##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q þ
    
    Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2005 or
 o
    
    Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
 Commission File Number 0-14120 Advanta Corp.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    23-1462070
(I.R.S. Employer
Identification No.)
 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     þ     No     o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes     þ     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
Common Stock, $.01 par value
    
    Outstanding at May 2, 2005
9,606,862 sharesClass B
Common Stock, $.01 par value
    
    Outstanding at May 2, 2005
18,406,010 shares




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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
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4.
    
    Controls and Procedures
    
    
    39PART II- OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    40Item 6.
    
    Exhibits
    
    
    40Exhibit Index
    
    
    42COMPUTATION 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)
 March 31,
    
    
    December 31,(In thousands, except share amounts)
    
    2005
    
    
    2004ASSETSCash
    
    $
    27,756
    
    
    $
    35,565Federal funds sold
    
    
    330,336
    
    
    
    298,677Restricted interest-bearing deposits
    
    
    2,061
    
    
    
    2,946Investments available for sale
    
    
    229,294
    
    
    
    184,240Receivables, net:Held for sale
    
    
    408,759
    
    
    
    377,158Other
    
    
    355,164
    
    
    
    328,872Total receivables, net
    
    
    763,923
    
    
    
    706,030Accounts receivable from securitizations
    
    
    246,036
    
    
    
    244,362Premises and equipment, net
    
    
    16,694
    
    
    
    17,958Other assets
    
    
    192,091
    
    
    
    191,451Assets of discontinued operations, net
    
    
    5,052
    
    
    
    11,695Total assets
    
    $
    1,813,243
    
    
    $
    1,692,924LIABILITIESDeposits
    
    $
    873,674
    
    
    $
    825,273Debt
    
    
    252,516
    
    
    
    265,759Subordinated debt payable to preferred securities trust
    
    
    103,093
    
    
    
    103,093Other liabilities
    
    
    111,101
    
    
    
    106,605Total liabilities
    
    
    1,340,384
    
    
    
    1,300,730Commitments and contingenciesSTOCKHOLDERS EQUITYClass A preferred stock, $1,000 par value:Authorized, issued and outstanding  1,010 shares in
2005 and 2004
    
    
    1,010
    
    
    
    1,010Class A voting common stock, $.01 par value:Authorized  200,000,000 shares; issued  10,041,017
shares in 2005 and 2004
    
    
    100
    
    
    
    100Class B non-voting common stock, $.01 par value:Authorized  200,000,000 shares; issued  21,585,604
shares in 2005 and 21,537,061 shares in 2004
    
    
    216
    
    
    
    215Additional paid-in capital
    
    
    265,171
    
    
    
    258,223Unearned restricted stock
    
    
    (5,072
    )
    
    
    (9,460
    )Unearned ESOP shares
    
    
    (9,854
    )
    
    
    (9,930
    )Accumulated other comprehensive loss
    
    
    (610
    )
    
    
    (261
    )Retained earnings
    
    
    271,373
    
    
    
    201,772Treasury stock at cost, 434,155 Class A common shares
and 3,186,647 Class B common shares in 2005 and 2004
    
    
    (49,475
    )
    
    
    (49,475
    )Total stockholders equity
    
    
    472,859
    
    
    
    392,194Total liabilities and stockholders equity
    
    $
    1,813,243
    
    
    $
    1,692,924
 See Notes to Consolidated Financial Statements 3




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ADVANTA CORP. AND SUBSIDIARIES 
 CONSOLIDATED INCOME STATEMENTS (Unaudited)
 Three Months Ended(In thousands, except per share amounts)
    
    March 31,2005
    
    
    2004Interest income:Receivables
    
    $
    24,974
    
    
    $
    17,393Investments
    
    
    3,184
    
    
    
    1,416Other interest income
    
    
    4,021
    
    
    
    4,602Total interest income
    
    
    32,179
    
    
    
    23,411Interest expense:Deposits
    
    
    6,448
    
    
    
    4,492Debt
    
    
    3,848
    
    
    
    4,750Subordinated debt payable to preferred securities trust
    
    
    2,289
    
    
    
    2,289Total interest expense
    
    
    12,585
    
    
    
    11,531Net interest income
    
    
    19,594
    
    
    
    11,880Provision for credit losses
    
    
    10,444
    
    
    
    9,511Net interest income after provision for credit losses
    
    
    9,150
    
    
    
    2,369Noninterest revenues:Securitization income
    
    
    30,396
    
    
    
    32,540Servicing revenues
    
    
    12,599
    
    
    
    12,133Gain on transfer of consumer credit card business (See Note 11)
    
    
    67,679
    
    
    
    0Other revenues, net
    
    
    27,813
    
    
    
    26,754Total noninterest revenues
    
    
    138,487
    
    
    
    71,427Operating expenses
    
    
    62,620
    
    
    
    58,194Income before income taxes
    
    
    85,017
    
    
    
    15,602Income tax expense
    
    
    12,347
    
    
    
    6,163Net income
    
    $
    72,670
    
    
    $
    9,439Basic net income per common shareClass A
    
    $
    2.82
    
    
    $
    0.37Class B
    
    
    2.85
    
    
    
    0.39Combined
    
    
    2.84
    
    
    
    0.38Diluted net income per common shareClass A
    
    $
    2.54
    
    
    $
    0.34Class B
    
    
    2.55
    
    
    
    0.36Combined
    
    
    2.55
    
    
    
    0.35Basic weighted average common shares outstandingClass A
    
    
    8,812
    
    
    
    8,786Class B
    
    
    16,705
    
    
    
    15,502Combined
    
    
    25,517
    
    
    
    24,288Diluted weighted average common shares outstandingClass A
    
    
    8,812
    
    
    
    8,786Class B
    
    
    19,670
    
    
    
    17,656Combined
    
    
    28,482
    
    
    
    26,442
 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, 2003
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    206
    
    
    $
    245,295Net income
    
    $
    44,741Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $175
    
    
    (324
    )Comprehensive income
    
    $
    44,417Preferred and common cash
dividends declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8,489Modification of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option exchange program
stock distributionStock-based nonemployee
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Issuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    5,427Amortization of restricted stockForfeitures of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1,887
    )ESOP shares committed to be
released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221Balance at December 31, 2004
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    215
    
    
    $
    258,223Net income
    
    $
    72,670Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $188
    
    
    (349
    )Comprehensive income
    
    $
    72,321Preferred and common cash
dividends declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1,046Tax benefits from stock-based
compensation and ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,494Issuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Amortization of restricted stockForfeitures of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833
    )ESOP shares committed to be
released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116Balance at March 31, 2005
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    216
    
    
    $
    265,171
 See Notes to Consolidated Financial Statements 5




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UnearnedRestricted
    
    
    AccumulatedStock
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Total& Unearned
    
    
    Comprehensive
    
    
    Retained
    
    
    Treasury
    
    
    Stockholders($ in thousands)
    
    ESOP Shares
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance at December 31, 2003
    
    $
    (23,629
    )
    
    $
    63
    
    
    $
    167,783
    
    
    $
    (49,621
    )
    
    $
    341,207Net income
    
    
    
    
    
    
    
    
    
    
    44,741
    
    
    
    
    
    
    
    44,741Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $175
    
    
    
    
    
    
    (324
    )
    
    
    
    
    
    
    
    
    
    
    (324
    )Comprehensive incomePreferred and common cash
dividends declared
    
    
    
    
    
    
    
    
    
    
    (10,752
    )
    
    
    
    
    
    
    (10,752
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,497Modification of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option exchange program
stock distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    146Stock-based nonemployee
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Issuance of restricted stock
    
    
    (5,430
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of restricted stock
    
    
    7,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,740Forfeitures of restricted stock
    
    
    1,473
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416
    )ESOP shares committed to be released
    
    
    456
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    677Balance at December 31, 2004
    
    $
    (19,390
    )
    
    $
    (261
    )
    
    $
    201,772
    
    
    $
    (49,475
    )
    
    $
    392,194Net income
    
    
    
    
    
    
    
    
    
    
    72,670
    
    
    
    
    
    
    
    72,670Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $188
    
    
    
    
    
    
    (349
    )
    
    
    
    
    
    
    
    
    
    
    (349
    )Comprehensive incomePreferred and common cash
dividends declared
    
    
    
    
    
    
    
    
    
    
    (3,069
    )
    
    
    
    
    
    
    (3,069
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,047Tax benefits from stock-based
compensation and ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,494Issuance of restricted stock
    
    
    (125
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of restricted stock
    
    
    4,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,098Forfeitures of restricted stock
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (419
    )ESOP shares committed to be released
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193Balance at March 31, 2005
    
    $
    (14,926
    )
    
    $
    (610
    )
    
    $
    271,373
    
    
    $
    (49,475
    )
    
    $
    472,859
 See Notes to Consolidated Financial Statements 6




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ADVANTA CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended($ in thousands)
    
    March 31,2005
    
    
    2004OPERATING ACTIVITIES  CONTINUING OPERATIONSNet income
    
    $
    72,670
    
    
    $
    9,439Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Investment securities losses (gains), net
    
    
    1,040
    
    
    
    (49
    )Depreciation and amortization
    
    
    1,964
    
    
    
    2,558Stock-based compensation expense
    
    
    3,679
    
    
    
    1,849Provision for credit losses
    
    
    10,444
    
    
    
    9,511Provision for interest and fee losses
    
    
    2,603
    
    
    
    2,158Change in deferred origination costs, net of deferred fees
    
    
    (5,494
    )
    
    
    696Change in receivables held for sale
    
    
    (31,601
    )
    
    
    (90,500
    )Proceeds from sale of receivables held for sale
    
    
    0
    
    
    
    95,361Change in accounts receivable from securitizations
    
    
    (1,674
    )
    
    
    3,554Change in other assets and other liabilities
    
    
    18,933
    
    
    
    (45,195
    )Net cash provided by (used in) operating activities
    
    
    72,564
    
    
    
    (10,618
    )INVESTING ACTIVITIES  CONTINUING OPERATIONSChange in federal funds sold and restricted interest-bearing
deposits
    
    
    (30,774
    )
    
    
    6,941Purchase of investments available for sale
    
    
    (150,875
    )
    
    
    (265,601
    )Proceeds from sales of investments available for sale
    
    
    76,667
    
    
    
    300,994Proceeds from maturing investments available for sale
    
    
    27,577
    
    
    
    1,718Change in receivables not held for sale
    
    
    (33,845
    )
    
    
    (20,861
    )Purchases of premises and equipment, net
    
    
    (634
    )
    
