the same periods of 2003 due to an increase in
directors and officers professional liability insurance costs as a
result of market rates for this type of insurance. LITIGATION CONTINGENCIES We estimate our litigation reserves based on the status of litigation and
our assessment of the ultimate resolution of each action after
consultation with our attorneys. However, due to the inherent
uncertainty in litigation and since the ultimate resolutions of our
litigation, claims and other legal proceedings are influenced by factors
outside of our control, it is reasonably possible that our estimated
liability under these proceedings may change or that actual results will
differ from our estimates. Changes in estimates or other charges related
to 40




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##### Table of Contents



litigation are included in operating expenses of the respective business
segment if related to continuing operations, or gain (loss) on
discontinuance of mortgage and leasing businesses if related to
discontinued operations. See Note 8 to the consolidated financial
statements for further discussion of litigation contingencies. INCOME TAXES Our effective tax rate increased to 39.5% in 2004 due to higher state
income taxes. Income tax expense on income from continuing operations
was as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Income tax expense
    
    $
    7,071
    
    
    $
    3,932
    
    
    $
    13,234
    
    
    $
    7,628Effective tax rate
    
    
    39.5
    %
    
    
    38.5
    %
    
    
    39.5
    %
    
    
    38.5
    %
 See Note 8 for a discussion of tax matters currently before the Internal
Revenue Service Regional Office of Appeals and the agreement with Bank of America signed in the second quarter of 2004. DISCONTINUED OPERATIONS For the three months ended June 30, 2004, we recorded an after-tax gain
on the discontinuance of our mortgage and leasing businesses of $160
thousand. The components of this net gain include a $2.8 million pretax
loss on the discontinuance of the mortgage business, a $3.0 million
pretax gain on the discontinuance of the leasing business, and tax
expense of $105 thousand. The loss on the discontinuance of the mortgage
business was the result of an increase in our estimated future costs of
mortgage business-related contingent liabilities, due primarily to recent
litigation with Chase and disputes related to one of our former mortgage
programs. The gain on the discontinuance of the leasing business was
principally associated with favorable performance in revenues and an
insurance settlement, partially offset by increased operating expenses
due to a lengthening of the anticipated timeframe over which we expect to
incur certain operating expenses related to the lease portfolio. For the three months ended June 30, 2003, we recorded an after-tax loss
on the discontinuance of our mortgage and leasing businesses of $2.0
million. The components of this net loss include a pretax loss on the
discontinuance of the mortgage business of $2.6 million, a pretax loss
on the discontinuance of the leasing business of $600 thousand, and a
tax benefit of $1.2 million. The loss on the discontinuance of the
mortgage business represents an increase in our estimated future costs
of mortgage business-related contingent liabilities, due primarily to a
lengthening of the anticipated timeframe of the resolution for those
contingent liabilities, which included an extension of the discovery
process and a delay in the scheduled trial date in the original
litigation with Chase. The loss on the discontinuance of the leasing
business represents an adjustment in our estimate of operating results
of the leasing segment over the remaining life of the lease portfolio.
The decrease in estimated operating results of the leasing segment was
primarily associated with an unfavorable sales tax assessment, partially
offset by favorable credit performance on the leasing portfolio. 41




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OFF-BALANCE SHEET ARRANGEMENTS Off-balance sheet securitizations provide a significant portion of our
funding and they are one of our primary sources of liquidity. At June
30, 2004, off-balance sheet securitized receivables represented 64% of
our funding. These transactions enable us to limit our credit risk in
the securitized receivables to the amount of our retained interests in
securitizations. We had $150.0 million of retained interests in
securitizations at June 30, 2004 and at December 31, 2003. The following table summarizes business credit card securitization data
including income and cash flows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Average securitized receivables
    
    $
    2,532,885
    
    
    $
    2,290,671
    
    
    $
    2,524,208
    
    
    $
    2,231,572Securitization income
    
    
    32,627
    
    
    
    31,752
    
    
    
    65,167
    
    
    