    
    (3,053
    )Net cash (used in) provided by investing activities
    
    
    (111,884
    )
    
    
    20,138FINANCING ACTIVITIES  CONTINUING OPERATIONSChange in demand and savings deposits
    
    
    (4,868
    )
    
    
    (3,316
    )Proceeds from time deposits
    
    
    136,000
    
    
    
    157,490Payments on time deposits
    
    
    (86,649
    )
    
    
    (161,824
    )Proceeds from debt
    
    
    9,870
    
    
    
    7,984Payments on debt
    
    
    (23,366
    )
    
    
    (32,465
    )Change in cash overdraft
    
    
    (3,627
    )
    
    
    (4,718
    )Proceeds from exercise of stock options
    
    
    1,047
    
    
    
    3,943Cash dividends paid
    
    
    (3,069
    )
    
    
    (2,035
    )Net cash provided by (used in) financing activities
    
    
    25,338
    
    
    
    (34,941
    )DISCONTINUED OPERATIONSNet cash provided by operating activities of discontinued
operations
    
    
    6,173
    
    
    
    18,816Net decrease in cash
    
    
    (7,809
    )
    
    
    (6,605
    )Cash at beginning of period
    
    
    35,565
    
    
    
    26,941Cash at end of period
    
    $
    27,756
    
    
    $
    20,336
 See Notes to Consolidated Financial Statements 7




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ADVANTA CORP. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
 March 31, 2005
(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
(GAAP) 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 GAAP 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 amounts 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, (SFAS No. 123) 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, entities are permitted 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 these plans been determined using the fair
value based method, our 8




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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 for the three
months ended March 31: 2005
    
    
    2004Stock-based employee compensation expense for stock
option plans, net of related tax effectsAs reported
    
    $
    0
    
    
    $
    0Pro forma
    
    
    901
    
    
    
    446Net incomeAs reported
    
    $
    72,670
    
    
    $
    9,439Pro forma
    
    
    71,769
    
    
    
    8,993Basic net income per common shareAs reportedClass A
    
    $
    2.82
    
    
    $
    0.37Class B
    
    
    2.85
    
    
    
    0.39Combined
    
    
    2.84
    
    
    
    0.38Pro formaClass A
    
    $
    2.79
    
    
    $
    0.35Class B
    
    
    2.82
    
    
    
    0.37Combined
    
    
    2.81
    
    
    
    0.36Diluted net income per common shareAs reportedClass A
    
    $
    2.54
    
    
    $
    0.34Class B
    
    
    2.55
    
    
    
    0.36Combined
    
    
    2.55
    
    
    
    0.35Pro formaClass A
    
    $
    2.51
    
    
    $
    0.33Class B
    
    
    2.53
    
    
    
    0.34Combined
    
    
    2.52
    
    
    
    0.34
 Note 2) Recently Issued Accounting Standards In June 2003, the Financial Accounting Standards Board (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, Consolidation of Variable Interest Entities
- An Interpretation of ARB No. 51, 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 April
2005, the FASB announced plans to issue a revised exposure draft in the third quarter of
2005 and a final statement in the first quarter of 2006. Management will evaluate any
potential impact of this revised proposed statement when it is available. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS No. 123R)
which, when effective, replaces SFAS No. 123 and supercedes Opinion No. 25 and the related
implementation guidance. SFAS No. 123R addresses accounting for equity-based compensation
arrangements, including employee stock options. Upon 9




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##### Table of Contents



implementation, entities are no longer able to account for equity-based compensation using
the intrinsic value method under Opinion No. 25. Entities are 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. This statement is effective for Advanta as of
January 1, 2006 and will increase our operating expenses. Compensation expense calculated
in accordance with SFAS 123R in future periods may differ from the pro forma amounts
disclosed in Note 1 for the quarters ended March 31, 2005 and 2004. The amount of
compensation expense will vary depending on the number of options granted in future periods,
the market value of our common stock and changes in other variables impacting stock option
valuation estimates. In addition, upon adoption of SFAS 123R, we may choose to use a
different valuation model to estimate stock option fair value. Accordingly, we have not yet
quantified the impact that the adoption of this statement will have on our results of
operations. Note 3) Investments Available for Sale Investments available for sale consisted of the following: March 31, 2005
    
    
    December 31, 2004Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueU.S. Treasury and government
agencies securities
    
    $
    66,790
    
    
    $
    65,962
    
    
    $
    69,402
    
    
    $
    68,917State and municipal securities
    
    
    3,153
    
    
    
    3,145
    
    
    
    3,329
    
    
    
    3,370Corporate bonds
    
    
    12,171
    
    
    
    12,131
    
    
    
    12,308
    
    
    
    12,259Asset-backed securities
    
    
    6,630
    
    
    
    6,612
    
    
    
    4,358
    
    
    
    4,398Equity securities(1)
    
    
    15,483
    
    
    
    15,438
    
    
    
    14,626
    
    
    
    14,677Money market funds(2)
    
    
    125,897
    
    
    
    125,897
    
    
    
    80,509
    
    
    
    80,509Other
    
    
    109
    
    
    
    109
    
    
    
    110
    
    
    
    110Total investments available for sale
    
    $
    230,233
    
    
    $
    229,294
    
    
    $
    184,642
    
    
    $
    184,240
   (1)
    
    Includes venture capital investments of $5.1 million at March 31, 2005 and $5.3
million at December 31, 2004. The amount shown as amortized cost for venture capital investments represents estimated
fair value for these investments.(2)
    
    As of March 31, 2005, money market funds include investments in the Reserve Primary
Money Market Fund of $49.3 million, the Barclays Global Investors Prime Money Market
Fund of $49.3 million and the Merrill Lynch Premier Institutional Money Market Fund of
$26.1 million. As of December 31, 2004, money market funds include investments in the
Merrill Lynch Premier Institutional Money Market Fund of $44.0 million and the Barclays
Global Investors Prime Money Market Fund of $35.0 million. We had gross unrealized losses of $1 million at March 31, 2005 and $586 thousand at December
31, 2004. There were no declines in the fair value of investments available for sale below
their cost that were deemed to be other than temporary at March 31, 2005 or December 31,
2004. At March 31, 2005, we held one investment in an equity security, eighteen investments
in U.S. Treasury and government agency securities and twenty investments in other debt
securities that were in an unrealized loss position. The range of unrealized losses per
individual debt security was $1 thousand to $121 thousand and resulted from increases in
interest rates, not from deterioration in the creditworthiness of the issuers. The maximum
length of time an investment was in an unrealized loss position was twelve months. These
unrealized losses were not deemed to be other than temporary impairments based upon the
length of time and the extent to which the fair value has been less than cost, the current
interest rate environment, the underlying credit rating of the issuers, anticipated
volatility in the market and our intent and ability to 10




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##### Table of Contents



retain the investments for a period of time sufficient to allow for recovery in fair value.
The fair value of investments available for sale in an unrealized loss position and the
related unrealized losses were as follows at March 31, 2005: Less Than
    
    
    12 Months12 Months in an
    
    
    or Longer in anUnrealized Loss Position
    
    
    Unrealized Loss Position
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueU.S. Treasury and
government
agencies
securities
    
    $
    (385
    )
    
    $
    39,454
    
    
    $
    (443
    )
    
    $
    22,917
    
    
    $
    (828
    )
    
    $
    62,371State and municipal
securities
    
    
    (39
    )
    
    
    1,681
    
    
    
    0
    
    
    
    0
    
    
    
    (39
    )
    
    
    1,681Corporate bonds
    
    
    (23
    )
    
    
    5,082
    
    
    
    (17
    )
    
    
    7,049
    
    
    
    (40
    )
    
    
    12,131Asset-backed
securities
    
    
    (4
    )
    
    
    2,498
    
    
    
    (77
    )
    
    
    2,502
    
    
    
    (81
    )
    
    
    5,000Equity securities
    
    
    (45
    )
    
    
    7,255
    
    
    
    0
    
    
    
    0
    
    
    
    (45
    )
    
    
    7,255Total
    
    $
    (496
    )
    
    $
    55,970
    
    
    $
    (537
    )
    
    $
    32,468
    
    
    $
    (1,033
    )
    
    $
    88,438
 Note 4) Receivables Receivables on the balance sheet, including those held for sale, consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004Business credit card receivables
    
    $
    783,916
    
    
    $
    730,483Other receivables
    
    
    9,373
    
    
    
    10,280Gross receivables
    
    
    793,289
    
    
    
    740,763Add: Deferred origination costs, net of deferred fees
    
    
    21,239
    
    
    
    15,745Less: Allowance for receivable lossesBusiness credit cards
    
    
    (49,292
    )
    
    
    (49,190
    )Other receivables
    
    
    (1,313
    )
    
    
    (1,288
    )Total allowance for receivable losses
    
    
    (50,605
    )
    
    
    (50,478
    )Receivables, net
    
    $
    763,923
    
    
    $
    706,030
 Note 5) Allowance for Receivable Losses The following table presents activity in the allowance for receivable losses for the three
months ended March 31: 2005
    
    
    2004Beginning balance at January 1
    
    $
    50,478
    
    
    $
    48,454Provision for credit losses
    
    
    10,444
    
    
    
    9,511Provision for interest and fee losses
    
    
    2,603
    
    
    
    2,158Gross principal charge-offs:Business credit cards
    
    
    (11,221
    )
    
    
    (9,548
    )Principal recoveries:Business credit cards
    
    
    802
    
    
    
    635Other receivables
    
    
    0
    
    
    
    4Total principal recoveries
    
    
    802
    
    
    
    639Net principal charge-offs
    
    
    (10,419
    )
    
    
    (8,909
    )Interest and fee charge-offs:Business credit cards
    
    
    (2,501
    )
    
    
    (2,411
    )Balance at March 31
    
    $
    50,605
    
    
    $
    48,803
 11




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##### Table of Contents



Note 6) Securitization Activities Accounts receivable from securitizations consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004Retained interests in securitizations
    
    $
    163,223
    
    
    $
    162,473Accrued interest and fees on securitized
receivables, net(1)
    
    
    51,864
    
    
    
    50,814Amounts due from the securitization trust
    
    
    30,949
    
    
    
    31,075Total accounts receivable from securitizations
    
    $
    246,036
    
    
    $
    244,362
   (1)
    
    Reduced by an estimate for uncollectible interest and fees of $8.9 million at March
31, 2005 and $9.2 million at December 31, 2004. The following represents 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 EndedMarch 31,2005
    
    
    2004Average securitized receivables
    
    $
    2,548,739
    
    
    $
    2,515,532Securitization income
    
    
    30,396
    
    
    