    61,362Discount accretion
    
    
    4,276
    
    
    
    4,373
    
    
    
    8,878
    
    
    
    7,965Interchange income
    
    
    28,801
    
    
    
    23,521
    
    
    
    54,745
    
    
    
    43,925Servicing revenues
    
    
    12,499
    
    
    
    9,873
    
    
    
    24,632
    
    
    
    19,900Proceeds from new securitizations
    
    
    0
    
    
    
    226,851
    
    
    
    90,000
    
    
    
    299,376Proceeds from collections reinvested
in revolving-period securitizations
    
    
    1,633,689
    
    
    
    710,553
    
    
    
    3,257,245
    
    
    
    1,768,945Cash flows received on retained
interests
    
    
    68,208
    
    
    
    84,702
    
    
    
    134,890
    
    
    
    133,002
 See Note 6 to the consolidated financial statements for the key
assumptions used in estimating the fair value of retained interests in
securitizations as of June 30, 2004 and December 31, 2003 and for the
three and six months ended June 30, 2004 and 2003. We have a $280 million committed commercial paper conduit facility that
provides off-balance sheet funding, $90 million of which was used at June
30, 2004. In June 2004, this facility was renewed through June 14, 2005. Each of our business credit card securitization series has a date that
the revolving period is scheduled to end. The revolving periods for each
of the series in our securitization trust, except Series 1997-A, may be
extended for up to seven months past the scheduled end of the revolving
period, if the payment rates on the receivables in the trust meet certain
thresholds. Based on current payment rates, we do not anticipate that
any of our business credit card securitization series will end their
revolving period in 2004. In June 2003, the FASB issued an exposure draft, Qualifying
Special-Purpose Entities and Isolation of Transferred Assets  An
Amendment of FASB Statement No. 140. The changes and clarifications in
the proposed statement would prevent derecognition by transferors that
may continue to retain effective control of transferred assets by
providing financial support other than a subordinated retained interest
or making decisions about beneficial interests. The changes would also
help to ensure that variable interest entities will not qualify for the
qualifying special-purpose entity exception to FASB Interpretation No.
46, as revised, if any party involved is in a position to enhance or
protect the value of its own subordinated interest by providing financial
support for or making decisions about reissuing beneficial interests.
For public entities, this proposed 42




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##### Table of Contents



statement would apply prospectively to transfers of assets occurring
after the beginning of the first interim period after the issuance of the
final statement. In June 2004, the FASB announced plans to issue a
revised exposure draft in the fourth quarter of 2004 and a final standard
in the second quarter of 2005. Management will evaluate any potential
impact of this revised proposed statement when it is available. MARKET RISK SENSITIVITY Market risk is the potential for loss or diminished financial performance
arising from adverse changes in market forces including interest rates
and market prices. Market risk sensitivity is the degree to which a
financial instrument, or a company that owns financial instruments, is
exposed to market forces. Fluctuations in interest rates, changes in
economic conditions, shifts in customer behavior, and other factors can
affect our financial performance. Changes in economic conditions and
shifts in customer behavior are difficult to predict, and our financial
performance generally cannot be insulated from these forces. We measure our interest rate risk using a rising rate scenario and a
declining rate scenario. Net interest income is estimated using a third
party software model that uses standard income modeling techniques. We
also measure the effect of interest rate risk on our managed net interest
income, which includes net interest income on owned assets and net
interest income on securitized receivables. The measurement of managed
net interest income in addition to net interest income on owned assets is
meaningful because our securitization income fluctuates with yields on
securitized receivables and interest rates earned by noteholders. Both
increasing and decreasing rate scenarios assume an instantaneous shift in
rates and measure the corresponding change in expected net interest
income as compared to a base case scenario. As of June 30, 2004 and
December 31, 2003, we estimated that our net interest income would change
as follows over a twelve-month period: June 30,
    
    December 31,2004
    
    2003Estimated percentage increase (decrease) in net interest
income on owned receivables:Assuming 200 basis point increase in interest rates
    
    
    11
    %
    
    
    11
    %Assuming 200 basis point decrease in interest rates
    
    
    (5
    )%
    
    
    3
    %Estimated percentage increase (decrease) in net interest
income on securitized receivables:Assuming 200 basis point increase in interest rates
    
    
    (5
    )%
    
    
    (5
    )%Assuming 200 basis point decrease in interest rates
    
    
    10
    %
    
    
    9
    %Estimated percentage increase (decrease) in net interest
income on managed receivables:Assuming 200 basis point increase in interest rates
    
    
    (2
    )%
    
    
    (2
    )%Assuming 200 basis point decrease in interest rates
    
    
    7
    %
    
    
    8
    %
 Our business credit card receivables include interest rate floors that
cause our net interest income on managed receivables to rise in the
declining rate scenario. Our net interest income on managed receivables
decreases in a rising rate scenario due to the variable rate funding of
off-balance sheet securitized receivables and the portion of the business
credit card portfolio that is effectively at a fixed rate because of the
nature of the pricing of the accounts or because the cardholder pays
their balance in full each month resulting in an effective fixed yield of
0%. 43




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Changes in the composition of our balance sheet and the interest
rate environment have also impacted the results of the net interest
income sensitivity analyses. The above estimates of net interest income sensitivity alone do not
provide a comprehensive view of our exposure to interest rate risk. The
quantitative risk information is limited by the parameters and
assumptions utilized in generating the results. These analyses are
useful only when viewed within the context of the parameters and
assumptions used. The above rate scenarios do not reflect managements
expectation regarding the future direction of interest rates, and they
depict only two possibilities out of a large set of possible scenarios. LIQUIDITY, CAPITAL RESOURCES AND ANALYSIS OF FINANCIAL CONDITION Our goal is to maintain an adequate level of liquidity, for both
long-term and short-term needs, through active management of both assets
and liabilities. Since Advanta Corp.s debt rating is not investment
grade, our access to unsecured, institutional debt is limited. However,
we do have access to diverse funding sources as described below, and had
a high level of liquidity at June 30, 2004. At June 30, 2004, we had
$289 million of federal funds sold, $230 million of receivables held for
sale, and $180 million of investments, which could be sold to generate
additional liquidity. Components of funding were as follows: June 30, 2004
    
    December 31, 2003($ in thousands)
    
    Amount
    
    %
    
    Amount
    
    %Off-balance sheet securitized
receivables(1)
    
    $
    2,454,849
    
    
    
    64
    %
    
    $
    2,371,819
    
    
    
    62
    %Deposits
    
    
    647,104
    
    
    
    17
    
    
    
    672,204
    
    
    
    18Debt and other borrowings
    
    
    291,226
    
    
    
    7
    
    
    
    314,817
    
    
    
    8Subordinated debt payable to
preferred securities trust
    
    
    103,093
    
    
    
    3
    
    
    
    103,093
    
    
    
    3Equity
    
    
    366,612
    
    
    
    9
    
    
    
    341,207
    
    
    
    9Total
    
    $
    3,862,884
    
    
    
    100
    %
    
    $
    3,803,140
    
    
    
    100
    %
  (1)
    
    Includes off-balance sheet business credit card receivables.
Excludes our ownership interests in the noteholder principal balance
of securitizations (subordinated trust assets) that are held
on-balance sheet and classified as retained interests in
securitizations. As shown above in the components of funding table, off-balance sheet
securitizations provide a significant portion of our funding and they are
one of our primary sources of liquidity. See the Off-Balance Sheet
Arrangements section of this Managements Discussion and Analysis of
Financial Condition and Results of Operations for further discussion of
off-balance sheet securitizations and their impact on our liquidity,
capital resources and financial condition. In order to further diversify
our sources of funding, we anticipate increasing the percentage of
receivables that are held on-balance sheet in the second half of 2004,
and expect off-balance sheet securitized receivables to represent
approximately 60% of our funding at December 31, 2004, as compared to 64%
at June 30, 2004. Given our current expectations, we may not have any
significant public business card securitizations in the remainder of
2004. We continue to offer unsecured debt securities of Advanta Corp., in the
form of RediReserve Certificates and Investment Notes, to retail
investors through our 44