    32,540Discount accretion
    
    
    4,021
    
    
    
    4,602Interchange income
    
    
    27,331
    
    
    
    25,944Servicing revenues
    
    
    12,599
    
    
    
    12,133Proceeds from new securitizations
    
    
    0
    
    
    
    90,000Proceeds from collections reinvested in revolving-period
securitizations
    
    
    1,671,645
    
    
    
    1,623,556Cash flows received on retained interests
    
    
    60,166
    
    
    
    66,682
 Three Months EndedMarch 31,2005
    
    
    2004Key assumptions:Discount rate
    
    
    8.22% - 11.27
    %
    
    
    10.98% - 14.33
    %Monthly payment rate
    
    
    21.77% - 23.06
    %
    
    
    20.63% - 22.25
    %Loss rate
    
    
    5.75% -  6.79
    %
    
    
    7.45% -  8.47
    %Interest yield, net of interest earned
by noteholders
    
    
    10.84% - 11.28
    %
    
    
    13.47% - 13.84
    %
 There were no purchases of delinquent accounts from the securitization trust during the
three months ended March 31, 2005 or 2004. The following assumptions were used in measuring the fair value of retained interests in
securitizations at March 31, 2005 and December 31, 2004. The assumptions listed represent
weighted averages of assumptions used for each securitization. The retained interest-only
strip valuation includes cash flow projections over the three month weighted average life of
existing receivables at March 31, 2005 and December 31, 2004. 12




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##### Table of Contents



March 31,
    
    
    December 31,2005
    
    
    2004Discount rate
    
    
    8.22% -  9.85
    %
    
    
    9.79% - 11.27
    %Monthly payment rate
    
    
    21.91% - 23.06
    %
    
    
    21.77% - 22.65
    %Loss rate
    
    
    5.75% -  6.61
    %
    
    
    5.90% -  6.79
    %Interest yield, net of interest earned by
noteholders
    
    
    10.84
    %
    
    
    11.28
    %
 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
receivables sold and the potential volatility of the current market for similar instruments
in assessing the fair value of retained interests in 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 estimated fair value of those assets of two unfavorable
variations from 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 at March 31, 2005. Effect on estimated fair value of the following
hypothetical changes in key assumptions:Discount rate increased by 2%
    
    $
    (1,972
    )Discount rate increased by 4%
    
    
    (3,891
    )Monthly payment rate at 110% of base assumption
    
    
    (1,388
    )Monthly payment rate at 125% of base assumption
    
    
    (3,306
    )Loss rate at 110% of base assumption
    
    
    (3,540
    )Loss rate at 125% of base assumption
    
    
    (8,850
    )Interest yield, net of interest earned by noteholders,
decreased by 1%
    
    
    (6,157
    )Interest yield, net of interest earned by noteholders,
decreased by 2%
    
    
    (12,313
    )
 The objective of these hypothetical analyses is to measure the sensitivity of the fair value
of the retained interests in securitizations to changes in assumptions. The methodology
used to calculate the estimated fair value in the analyses is a discounted cash flow
analysis, which is the same methodology used to calculate the estimated fair value of the
retained interests when quoted market prices are not available at each reporting date.
These estimates do not factor in the impact of simultaneous changes in other key
assumptions. The above scenarios do not reflect managements expectation regarding the
future direction of these rates, and they depict only certain possibilities out of a large
set of possible scenarios. 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: 13




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##### Table of Contents



March 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004Owned business credit card receivables
    
    $
    783,916
    
    
    $
    730,483
    
    
    $
    528,204Securitized business credit card receivables
    
    
    2,565,085
    
    
    
    2,564,147
    
    
    
    2,548,942Total managed receivables
    
    
    3,349,001
    
    
    
    3,294,630
    
    
    
    3,077,146Receivables 30 days or more delinquent:Owned
    
    
    27,507
    
    
    
    28,287
    
    
    
    26,908Securitized
    
    
    110,069
    
    
    
    107,546
    
    
    
    138,440Total managed
    
    
    137,576
    
    
    
    135,833
    
    
    
    165,348Receivables 90 days or more delinquent:Owned
    
    
    12,775
    
    
    
    13,638
    
    
    
    13,368Securitized
    
    
    51,318
    
    
    
    51,770
    
    
    
    69,087Total managed
    
    
    64,093
    
    
    
    65,408
    
    
    
    82,455Nonaccrual receivables:Owned
    
    
    11,658
    
    
    
    11,393
    
    
    
    8,879Securitized
    
    
    46,754
    
    
    
    43,114
    
    
    
    46,409Total managed
    
    
    58,412
    
    
    
    54,507
    
    
    
    55,288Accruing receivables past due 90 days or more:Owned
    
    
    11,139
    
    
    
    12,233
    
    
    
    11,973Securitized
    
    
    44,361
    
    
    
    45,981
    
    
    
    61,713Total managed
    
    
    55,500
    
    
    
    58,214
    
    
    
    73,686Net principal charge-offs for the year-to-date
period ended March 31 and December 31:Owned
    
    
    10,419
    
    
    
    39,936
    
    
    
    8,913Securitized
    
    
    35,270
    
    
    
    170,024
    
    
    
    46,187Total managed
    
    
    45,689
    
    
    
    209,960
    
    
    
    55,100
 Note 7) Selected Balance Sheet Information Other assets consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004Net deferred tax asset
    
    $
    68,878
    
    
    $
    70,260Investment in Fleet Credit Card Services, L.P.
    
    
    32,095
    
    
    
    32,095Investment in preferred securities trust
    
    
    3,163
    
    
    
    3,093Intangible assets
    
    
    3,051
    
    
    
    3,360Other
    
    
    84,904
    
    
    
    82,643Total other assets
    
    $
    192,091
    
    
    $
    191,451
 Other liabilities consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004Accounts payable and accrued expenses
    
    $
    35,586
    
    
    $
    33,091Business credit card business rewards
liability
    
    
    17,181
    
    
    
    16,872Business credit card cash back rewards
liability
    
    
    3,137
    
    
    
    2,817Current income tax payable
    
    
    20,323
    
    
    
    16,068Accrued interest payable
    
    
    9,608
    
    
    
    3,310Amounts due to the securitization trust
    
    
    3,848
    
    
    
    4,493Other
    
    
    21,418
    
    
    
    29,954Total other liabilities
    
    $
    111,101
    
    
    $
    106,605
 Eligible cardholders earn cash back rewards or business rewards based on net purchases
charged on their business credit card account. 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 estimates of the
percentage of earned rewards that cardholders will ultimately redeem and the costs of
business rewards based on historical experience, consideration of changes in portfolio
composition and changes in the rewards programs, including redemption terms. The following
table 14




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##### Table of Contents



shows the impact of the changes in the estimated percentage of earned rewards that
cardholders will ultimately redeem and other changes in estimated costs of future period
rewards redemptions for the three months ended March 31: 2005
    
    
    2004Decrease in other revenues
    
    $
    (650
    )
    
    $
    (500
    )Decrease in net income
    
    
    (397
    )
    
    
    (300
    )Amount per combined diluted share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
 Note 8) Commitments and Contingencies All outstanding litigation between Advanta and Fleet Financial Group, Inc. (Fleet) was
dismissed in February 2005, consistent with the terms of the May 28, 2004 agreement between
Advanta and Bank of America Corporation (Bank of America). See further discussion of
agreement in Note 11. 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 the complaint and asserted a counterclaim against Chase for
breach of contract relating to funds owed by Chase to us in connection with the Mortgage
Transaction. 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 in
May 2004, and the court ordered the parties to make certain post-trial filings with the
court. Post-trial filings were filed on July 30, 2004 and 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.
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 position 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.
Discovery in this matter is ongoing. 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. On August 9, 2004, we
filed our answer, affirmative defenses and counterclaims to the first amended complaint in
the United States District Court for the District of Delaware, asserting substantially the
same claims and damages as in the Montgomery County, Pennsylvania action. On August 30,
2004, Chase filed a motion to dismiss our counterclaims. On September 15, 2004, we filed
our opposition to Chases 15




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##### Table of Contents



motion. Discovery in this matter is ongoing. The Court has scheduled mediation for the
parties on May 5 and 6, 2005, at which the parties are to attempt to resolve or narrow some
or all of the claims. The mediation is non-binding and the success or failure is not
possible to predict. These complaints, counterclaims and other filings relate to
contractual claims, including claims for indemnification, under the purchase and sale
agreement governing the Mortgage Transaction and are a continuation of the ongoing dispute
associated with the Mortgage Transaction. Since this litigation relates to a discontinued
operation, we have established reserves for estimated future litigation costs. 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 position 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 AMCUSA and AMCSIs alleged failure to provide information and
documentation under the former mortgage program. In February and June 2004, GPMF filed
Statements of Claim, alleging additional contractual claims concerning GPMFs relationship
with AMCUSA and AMCSI. Certain of GPMFs claims were tried at an arbitration hearing in
November 2004 (Phase I Claims). On January 10, 2005, the arbitrator issued a ruling in
AMCUSA and AMCSIs favor on all issues capable of determination from the evidence presented
at the hearing on the Phase I Claims. Further evidence will be presented to address certain
issues unresolved by the January 2005 ruling. On January 28, 2005, GPMF filed an amended
statement of claim, raising issues related to the effect of the Mortgage Transaction on
GPMFs contracts with AMCUSA and AMCSI and attempting to add Chase as a party to the
arbitration. AMCUSA, AMCSI and GPMF have filed various motions and cross-motions relating
to GPMFs amended statement of claim, which were all denied by the arbitrator on April 5,
2005. All remaining claims are scheduled to be heard in July 2005 (Phase II Claims),
including any claims GPMF is permitted to pursue against Chase in the arbitration. The
aggregate amount of damages sought by GPMF on the Phase II Claims is not known and at this
time, no cognizable damage amount has been specified by GPMF in its pleadings. Since this
arbitration relates to a discontinued operation, we have established reserves for estimated
future legal costs. We do not expect this arbitration to have a material adverse effect on
our financial position or results of operations. 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 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 16




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##### Table of Contents



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 Cash dividends per share of common stock declared were as follows: Three Months EndedMarch 31,2005
    
    
    2004Class A Common Stock
    
    $
    0.095
    
    
    $
    0.063Class B Common Stock
    
    
    0.113
    
    
    
    0.076
 In November 2004, the Board of Directors of Advanta Corp. approved a 20% increase in the

regular quarterly cash dividends on Class A and Class B Common Stock beginning with the
dividends payable in the second quarter of 2005. Note 10) Segment Information Information about reportable segments and a reconciliation of such information to the
consolidated financial statements follows: Advanta Business
    
    
    VentureCards
    
    
    Capital
    
    
    Other(1)
    
    
    TotalThree months ended March 31, 2005Interest income
    
    $
    28,866
    
    
    $
    0
    
    
    $
    3,313
    
    
    $
    32,179Interest expense
    
    
    8,521
    
    
    
    38
    
    
    
    4,026
    
    
    
    12,585Noninterest revenues (losses)
    
    
    70,865
    
    
    
    (1,041
    )
    
    
    984
    
    
    
    70,808Gain on transfer of consumer
credit card business
    
    
    0
    
    
    
    0
    
    
    
    67,679
    
    
    
    67,679Pretax income (loss) from
continuing operations
    
    
    18,417
    
    
    
    (1,079
    )
    
    
    67,679
    
    
    
    85,017Total assets at end of period
    
    
    1,050,228
    
    
    
    5,417
    
    
    
    757,598
    
    
    
    1,813,243Three months ended March 31, 2004Interest income
    
    $
    21,849
    
    
    $
    0
    
    
    $
    1,562
    
    
    $
    23,411Interest expense
    
    
    9,123
    
    
    
    88
    
    
    
    2,320
    
    
    
    11,531Noninterest revenues
    
    
    70,262
    
    
    
    32
    
    
    
    1,133
    
    
    
    71,427Pretax income (loss) from
continuing operations
    
    
    16,665
    
    
    
    (1,063
    )
    
    
    0
    
    
    
    15,602Total assets at end of period
    
    
    756,324
    
    
    
    10,524
    
    
    
    757,166
    
    
    
    1,524,014
   (1)
    
    Other includes investment and other activities not attributable to
reportable segments. Total assets in the Other segment include assets of
discontinued operations. Note 11) Gain on Transfer of Consumer Credit Card Business 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 acquired by Bank of America, relating to the transfer of our
consumer credit card business to Fleet Credit Card Services, L.P. in 1998. The agreement
was subject to the Internal Revenue Services final approval of the settlement of the tax
disputes. We received the final approval of the Internal Revenue Service in January 2005
and, as a result, we received $63.8 million in cash from Bank of America in February 2005,
representing a return of the payments that we made to Fleet in the Delaware state court
litigation in February 2004. Consistent with the terms of our agreement with Bank 17




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##### Table of Contents



of America, all outstanding litigation between Advanta and Fleet was dismissed in February
2005. The overall impact in the three months ended March 31, 2005 of the agreement with
Bank of America, including the cash received, settlement of the tax disputes and
reevaluation of the valuation allowance on deferred tax assets, was a pretax gain of $67.7
million, tax expense of $5.6 million and an increase in additional paid-in capital of $6.0
million. See Note 12 for further description of the income tax impact of our May 28, 2004
agreement with Bank of America. Note 12) Income Taxes Income tax expense consisted of the following components for the three months ended March
31: 2005
    
    
    2004Current:Federal
    
    $
    3,463
    
    
    $
    0State
    
    
    1,177
    
    
    
    520Total current
    
    
    4,640
    
    
    
    520Deferred:Federal
    
    
    7,317
    
    
    
    5,452State
    
    
    390
    
    
    
    191Total deferred
    
    
    7,707
    
    
    
    5,643Income tax expense
    
    $
    12,347
    
    
    $
    6,163
 The reconciliation of the statutory federal income tax to income tax expense is as follows
for the three months ended March 31: 2005
    
    
    2004Statutory federal income tax
    
    $
    29,756
    
    
    $
    5,461Gain on transfer of consumer credit card business
    
    
    (12,347
    )
    
    
    0Change in valuation allowance
    
    
    (6,393
    )
    
    
    0State income taxes, net of federal income tax benefit
    
    
    1,019
    
    
    
    462Nondeductible expenses
    
    
    281
    
    
    
    168Compensation limitation
    
    
    110
    
    
    
    49Other
    
    
    (79
    )
    
    
    23Income tax expense
    
    $
    12,347
    
    
    $
    6,163
 Our effective tax rate was 14.5% for the three months ended March 31, 2005 and 39.5% for the
three months ended March 31, 2004. The effective tax rate for the three months ended March
31, 2005 was impacted by the Bank of America agreement and reevaluation of the valuation
allowance discussed below. Deferred taxes are provided 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: March 31,
    
    
    December 31,2005
    
    
    2004Deferred tax assets
    
    $
    82,261
    
    
    $
    81,947Deferred tax
liabilities
    
    
    (13,383
    )
    
    
    (11,687
    )Net deferred tax asset
    
    $
    68,878
    
    
    $
    70,260
 18




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##### Table of Contents



The components of the net deferred tax asset are as follows: March 31,
    
    
    December 31,2005
    
    
    2004Net operating loss carryforwards
    
    $
    16,035
    
    
    $
    156,381Valuation allowance
    
    
    0
    
    
    
    (145,745
    )Allowance for receivable losses
    
    
    21,616
    
    
    
    21,618Alternative minimum tax credit carryforwards
    
    
    14,242
    
    
    
    15,187Unrealized venture capital investment losses
    
    
    9,534
    
    
    
    9,304Deferred origination costs, net of deferred fees
    
    
    (7,148
    )
    
    
    (5,233
    )Business credit card rewards
    
    
    7,111
    
    
    
    6,891Deferred compensation
    
    
    3,397
    
    
    
    6,925Securitization income
    
    
    (2,624
    )
    
    
    (2,624
    )Capital loss carryforwards
    
    
    1,399
    
    
    
    1,399Other
    
    
    5,316
    
    
    
    6,157Net deferred tax asset
    
    $
    68,878
    
    
    $
    70,260
 In January 2005, we received the Internal Revenue Services final approval of the settlement
of tax disputes in our May 28, 2004 agreement with Bank of America and in February 2005, we
received $63.8 million in cash from Bank of America. See Note 11 for further discussion.
The settlement of the tax disputes resulted in an allocation of $381 million of the disputed
partnership tax deductions to Fleet and $617 thousand of the disputed $47 million
partnership taxable gain to Advanta. The impact to us of the tax deduction and gain
allocation was a reduction in our deferred tax asset related to net operating loss
carryforwards of $133.4 million and a corresponding reduction in our valuation allowance on
deferred tax assets of $133.4 million, both in the three months ended March 31, 2005. Upon
receipt of the Internal Revenue Services approval of the settlement of the tax disputes,
the remaining valuation allowance of $12.4 million was evaluated, and management determined
that it was more likely than not that the remaining deferred tax asset was realizable and
therefore, no valuation allowance was needed, resulting in a $6.4 million reduction in tax
expense and a $6.0 million increase in additional paid-in capital. The increase in
additional paid-in capital represents the portion of the valuation allowance that had been
related to tax benefits from stock-based compensation. The gain associated with the
original transfer of assets to Fleet Credit Card Services, L.P. in 1998 was not subject to
income tax, and therefore, a substantial portion of the February 2004 payment to Fleet was
not tax-deductible. A substantial portion of the $63.8 million payment received in February
2005 was not taxable since it is a return of our payment to Fleet in February 2004. After
the February 2005 payment, the cumulative gain on transfer of consumer credit card business
for which no deferred taxes have been provided is approximately $650 million, as the
transaction structure remains nontaxable under current tax law. Net operating loss carryforwards of $45.8 million at March 31, 2005 are scheduled to expire
in the year ended December 31, 2021. Capital loss carryforwards of $4.0 million at March
31, 2005 are scheduled to expire in the year ended December 31, 2009. Alternative minimum
tax credit carryforwards do not expire. 19




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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 EndedMarch 31,2005
    
    
    2004Net income
    
    $
    72,670
    
    
    $
    9,439Less: Preferred A dividends
    
    
    (141
    )
    
    
    (141
    )Net income available to common stockholders
    
    
    72,529
    
    
    
    9,298Less: Class A dividends declared
    
    
    (830
    )
    
    
    (551
    )Less: Class B dividends declared
    
    
    (2,098
    )
    
    
    (1,343
    )Undistributed net income
    
    $
    69,601
    
    
    $
    7,404Basic net income per common shareClass A
    
    $
    2.82
    
    
    $
    0.37Class B
    
    
    2.85
    
    
    
    0.39Combined(1)
    
    
    2.84
    
    
    
    0.38Diluted net income per common shareClass A
    
    $
    2.54
    
    
    $
    0.34Class B
    
    
    2.55
    
    
    
    0.36Combined(1)
    
    
    2.55
    
    
    
    0.35Basic weighted average common shares outstandingClass A
    
    
    8,812
    
    
    
    8,786Class B
    
    
    16,705
    
    
    
    15,502Combined
    
    
    25,517
    
    
    
    24,288Dilutive effect ofOptions Class B
    
    
    1,876
    
    
    
    1,225Restricted stock Class B
    
    
    1,089
    
    
    
    929Diluted weighted average common shares outstandingClass A
    
    
    8,812
    
    
    
    8,786Class B
    
    
    19,670
    
    
    
    17,656Combined
    
    
    28,482
    
    
    
    26,442Antidilutive sharesOptions Class B
    
    
    49
    
    
    
    249
   (1)
    
    Combined represents income available to common stockholders divided by the combined
total of Class A and Class B weighted average common shares outstanding. 20




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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 Net income includes the following business segment results for the three months ended March
31: ($ in thousands, except per share amounts)2005
    
    
    2004Pretax income (loss):Advanta Business Cards
    
    $
    18,417
    
    
    $
    16,665Venture Capital
    
    
    (1,079
    )
    
    
    (1,063
    )Other(1)
    
    
    67,679
    
    
    
    0Total pretax income
    
    
    85,017
    
    
    
    15,602Income tax expense
    
    
    12,347
    
    
    
    6,163Net income
    
    $
    72,670
    
    
    $
    9,439Per combined common share, assuming dilution
    
    $
    2.55
    
    
    $
    0.35
   (1)
    