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##### Table of Contents



retail note program. We change the interest rates we offer frequently,
depending on market conditions and our funding needs. In the three and
six months ended June 30, 2004, we reduced originations of retail notes
due to our liquidity position and, as a result, the balance of
RediReserve Certificates and Investment Notes outstanding decreased by
$33.6 million in the six months ended June 30, 2004 to $281 million at
June 30, 2004. Based on anticipated liquidity needs, we plan to continue
reducing originations of retail notes during the remainder of 2004. In June 2004, we exercised an option to extend the term of an existing
operating lease for five years through 2010 for office space used for
certain business card operations and general business purposes. The
minimum lease payments under the extension will be $2.5 million in each
of the years 2006 through 2009 and $2.0 million in 2010. On February 2, 2004, the court issued its final judgment and order in the
Delaware Chancery Court litigation with Fleet. In early February 2004,
the escrow agent released $63.8 million from the escrow account to Fleet
in satisfaction of all amounts due to Fleet in connection with this
litigation and the $10.5 million of funds remaining in the escrow account
were released and transferred from the restricted escrow account to an
unrestricted cash account. At December 31, 2003, the escrow account was
included in restricted interest-bearing deposits on the consolidated
balance sheet. In accordance with the courts order, the payment to
Fleet was net of amounts due to Advanta from Fleet. As a result of the
courts order and payment to Fleet in February 2004, there was a decrease
in other assets and other liabilities as of the payment date. There was
no impact to the results of our operations since, based on the final
judgment and order, our reserves at December 31, 2003 were adequate. In
March 2004, we filed a notice of appeal to commence the appeals process
related to this final judgment and order. On May 28, 2004, we reached an
agreement with Bank of America to resolve all outstanding litigation,
including partnership tax disputes, between Advanta and FleetBoston
Financial Corporation, which was recently acquired by Bank of America.
Under the agreement, Bank of America will pay Advanta $63.8 million in
cash which represents a return of the payments made to Fleet in February
2004 described above. That payment will be made following IRS approval
of the settlement of the tax disputes. We expect our book value would increase by approximately $2.45 per share as
a result of the agreement and other considerations associated with the
agreement. We anticipate that the $63.8 million of cash will be used for
general corporate purposes and to enable us to have lower debt levels
than would otherwise be the case. See Note 8 to the consolidated
financial statements for further discussion. Advanta Corp. and its subsidiaries are involved in other litigation,
including litigation relating to the Mortgage Transaction, class action
lawsuits, claims and legal proceedings arising in the ordinary course of
business or discontinued operations, including litigation arising from
our operation of the mortgage business prior to our exit from that
business in the first quarter of 2001. See Note 8 to the consolidated
financial statements for further discussion. Management believes that
the aggregate loss, if any, resulting from existing litigation, claims
and other legal proceedings will not have a material adverse effect on
our liquidity or capital resources based on our current expectations
regarding the ultimate resolutions of these actions. However, due to the
inherent uncertainty in litigation and since the ultimate resolutions of
these proceedings are influenced by factors outside of our control, it is
reasonably possible that the estimated cash flow related to these
proceedings may change or that actual results will differ from our
estimates. 45