    Other for the three months ended March 31, 2005 includes a $67.7 million pretax gain
on transfer of consumer credit card business. Advanta Business Cards pretax income increased for the three months ended March 31, 2005 as
compared to the same period of 2004 due primarily to growth in average owned receivables.
Improved asset quality resulted in decreases in net principal charge-off rates on owned and
securitized receivables that were offset primarily by higher securitized cost of funds and
lower yields on securitized receivables. The decrease in yields on securitized receivables
reflects our competitively-priced offerings and products, including promotional pricing and
rewards, designed to selectively attract and retain high credit quality customers and to
respond to the competitive environment. We are experiencing the benefits of high credit
quality customers in lower delinquency and charge-off rates and increased transaction
volume, and we expect these benefits to continue in future periods. Venture Capital segment results include pretax investment losses of $1.0 million for the
three months ended March 31, 2005 as compared to pretax investment gains of $32 thousand for
the same period of 2004, which reflect the market conditions for our venture capital
investments in each respective period. Venture Capital pretax loss in the three months
ended March 31, 2004 also included $807 thousand of expenses relating to the lease
commitments and severance costs associated with the closure of an operational location of
our Venture Capital segment in the first quarter of 2004. Pretax income for the three months ended March 31, 2005 also includes a $67.7 million pretax
gain on transfer of consumer credit card business relating to our May 28, 2004 agreement
with Bank of America. See further discussion in the Gain on Transfer of Consumer Credit
Card Business section of Managements Discussion and Analysis of Financial Condition and
Results of Operations. 21




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with U.S. generally accepted
accounting principles (GAAP) 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 income, 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 estimates could have a material impact on
our financial position or results of operations. These accounting policies are described in
our Annual Report on Form 10-K for the year ended December 31, 2004. 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 months ended March 31. Credit quality statistics for the
business credit card portfolio are included in the Provision and Allowance for Receivable
Losses section of Managements Discussion and Analysis of Financial Condition and Results
of Operations. ($ in thousands)
    
    2005
    
    
    2004Average owned receivables
    
    $
    779,176
    
    
    $
    551,652Average securitized receivables
    
    $
    2,548,739
    
    
    $
    2,515,532Cardholder transaction volume
    
    $
    2,176,809
    
    
    $
    1,921,933New account originations
    
    
    44,781
    
    
    
    39,135Average number of active accounts(1)
    
    
    577,301
    
    
    
    592,114Ending number of accounts at March 31
    
    
    786,967
    
    
    
    788,330
   (1)
    
    Active accounts are defined as accounts with a balance at month-end. Active account
statistics do not include charged-off accounts. The statistics reported above are the
average number of active accounts for the three months ended March 31. The increase in new account originations in the three months ended March 31, 2005 as
compared to the same period of 2004 is due primarily to the number and timing of marketing
campaigns. We expect managed business credit card receivables to grow 10% to 20% and owned
receivables to grow 23% to 33% in the year ended December 31, 2005, based on our current
plans and strategies. See further discussion in the Securitization Income section of
Managements Discussion and Analysis of Financial Condition and Results of Operations for a
description of why management believes managed data is useful to investors. The following
is a reconciliation of projected estimated owned business credit card receivable growth to
managed business credit card receivable growth: 22




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##### Table of Contents



Projected Estimate at December 31, 2005Actual at
    
    
    Low End($ in thousands)
    
    December 31, 2004
    
    
    of Range
    
    
    Percentage Increase
    
    
    High End of Range
    
    
    Percentage IncreaseOwned receivables
    
    $
    730,483
    
    
    $
    898,500
    
    
    
    23.0
    %
    
    $
    971,500
    
    
    
    33.0
    %Securitized receivables
    
    
    2,564,147
    
    
    
    2,725,500
    
    
    
    6.3
    %
    
    
    2,982,500
    
    
    
    16.3
    %Managed receivables
    
    $
    3,294,630
    
    
    $
    3,624,000
    
    
    
    10.0
    %
    
    $
    3,954,000
    
    
    
    20.0
    %
 Pretax income for Advanta Business Cards was $18.4 million for the three months ended
March 31, 2005 as compared to $16.7 million for the same period of 2004. The components of
pretax income for Advanta Business Cards for the three months ended March 31 were as
follows: ($ in thousands)
    
    2005
    
    

    2004Net interest income on owned interest-earning assets
    
    $
    20,345
    
    
    $
    12,726Noninterest revenues
    
    
    70,865
    
    
    
    70,262Provision for credit losses
    
    
    (10,419
    )
    
    
    (9,413
    )Operating expenses
    
    
    (62,374
    )
    
    
    (56,910
    )Pretax income
    
    $
    18,417
    
    
    $
    16,665
 Net interest income on owned interest-earning assets increased by $7.6 million for the three
months ended March 31, 2005 as compared to the same period of 2004 due primarily to an
increase in average owned business credit card receivables of $228 million. The increase in
provision for credit losses in the three months ended March 31, 2005 as compared to the same
period of 2004 primarily reflects the increase 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 principal charge-off trends and the current
composition of the portfolio as compared to the same period of 2004. The increase in
operating expenses in the three months ended March 31, 2005 as compared to the same period
of 2004 was due primarily to increased salaries and employee benefits and marketing
expenses. Operating expenses in the three months ended March 31, 2005 include $2.9 million
of expense associated with a separation agreement for a former executive. Operating
expenses in the three months ended March 31, 2004 include $1.6 million of expense associated
with executive compensation incurred in connection with changes in senior management and
Venture Capital segment severance costs. VENTURE CAPITAL The components of pretax loss for our Venture Capital segment for the three months ended
March 31 were as follows: ($ in thousands)
    
    2005
    
    
    2004Interest expense
    
    $
    (38
    )
    
    $
    (88
    )Realized losses
    
    
    (383
    )
    
    
    0Unrealized gains (losses)
    
    
    (658
    )
    
    
    32Operating expenses
    
    
    0
    
    
    
    (1,007
    )Pretax loss
    
    $
    (1,079
    )
    
    $
    (1,063
    )
 As shown in the table above, pretax loss for our Venture Capital segment is comprised
primarily of realized and unrealized gains or losses on our venture capital investments,
which reflect the market conditions for those investments in each respective period, and
operating expenses, if applicable. The estimated fair value of our venture capital
investments was $5.1 million as of March 31, 2005 and $5.3 million as of December 31, 2004.
Operating expenses for the three months 23




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##### Table of Contents



ended March 31, 2004 included 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 incurred minimal operating expenses in the
Venture Capital segment in subsequent periods, including the three months ended March 31,
2005. INTEREST INCOME AND EXPENSE Interest income increased $8.8 million to $32.2 million for the three months ended March 31,
2005 as compared to the same period of 2004. The increase was due primarily to an increase
in average owned business credit card receivables of $228 million to $779 million and an
increase in the average yield earned on our business credit card receivables. The average
yield earned on our business credit card receivables increased in the three months ended
March 31, 2005 as compared to the same period of 2004 due to the composition of receivables
that were held on-balance sheet. Average owned business credit card receivables in the
three months ended March 31, 2005 included proportionately less newly-originated receivables
with promotional rates than the average in the same period of 2004, resulting in an
increase in average yield earned on owned business credit card receivables. Interest expense increased $1.1 million to $12.6 million for the three months ended March
31, 2005 as compared to the same period of 2004. The increase in interest expense is due
primarily to an increase in our average deposits outstanding of $176 million to $842 million
and an increase in the average cost of funds on deposits. We expect our average cost of
funds on deposits to increase in future periods based on the current market expectations for
future interest rates and our anticipated funding needs resulting from expected higher
levels of on-balance sheet receivables and assets at Advanta Bank Corp. in 2005. However,
this may not result in an increase in our aggregate average cost of funds due to the
fluctuation in funding mix and our parent company liquidity position in 2005 that will
provide us with the flexibility to manage our debt pricing and maturities. See further
discussion in the Liquidity, Capital Resources and Analysis of Financial Condition section
of Managements Discussion and Analysis of Financial Condition and Results of Operations.
We expect higher levels of average on-balance sheet receivables and assets for the year
ended December 31, 2005 as compared to 2004 as a result of our current growth plans and
strategies and securitizations in their amortization periods in 2005. The following table provides an analysis of interest income and expense data, average
balance sheet data, net interest spread and net interest margin for both continuing and
discontinued operations. The net interest spread represents the difference between the
yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
The net interest margin represents the difference between the yield on interest-earning
assets and the average rate paid to fund interest-earning assets. Interest income includes
late fees on business credit card receivables. 24




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##### Table of Contents



INTEREST RATE ANALYSIS AND AVERAGE BALANCES Three Months Ended March 31,2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Owned receivables:Business credit cards(1)
    
    $
    779,176
    
    
    $
    24,845
    
    
    
    12.93
    %
    
    $
    551,652
    
    
    $
    17,247
    
    
    
    12.57
    %Other receivables
    
    
    9,959
    
    
    
    129
    
    
    
    5.24
    
    
    
    13,888
    
    
    
    146
    
    
    
    4.23Total receivables
    
    
    789,135
    
    
    
    24,974
    
    
    
    12.83
    
    
    
    565,540
    
    
    
    17,393
    
    
    
    12.37Investments(2)
    
    
    516,046
    
    
    
    3,188
    
    
    
    2.47
    
    
    
    497,561
    
    
    
    1,419
    
    
    
    1.13Retained interests in
securitizations
    
    
    162,727
    
    
    
    4,021
    
    
    
    9.88
    
    
    
    149,998
    
    
    
    4,602
    
    
    
    12.27Interest-earning assets
of discontinued
operations
    
    
    14,756
    
    
    
    358
    
    
    
    9.72
    
    
    
    63,046
    
    
    
    1,526
    
    
    
    9.68Total interest-earning
assets(3)
    
    
    1,482,664
    
    
    $
    32,541
    
    
    
    8.87
    %
    
    
    1,276,145
    
    
    $
    24,940
    
    
    
    7.84
    %Noninterest-earning assets
    
    
    271,144
    
    
    
    
    
    
    
    
    
    
    
    338,536Total assets
    
    $
    1,753,808
    
    
    
    
    
    
    
    
    
    
    $
    1,614,681Interest-bearing liabilities:Deposits
    
    $
    841,786
    
    
    $
    6,533
    
    
    
    3.15
    %
    
    $
    666,270
    
    
    $
    4,682
    
    
    
    2.83
    %Debt
    
    
    260,380
    
    
    
    3,898
    
    
    
    6.07
    
    
    
    303,848
    
    
    
    4,632
    
    
    
    6.13Subordinated debt
payable to preferred
securities trust
    
    
    103,093
    
    
    
    2,289
    
    
    
    8.88
    
    
    
    103,093
    
    
    
    2,289
    
    
    
    8.88Total interest-bearing
liabilities(4)
    
    
    1,205,259
    
    
    $
    12,720
    
    
    
    4.27
    %
    
    
    1,073,211
    
    
    $
    11,603
    
    
    
    4.34
    %Noninterest-bearing
liabilities
    
    
    115,864
    
    
    
    
    
    
    
    
    
    
    
    194,016Total liabilities
    
    
    1,321,123
    
    
    
    
    
    
    