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In February 2004, the Board of Directors of Advanta Corp. approved a 50%
increase in the regular quarterly cash dividends per share beginning in
the second quarter of 2004. We funded the increase in dividends with
operating cash flows. Our bank subsidiaries are subject to regulatory capital requirements and
other regulatory provisions that restrict their ability to lend and/or
pay dividends to Advanta Corp. and its affiliates. Advanta Bank Corp.
issues and funds our business credit cards and is the servicer of our
discontinued leasing business. Advanta Bank Corp. paid dividends to
Advanta Corp. of $20 million in March 2004 and $5 million in June 2004.
At June 30, 2004, Advanta Bank Corp.s combined total capital ratio
(combined Tier I and Tier II capital to risk-weighted assets) was 28.15%
as compared to 26.28% at December 31, 2003. At both dates, Advanta Bank
Corp. had capital in excess of levels a bank is required to maintain to
be classified as well-capitalized under the regulatory framework for
prompt corrective action. Prior to our exit from the mortgage business
in the first quarter of 2001, Advanta National Bank issued and funded a
large portion of our mortgage business. Advanta National Banks
operations are currently not material to our consolidated operating
results. Our insurance subsidiaries are also subject to certain capital
and dividend rules and regulations as prescribed by state jurisdictions
in which they are authorized to operate. Management believes that these
restrictions, for both bank and insurance subsidiaries, will not have an
adverse effect on Advanta Corp.s ability to meet its cash obligations
due to the current levels of liquidity and diversity of funding sources. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. These forward-looking statements may be
identified by the use of forward-looking phrases such as will likely
result, may, are expected to, is anticipated, estimate,
projected, intends to or other similar words or phrases. The most
significant among these risks and uncertainties are:  (1)
    
    our managed net interest income including changes
resulting from fluctuations in the volume of receivables and
the range and timing of pricing offers to cardholders;(2)
    
    competitive pressures;(3)
    
    political conditions, social conditions, monetary and
fiscal policies and general economic conditions that affect the
level of new account originations, customer spending,
delinquencies and charge-offs;(4)
    
    factors affecting fluctuations in the number of accounts
or receivable balances including the retention of cardholders
after promotional pricing periods have expired;(5)
    
    interest rate fluctuations;(6)
    
    the level of expenses;(7)
    
    the timing of the securitizations of our receivables;(8)
    
    factors affecting the value of investments that we hold;(9)
    
    the effects of government regulation, including
restrictions and limitations imposed by banking laws,
regulators, examinations, and Advanta National Banks
agreements with its regulators;(10)
    
    effect of, and changes in, tax laws, rates, regulations
and policies;(11)
    
    relationships with customers, significant vendors and
business partners;(12)
    
    difficulties or delays in the development, production,
testing and marketing of products or services;(13)
    
    the amount and cost of financing available to us;(14)
    
    the ratings on our debt and the debt of our subsidiaries;(15)
    
    revisions to estimates associated with the discontinuance
of our mortgage and leasing businesses; 46




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(16)
    
    obtaining Internal Revenue Service approval of the
settlement of the tax disputes, as required under the agreement
with Bank of America;(17)
    
    the impact of litigation;(18)
    
    the proper design and operation of our disclosure
controls and procedures; and(19)
    
    the ability to attract and retain key personnel. Additional risks that may affect our future performance are set forth
elsewhere in this Quarterly Report on Form 10-Q, in our Annual Report on
Form 10-K for the year ended December 31, 2003 and in our other filings
with the Securities and Exchange Commission. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set forth in Item
2-Managements Discussion and Analysis of Financial Condition and Results
of Operations in this Report on Form 10-Q. See Market Risk
Sensitivity. 
 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any disclosure controls and
procedures, no matter how well designed and operated, can provide only
reasonable, rather than absolute, assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls
and procedures. An evaluation was performed by management with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures.
Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of June 30, 2004, our disclosure controls
and procedures are effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
There have been no changes in our internal controls over financial
reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially affect,
these internal controls over financial reporting. 
 PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The legal proceedings and claims described under the heading captioned
Commitments and Contingencies in Note 8 of the Notes to Consolidated
Financial Statements set forth in Part I, Item 1 of this Quarterly Report
are hereby incorporated by reference. 47




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  (a)
    
    Advanta Corp. held its Annual Meeting of Stockholders on June 9, 2004
(the Annual Meeting).(b)
    