    
    
    
    
    1,267,227Stockholders equity
    
    
    432,685
    
    
    
    
    
    
    
    
    
    
    
    347,454Total liabilities and
stockholders equity
    
    $
    1,753,808
    
    
    
    
    
    
    
    
    
    
    $
    1,614,681Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.60
    %
    
    
    
    
    
    
    
    
    
    

    3.50
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.42
    %
    
    
    
    
    
    
    
    
    
    
    4.20
    %
   (1)
    
    Interest income includes late fees for owned business credit card receivables of $1.7
million for the three months ended March 31, 2005 and $1.4 million for the three months
ended March 31, 2004.(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. PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES For the three months ended March 31, 2005, provision for credit losses on a consolidated
basis increased $0.9 million to $10.4 million as compared to the same period of 2004. The
increase in provision for credit losses was due primarily to an increase in average owned
business credit card receivables of $228 million in the three months ended March 31, 2005 as
compared to the same period of 2004, partially offset by a decrease in the estimate of
losses inherent in the portfolio 25




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##### Table of Contents



based on delinquency and principal charge-off trends and the current composition of the
portfolio that included more high credit quality customers. For the three months ended March 31, 2005, the provision for interest and fee losses, which
is recorded as a direct reduction to interest and fee income, increased by $0.4 million to
$2.6 million as compared to the same period of 2004. The increase was due primarily to
growth in average owned business credit card receivables for the three months ended March
31, 2005, partially offset by a reduction in the estimate of losses inherent in the
portfolio based on the improved delinquency and principal charge-off trends and the
composition of the portfolio. The allowance for receivable losses on business credit card receivables was $49.3 million as
of March 31, 2005, or 6.29% of owned receivables, which was lower as a percentage of owned
receivables than the allowance of $49.2 million, or 6.73% of owned receivables, as of
December 31, 2004. The decrease in allowance as a percentage of owned receivables reflects
an increase in owned business credit card receivables and a reduction in the estimate of
losses inherent in the portfolio based on delinquency and principal charge-off trends. In
addition, refinements and enhancements to our procedures and tools used in the risk
management of existing customers have helped to reduce credit risk in the portfolio. Although charge-off levels are not always predictable since they are impacted by the
economic environment and other factors beyond our control, including the potential impact of
the recent changes in bankruptcy law, 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 year ended December 31, 2005 will be lower than those
experienced for the year ended December 31, 2004. We base this expectation on the level of
delinquent receivables at March 31, 2005 and the current composition of the portfolio that
reflects our strategic initiative to selectively attract and retain high credit quality
customers. The following table provides credit quality data as of and for the 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. 26




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##### Table of Contents



March 31,
    
    
    December 31,
    
    
    March 31,($ in thousands)
    
    2005
    
    
    2004
    
    
    2004CONSOLIDATED  OWNEDAllowance for receivable losses
    
    $
    50,605
    
    
    $
    50,478
    
    
    $
    48,803Receivables 30 days or more delinquent
    
    
    27,589
    
    
    
    28,369
    
    
    
    27,020Receivables 90 days or more delinquent
    
    
    12,775
    
    
    
    13,638
    
    
    
    13,480Nonaccrual receivables
    
    
    11,658
    
    
    
    11,393
    
    
    
    8,991Accruing receivables past due 90 days or more
    
    
    11,139
    
    
    
    12,233
    
    
    
    11,973As a percentage of gross receivables:Allowance for receivable losses
    
    
    6.38
    %
    
    
    6.81
    %
    
    
    9.04
    %Receivables 30 days or more delinquent
    
    
    3.48
    
    
    
    3.83
    
    
    
    5.01Receivables 90 days or more delinquent
    
    
    1.61
    
    
    
    1.84
    
    
    
    2.50Nonaccrual receivables
    
    
    1.47
    
    
    
    1.54
    
    
    
    1.67Accruing receivables past due 90 days or more
    
    
    1.40
    
    
    
    1.65
    
    
    
    2.22Net principal charge-offs for the three months
ended March 31 and December 31
    
    $
    10,419
    
    
    $
    10,729
    
    
    $
    8,909As a percentage of average gross receivables
(annualized):Net principal charge-offs for the three months
ended March 31 and December 31
    
    
    5.28
    %
    
    
    5.86
    %
    
    
    6.30
    %BUSINESS CREDIT CARDS  OWNEDAllowance for receivable losses
    
    $
    49,292
    
    
    $
    49,190
    
    
    $
    47,289Receivables 30 days or more delinquent
    
    
    27,507
    
    
    
    28,287
    
    
    
    26,908Receivables 90 days or more delinquent
    
    
    12,775
    
    
    
    13,638
    
    
    
    13,368Nonaccrual receivables
    
    
    11,658
    
    
    
    11,393
    
    
    
    8,879Accruing receivables past due 90 days or more
    
    
    11,139
    
    
    
    12,233
    
    
    
    11,973As a percentage of gross receivables:Allowance for receivable losses
    
    
    6.29
    %
    
    
    6.73
    %
    
    
    8.95
    %Receivables 30 days or more delinquent
    
    
    3.51
    
    
    
    3.87
    
    
    
    5.09Receivables 90 days or more delinquent
    
    
    1.63
    
    
    
    1.87
    
    
    
    2.53Nonaccrual receivables
    
    
    1.49
    
    
    
    1.56
    
    
    
    1.68Accruing receivables past due 90 days or more
    
    
    1.42
    
    
    
    1.67
    
    
    
    2.27Net principal charge-offs for the three months
ended March 31 and December 31
    
    $
    10,419
    
    
    $
    10,721
    
    
    $
    8,913As a percentage of average gross receivables
(annualized):Net principal charge-offs for the three months
ended March 31 and December 31
    
    
    5.35
    %
    
    
    5.94
    %
    
    
    6.46
    %
 SECURITIZATION INCOME Securitization income decreased $2.1 million for the three months ended March 31, 2005 to
$30.4 million as compared to the same period of 2004. The decrease in securitization income
was due to an increase in the floating interest rates earned by noteholders and a decrease
in yields on securitized receivables, partially offset by the positive impact from a
decrease in the net principal charge-off rate on securitized receivables. The increase in
the floating interest rates earned by noteholders resulted from the rising interest rate
environment, which we expect may continue based on the current market expectations for
future interest rates. The decrease in yields on securitized receivables reflects our
competitively-priced offerings and products, including promotional pricing and rewards,
designed to selectively attract and retain high credit quality customers and to respond to
the competitive environment. The decrease in the net principal charge-off rate is similar
to trends experienced in owned business credit card receivables as discussed in the
Provision and Allowance for Receivable Losses section of Managements Discussion and
Analysis of Financial Condition and Results of Operations. 27




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##### Table of Contents



Managed Receivable Data In addition to evaluating the financial performance of the Advanta Business Cards segment
under 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 STATISTICSAdvanta
    
    
    
    
    
    
    
    
    
    
    AdvantaBusiness
    
    
    GAAP
    
    
    Securitization
    
    
    Business
    
    
    Managed($ in thousands)
    
    Cards GAAP
    
    
    Ratio(2)
    
    
    Adjustments
    
    
    Cards Managed
    
    
    Ratio(2)Three Months Ended March 31, 2005:Interest income
    
    $
    28,866
    
    
    
    12.26
    %
    
    $
    90,742
    
    
    $
    119,608
    
    
    
    14.38
    %Interest expense
    
    
    8,521
    
    
    
    3.62
    
    
    
    19,874
    
    
    
    28,395
    
    
    
    3.42Net interest income
    
    
    20,345
    
    
    
    8.64
    
    
    
    70,868
    
    
    
    91,213
    
    
    
    10.96Noninterest revenues
    
    
    70,865
    
    
    
    30.09
    
    
    
    (35,598
    )
    
    
    35,267
    
    
    
    4.24Provision for credit losses
    
    
    10,419
    
    
    
    4.42
    
    
    
    35,270
    (3)
    
    
    45,689
    
    
    
    5.49Risk-adjusted revenues(1)
    
    
    80,791
    
    
    
    34.31
    
    
    
    0
    
    
    
    80,791
    
    
    
    9.71Average business credit card
interest-earning assets
    
    
    941,903
    
    
    
    
    
    
    
    2,386,012
    
    
    
    3,327,915Average business credit card
receivables
    
    
    779,176
    
    
    
    
    
    
    
    2,548,739
    
    
    
    3,327,915Net principal charge-offs
    
    
    10,419
    
    
    
    5.35
    
    
    
    35,270
    
    
    
    45,689
    
    
    
    5.49Three Months Ended March 31, 2004:Interest income
    
    $
    21,849
    
    
    
    12.46
    %
    
    $
    93,107
    
    
    $
    114,956
    
    
    
    14.99
    %Interest expense
    
    
    9,123
    
    
    
    5.21
    
    
    
    11,334
    
    
    
    20,457
    
    
    
    2.67Net interest income
    
    
    12,726
    
    
    
    7.25
    
    
    
    81,773
    
    
    
    94,499
    
    
    
    12.32Noninterest revenues
    
    
    70,262
    
    
    
    40.06
    
    
    
    (35,586
    )
    
    
    34,676
    
    
    
    4.52Provision for credit losses
    
    
    9,413
    
    
    
    5.37
    
    
    
    46,187
    (3)
    
    
    55,600
    
    
    
    7.25Risk-adjusted revenues(1)
    
    
    73,575
    
    
    
    41.94
    
    
    
    0
    
    
    
    73,575
    
    
    
    9.59Average business credit card
interest-earning assets
    
    
    701,650
    
    
    
    
    
    
    
    2,365,534
    
    
    
    3,067,184Average business credit card
receivables
    
    
    551,652
    
    
    
    
    
    
    
    2,515,532
    
    
    
    3,067,184Net principal charge-offs
    
    
    8,913
    
    
    
    6.46
    
    
    
    46,187
    
    
    
    55,100
    
    
    
    7.19
   (1)
    
    Risk-adjusted revenues represent net interest income and noninterest revenues, less
provision for credit losses.(2)
    
    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.(3)
    
    Includes the amount by which 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. 28




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##### Table of Contents



BALANCE SHEET MEASURES AND STATISTICSAdvanta
    
    
    
    
    
    
    
    
    
    
    AdvantaBusiness
    
    
    GAAP
    
    
    Securitization
    
    
    Business
    
    
    Managed($ in thousands)
    
    Cards GAAP
    
    
    Ratio(1)
    
    
    Adjustments
    
    
    Cards Managed
    
    
    Ratio(1)As of March 31, 2005Number of business
credit card accounts
    
    
    786,967
    
    
    
    
    
    
    
    N/A
    
    
    
    786,967Ending business credit
card receivables
    
    $
    783,916
    
    
    
    
    
    
    $
    2,565,085
    
    
    $
    3,349,001Receivables 30 days or
more delinquent
    
    
    27,507
    
    
    
    3.51
    %
    
    
    110,069
    
    
    
    137,576
    
    
    
    4.11
    %Receivables 90 days or
more delinquent
    
    
    12,775
    
    
    
    1.63
    
    
    
    51,318
    
    
    
    64,093
    
    
    
    1.91Nonaccrual receivables
    
    
    11,658
    
    
    
    1.49
    
    
    
    46,754
    
    
    
    58,412
    
    
    
    1.74Accruing receivables past
due 90 days or more
    
    
    11,139
    
    
    
    1.42
    
    
    
    44,361
    
    
    
    55,500
    
    
    
    1.66As of December 31, 2004Number of business
credit card accounts
    
    
    777,943
    
    
    
    
    
    
    
    N/A
    
    
    
    777,943Ending business credit
card receivables
    
    $
    730,483
    
    
    
    
    
    
    $
    2,564,147
    
    
    $
    3,294,630Receivables 30 days or
more delinquent
    
    
    28,287
    
    
    
    3.87
    %
    
    
    107,546
    
    
    
    135,833
    
    
    
    4.12
    %Receivables 90 days or
more delinquent
    
    
    13,638
    
    
    
    1.87
    
    
    
    51,770
    
    
    
    65,408
    
    
    
    1.99Nonaccrual receivables
    
    
    11,393
    
    
    
    1.56
    
    
    
    43,114
    
    
    
    54,507
    
    
    
    1.65Accruing receivables past
due 90 days or more
    
    
    12,233
    
    
    
    1.67
    
    
    
    45,981
    
    
    
    58,214
    
    
    
    1.77As of March 31, 2004Number of business
credit card accounts
    
    
    788,330
    
    
    
    
    
    
    
    N/A
    
    
    
    788,330Ending business credit
card receivables
    
    $
    528,204
    
    
    
    
    
    
    $
    2,548,942
    
    
    $
    3,077,146Receivables 30 days or
more delinquent
    
    
    26,908
    
    
    
    5.09
    %
    
    
    138,440
    
    
    
    165,348
    
    
    
    5.37
    %Receivables 90 days or
more delinquent
    
    
    13,368
    
    
    
    2.53
    
    
    
    69,087
    
    
    
    82,455
    
    
    
    2.68Nonaccrual receivables
    
    
    8,879
    
    
    
    1.68
    
    
    
    46,409
    
    
    
    55,288
    
    
    
    1.80Accruing receivables past
due 90 days or more
    
    
    11,973
    
    
    
    2.27
    
    
    
    61,713
    
    
    
    73,686
    
    
    
    2.39
   (1)
    
    Ratios are as a percentage of ending business credit card receivables. 29




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##### Table of Contents



SERVICING REVENUES Servicing revenues were $12.6 million for the three months ended March 31, 2005 and $12.1
million for the same period of 2004. The increase in servicing revenues was due to
increased volume of securitized business credit card receivables. OTHER REVENUES Three Months Ended($ in thousands)
    
    March 31,2005
    
    
    2004Interchange income
    
    $
    35,696
    
    
    $
    31,575Business credit card cash back rewards
    
    
    (6,044
    )
    
    
    (5,751
    )Business credit card business rewards
    
    
    (4,751
    )
    
    
    (3,470
    )Investment securities gains (losses), net
    
    
    (1,040
    )
    
    
    49Balance transfer fees
    
    
    1,029
    
    
    
    1,427Cash usage fees
    
    
    871
    
    
    
    763Other business credit card fees
    
    
    791
    
    
    
    603Earnings on investment in Fleet Credit Card Services, L.P.
    
    
    0
    
    
    
    600Other, net
    
    
    1,261
    
    
    
    958Total other revenues, net
    
    $
    27,813
    
    
    $
    26,754
 Interchange income includes interchange fees on both owned and securitized business credit
cards. The increase in interchange income in the three months ended March 31, 2005 as
compared to the same period of 2004 was due primarily to higher transaction volume. The
increase 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 March
31, 2005 as compared to 2.1% in the same period of 2004. The increase in business credit card business rewards in the three months ended March 31,
2005 as compared to the same period of 2004 was due primarily to higher transaction volume.
Both periods include changes in estimates of costs of future reward redemptions. Estimates
increased by $650 thousand in the three months ended March 31, 2005 as compared to an
increase of $500 thousand in the three months ended March 31, 2004. See Note 7 to the
consolidated financial statements for further discussion of changes in estimates. Investment securities gains (losses), net, primarily represent changes in valuations of
venture capital investments reflecting the market conditions for our investments in each
respective period. The decrease in balance transfer fees in the three months ended March 31, 2005 as compared
to the same period of 2004 was due to an increase in the volume of life-of-balance
promotional offers that do not have a transaction fee but carry a higher interest rate than
offers with a transaction fee.   *
    

MasterCard® is a federally registered service mark of MasterCard International, Inc. 30




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As a result of our May 28, 2004 agreement with Bank of America and the combination of Bank
of Americas and Fleet Credit Card Services, L.P.s consumer credit card businesses, our
partnership interest in Fleet Credit Card Services, L.P. represents an interest in the
combined business. Subsequent to the date of the agreement with Bank of America, we have
accounted for our investment in Fleet Credit Card Services, L.P. using the cost method and
have recognized dividends received distributed from net accumulated earnings as income.
There were no distributions received in the three months ending March 31, 2005. Prior to
the date of the agreement with Bank of America, we recognized earnings allocable to our
partnership interest using the equity method. GAIN ON TRANSFER OF CONSUMER CREDIT CARD BUSINESS 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 acquired by Bank of America, relating to the transfer of our
consumer credit card business to Fleet Credit Card Services, L.P. in 1998. The agreement
was subject to the Internal Revenue Services final approval of the settlement of the tax
disputes. We received the final approval of the Internal Revenue Service in January 2005
and, as a result, we received $63.8 million in cash from Bank of America in February 2005,
representing a return of the payments that we made to Fleet in the Delaware state court
litigation in February 2004. Consistent with the terms of our agreement with Bank of
America, all outstanding litigation between Advanta and Fleet was dismissed in February
2005. The overall impact in the three months ended March 31, 2005 of the agreement with
Bank of America, including the cash received, settlement of the tax disputes and
reevaluation of the valuation allowance on deferred tax assets, was a pretax gain of $67.7
million, tax expense of $5.6 million and an increase in additional paid-in capital of $6.0
million. See the Income Taxes section of Managements Discussion and Analysis of
Financial Condition and Results of Operations for further discussion of the income tax
impact of our May 28, 2004 agreement with Bank of America. OPERATING EXPENSES Three Months Ended($ in thousands)
    
    March 31,2005
    
    
    2004Salaries and employee benefits
    
    $
    25,854
    
    
    $
    22,431Amortization of deferred origination costs, net
    
    
    7,947
    
    
    
    9,337Marketing
    
    
    6,940
    
    
    
    3,261External processing
    
    
    5,148
    
    
    
    5,219Professional fees
    
    
    3,649
    
    
    
    4,248Equipment
    
    
    2,816
    
    
    
    2,988Occupancy
    
    
    1,877
    
    
    
    2,581Travel and entertainment
    
    
    1,428
    
    
    
    753Credit
    
    
    1,273
    
    
    
    1,591Other
    
    
    5,688
    
    
    
    5,785Total operating expenses
    
    $
    62,620
    
    
    $
    58,194
 Salaries and employee benefits increased in the three months ended March 31, 2005 as
compared to the same period of 2004 due to personnel hired in connection with initiatives to
originate and retain relationships with high credit quality customers. In addition,
salaries and employee benefits for the three months ended March 31, 2005 include $2.9
million of expense associated with a separation agreement with a former executive, as
compared to $1.6 million of expense 31




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##### Table of Contents



associated with executive compensation incurred in connection with changes in senior
management and Venture Capital segment severance costs in the three months ended March 31,
2004. 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
months ended March 31, 2005 as compared to the same period of 2004 due primarily to the
number and timing of new account originations in prior periods. Marketing expense increased in the three months ended March 31, 2005 as compared to the same
period of 2004 due primarily to costs associated with sponsorship activities relating to
cultural events, the development of programs to originate new customers and our customer
relationship management initiatives to enhance and maintain our relationships with existing
high credit quality business card customers, including marketing programs to stimulate
usage, enhance customer loyalty and retain existing accounts. Professional fees decreased in the three months ended March 31, 2005 as compared to the
same period of 2004 due primarily to a decrease in the use of external consultants for
initiatives to originate and retain relationships with high credit quality customers and
a decrease in expenses incurred for other corporate matters. Occupancy expense in the three months ended March 31, 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. Travel and entertainment expense increased in the three months ended March 31, 2005 as
compared to the same period of 2004 due to increased costs associated with sponsorship
activities relating to cultural events. Credit expense decreased in the three months ended March 31, 2005 as compared to the same
period of 2004 due primarily to a reduction in contract costs by one of our service
providers that was effective in March 2004 and a decrease in outsourced individual account
recovery expense. 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 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. 32




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INCOME TAXES Income tax expense was as follows for the three months ended March 31: ($ in thousands)2005
    