    Dennis Alter, Dana Becker Dunn, Arthur P. Bellis and Robert S. Blank
were the nominees for director who were included in the proxy statement sent to
stockholders of record in connection with the Annual Meeting and each
received sufficient votes at the Annual Meeting, in person or by
proxy, to be
reelected to the Board. However, Mr. Bellis did not stand for reelection because
prior to the Annual Meeting he retired from the Board of Directors. In addition to
Ms. Becker Dunn and Messrs. Alter and Blank, the following directors terms of
office continued after the Annual Meeting: Max Botel, Ronald Lubner, Robert H. Rock,
Olaf Olafsson, William A. Rosoff and Michael Stolper.(c)
    
    The following proposal was submitted to a vote of stockholders. The election of four directors to hold office until the 2007 Annual
Meeting of Stockholders. NOMINEES
    
    VOTES FOR
    
    VOTES WITHHELDDennis Alter
    
    
    8,332,783
    
    
    
    336,725Dana Becker Dunn
    
    
    8,018,834
    
    
    
    650,674Arthur P. Bellis
    
    
    8,354,917
    *
    
    
    314,591
    *Robert S. Blank
    
    
    8,055,439
    
    
    
    614,069
  *
    
    Mr. Bellis did not stand for reelection at the Annual Meeting
because prior to the Annual Meeting he retired from the Board of Directors.
See Item 4(b) above.  (d)
    
    Not required. 48




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits  The following exhibits are being filed with this report on
Form 10-Q. ExhibitNumber
    
    Description of Document10.1
    
    Agreement relating to Fleet Credit Card Services, L.P., dated
as of May 28, 2004, by and between Advanta Corp., Advanta National
Bank, Advanta Service Corp., Fleet Credit Card Holdings, Inc.,
Fleet Credit Card Services, L.P. and Bank of America Corp.10.2
    
    Letter Agreement between Advanta Corp. and Brian Tierney dated
June 8, 2004.10.3
    
    Relocation Agreement by and between Advanta Corp. and John F.
Moore, dated as of May 20, 2004.10.4
    
    Letter Agreement between Advanta Corp. and Arthur Bellis dated
June 8, 2004.12
    
    Consolidated 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
  (b)
    
    Reports on Form 8-K  (b)(1)
    
    A Current Report on Form 8-K, dated April 22, 2004, was filed
by Advanta setting forth the financial highlights of Advantas results
of operations for the quarter ended March 31, 2004.(b)(2)
    
    A Current Report on Form 8-K, dated April 22, 2004, was filed
by Advanta for the purpose of filing disclosures made during the
April 22, 2004 conference call discussing the companys results for
the quarter ended March 31, 2004.(b)(3)
    
    A Current Report on Form 8-K, dated June 21, 2004, was filed
by
Advanta announcing that it had reached an agreement with Bank
of America Corp. to resolve all outstanding litigation,
including partnership tax disputes, between Advanta and
FleetBoston Financial Corporation, which was recently acquired
by Bank of America. The agreement is subject to the Internal
Revenue Services final approval of the settlement of the tax
disputes. 49




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized. Advanta Corp.
(Registrant)By
    
    /s/ Philip M. BrowneSenior Vice President andChief Financial OfficerAugust 6, 2004By
    
    /s/ David B. WeinstockVice President andChief Accounting OfficerAugust 6, 2004
 50




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##### Table of Contents



EXHIBIT INDEX Manner ofExhibit
    
    Description
    
    Filing10.1
    
    Agreement relating to Fleet Credit Card Services, L.P., dated
as of May 28, 2004, by and between Advanta Corp., Advanta
National Bank, Advanta Service Corp., Fleet Credit Card Holdings,
Inc., Fleet Credit Card Services, L.P. and Bank of America Corp.
    
    *10.2
    
    Letter Agreement between Advanta Corp. and Brian Tierney dated
June 8, 2004.
    
    *10.3
    
    Relocation Agreement by and between Advanta Corp. and John F.
Moore, dated as of May 20, 2004
    
    *10.4
    
    Letter Agreement between Advanta Corp. and Arthur Bellis dated
June 8, 2004.
    
    *12
    
    Consolidated 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 Executive 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. 51