    
    2004Income tax expense
    
    $
    12,347
    
    
    $
    6,163Effective tax rate
    
    
    14.5
    %
    
    
    39.5
    %
 In January 2005, we received the Internal Revenue Services final approval of the settlement
of tax disputes in our May 28, 2004 agreement with Bank of America and in February 2005, we
received $63.8 million in cash from Bank of America. See the Gain on Transfer of Consumer
Credit Card Business section of Managements Discussion and Analysis of Financial Condition
and Results of Operations for further discussion. Excluding the impact of the Bank of
America agreement and reevaluation of the valuation allowance discussed below, our effective
tax rate would have been 39% for the three months ended March 31, 2005. The settlement of
the tax disputes resulted in an allocation of $381 million of the disputed partnership tax
deductions to Fleet and $617 thousand of the disputed $47 million partnership taxable gain
to Advanta. The impact to us of the tax deduction and gain allocation was a reduction in
our deferred tax asset related to net operating loss carryforwards of $133.4 million and a
corresponding reduction in our valuation allowance on deferred tax assets of $133.4 million,
both in the three months ended March 31, 2005. Upon receipt of the Internal Revenue
Services approval of the settlement of the tax disputes, the remaining valuation allowance
of $12.4 million was evaluated, and management determined that it was more likely than not
that the remaining deferred tax asset was realizable and therefore, no valuation allowance
was needed, resulting in a $6.4 million reduction in tax expense and a $6.0 million increase
in additional paid-in capital. The increase in additional paid-in capital represents the
portion of the valuation allowance that had been related to tax benefits from stock-based
compensation. The gain associated with the original transfer of assets to Fleet Credit Card
Services, L.P. in 1998 was not subject to income tax, and therefore, a substantial portion
of the February 2004 payment to Fleet was not tax-deductible. A substantial portion of the
$63.8 million payment received in February 2005 was not taxable since it is a return of our
payment to Fleet in February 2004. After the February 2005 payment, the cumulative gain on
transfer of consumer credit card business for which no deferred taxes have been provided is
approximately $650 million, as the transaction structure remains nontaxable under current
tax law. OFF-BALANCE SHEET ARRANGEMENTS Off-balance sheet business credit card securitizations provide a significant portion of our
funding and they are one of our primary sources of liquidity. At March 31, 2005,
off-balance sheet securitized receivables represented 59% 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 $163.2 million of retained interests
in securitizations at March 31, 2005 and $162.5 million at December 31, 2004. 33




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The following table summarizes securitization data including income and cash flows for the
three months ended March 31: ($ in thousands)
    
    2005
    
    
    2004Average securitized receivables
    
    $
    2,548,739
    
    
    $
    2,515,532Securitization income
    
    
    30,396
    
    
    
    32,540Discount accretion
    
    
    4,021
    
    
    
    4,602Interchange income
    
    
    27,331
    
    
    

    25,944Servicing revenues
    
    
    12,599
    
    
    
    12,133Proceeds from new securitizations
    
    
    0
    
    
    
    90,000Proceeds from collections reinvested in
revolving-period securitizations
    
    
    1,671,645
    
    
    
    1,623,556Cash flows received on retained interests
    
    
    60,166
    
    
    
    66,682
 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 March 31, 2005 and
December 31, 2004 and for the three months ended March 31, 2005 and 2004. When a securitization is in its revolving period, principal collections on securitized
receivables allocated to that securitization are used to purchase additional receivables to
replenish receivables that have been repaid. In contrast, when a securitization starts its
amortization period, principal collections are held in the trust until the payment date of
the notes. As principal is collected on securitized receivables during an amortization
period of a securitization, we need to replace that amount of funding. The revolving period
for our $300 million Series 2002-A securitization ended on March 31, 2005. Our
$300 million Series 2003-C securitization will end its revolving period in the second
quarter of 2005 and an additional $800 million of securitizations are expected to end their
revolving periods in the third and fourth quarters of 2005. The level of investment-grade
notes outstanding at March 31, 2005, issued as part of the AdvantaSeries de-linked
securitization structure in November 2004, provides additional capacity for future
securitization issuances in excess of $1.7 billion. The de-linked structure provides
flexibility to issue different classes of asset-backed securities with varying maturities,
sizes, and terms based on our funding needs and prevailing market conditions. We expect to
replace the funding of securitizations amortizing in 2005 through additional securitizations
with similar conditions as our existing securitizations and expect that the new
securitizations will have terms, including interest rate spreads, consistent with the
improvements experienced in our November 2004 securitization and the April 2005
securitization discussed below. In April 2005, we completed a $100 million public business credit card securitization that
was our second securitization using the de-linked structure. The interest rate spreads on
the securities issued in April 2005 were lower than the spreads on similarly-rated
securities in our prior securitizations due to the asset quality performance of our business
credit card portfolio and market demand for these securities. We have a $280 million committed commercial paper conduit facility that provides off-balance
sheet funding, none of which was used at March 31, 2005. This facilitys term extends
through June 14, 2005. Upon the termination of this facility in June 2005, management
expects to obtain the appropriate level of replacement funding under similar terms and
conditions. Based on a review of our funding needs and the flexibility provided by our new
de-linked securitization 34




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structure, we may decrease the amount of funding available through a committed commercial
paper conduit in 2005. 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, Consolidation of Variable Interest
Entities  An Interpretation of ARB No. 51, 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 April 2005, the FASB announced plans
to issue a revised exposure draft in the third quarter of 2005 and a final statement in the first quarter of 2006. 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 completely insulated from
these forces. We measure our interest rate risk using a rising rate scenario and a declining rate
scenario. We estimate net interest income using a third party software model that uses
standard income modeling techniques. We 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
securitization 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 based on the composition of our balance sheet as
of March 31, 2005 or December 31, 2004. We estimated that our net interest income would
change as follows over a twelve-month period: 35




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March 31,
    
    
    December 31,2005
    
    
    2004Estimated percentage increase (decrease) in owned net
interest income:Assuming 200 basis point increase in interest rates
    
    
    15
    %
    
    
    12
    %Assuming 200 basis point decrease in interest rates
    
    
    (10
    )%
    
    
    (4
    )%Estimated percentage increase (decrease) in securitized
net interest income:Assuming 200 basis point increase in interest rates
    
    
    (6
    )%
    
    
    (6
    )%Assuming 200 basis point decrease in interest rates
    
    
    11
    %
    
    
    14
    %Estimated percentage increase (decrease) in managed net
interest income:Assuming 200 basis point increase in interest rates
    
    
    (0
    )%
    
    
    (1
    )%Assuming 200 basis point decrease in interest rates
    
    
    6
    %
    
    
    9
    %
 Our business credit card receivables include interest rate floors that cause our managed net
interest income to increase in the declining rate scenario. Our managed net interest income
does not increase 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. 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 as of March 31, 2005 as compared to the results as of
December 31, 2004. 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 a diversity of funding sources as described below, and had a
high level of liquidity at March 31, 2005. At March 31, 2005, we had $28 million of cash,
$330 million of federal funds sold and $409 million of receivables held for sale. We also
have investments available for sale that could be sold to generate additional liquidity. 36




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Components of funding were as follows: March 31, 2005
    
    
    December 31, 2004($ in thousands)
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Off-balance sheet securitized
receivables(1)
    
    $
    2,463,157
    
    
    
    59
    %
    
    $
    2,462,220
    
    
    
    61
    %Deposits
    
    
    873,674
    
    
    
    21
    
    
    
    825,273
    
    
    
    20Debt
    
    
    252,516
    
    
    
    6
    
    
    
    265,759
    
    
    
    7Subordinated debt payable to
preferred securities trust
    
    
    103,093
    
    
    
    3
    
    
    
    103,093
    
    
    
    2Equity
    
    
    472,859
    
    
    
    11
    
    
    
    392,194
    
    
    
    10Total
    
    $
    4,165,299
    
    
    
    100
    %
    
    $
    4,048,539
    
    
    
    100
    %
   (1)
    
    Excludes our ownership interest 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 are one of our primary sources of liquidity. See
the Off-Balance Sheet Arrangements section of 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 February 2005, we received $63.8 million in connection with our May 28, 2004 agreement
with Bank of America. We are using the $63.8 million of cash for general corporate purposes
and to enable us to have lower debt levels than would otherwise be the case. See the Gain
on Transfer of Consumer Credit Card Business section of Managements Discussion and
Analysis of Financial Condition and Results of Operations for further discussion. We continue to offer unsecured debt securities of Advanta Corp., in the form of RediReserve
Variable Rate Certificates and Investment Notes, to retail investors through our retail note
program. We change the interest rates we offer frequently, depending on market conditions
and our funding needs. In the three months ended March 31, 2005, we continued to reduce
originations of retail notes due to our liquidity position and, as a result, the balance of
RediReserve Certificates and Investment Notes outstanding decreased by $13 million from $266
million at December 31, 2004 to $253 million at March 31, 2005. In March 2005, we entered into a ten year sponsorship agreement with World Teamtennis
Franchise Inc. to be the official business credit card of The World Team Tennis professional
and recreational leagues and a sponsor of the leagues and their events. Our payments under the
agreement will be $1 million in each of the years 2005 and 2006 and $3 million in each of
the years 2007 and 2008. In November 2004, the Board of Directors of Advanta Corp. approved a 20% increase in the
regular quarterly cash dividends on Class A and Class B Common Stock beginning with the
dividends payable in the second quarter of 2005. We plan to fund the increased dividends
with operating cash flows. Advanta Corp. and its subsidiaries are involved in 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 37




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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. 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 a dividend to
Advanta Corp. of $25 million in March 2005. At March 31, 2005, Advanta Bank Corp.s
combined total capital ratio (combined Tier I and Tier II capital to risk-weighted assets)
was 23.85% as compared to 26.07% at December 31, 2004. 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 various assumptions,
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 is anticipated, are expected to, estimate, intends to, believe,
will likely result, projected, may 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, including product development and pricing, among
financial institutions;(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 securitization 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, and examinations; 38




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##### Table of Contents



(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, including the ability and cost to obtain
intellectual property rights or a failure to implement new products or services
when anticipated;(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;(16)
    The effects of changes in accounting policies or practices as may be
required by changes in U.S. generally accepted accounting principles;(17)
    the impact of litigation;(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, 2004 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 incorporated herein by reference to Item
2-Managements Discussion and Analysis of Financial Condition and Results of Operations in
this Report on Form 10-Q under the heading 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 reports filed or submitted pursuant to the Securities
Exchange Act of 1934, as amended, (the Exchange Act) 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 March 31, 2005, 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 control over financial
reporting that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting. 39




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##### Table of Contents



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. 
 ITEM 6. EXHIBITS Exhibits  The following exhibits are being filed with this report on Form 10-Q. ExhibitNumber
    
    Description of Document10.1
    
    Sponsorship Agreement, dated as of March 14, 2005, between Advantennis, Corp.
and World Teamtennis Franchise Inc. (incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K dated March 14, 2005)10.2
    
    Master Agreement, dated as of March 15, 2005, between Dun & Bradstreet, Inc.
and Advanta Bank Corp. (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K dated March 14, 2005)10.3
    
    Separation Agreement, dated as of April 15, 2005, between Advanta Corp. and
Brian Tierney (incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K dated April 15, 2005)12
    
    Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 40




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##### Table of Contents



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 and
Chief Financial OfficerMay 9, 2005By
    
    /s/ David B. WeinstockVice President and
Chief Accounting OfficerMay 9, 2005
 41




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##### Table of Contents



EXHIBIT INDEX Manner ofExhibit
    
    Description
    
    Filing10.1
    
    Sponsorship Agreement, dated as of March 14, 2005, between
Advantennis, Corp. and World Teamtennis Franchise Inc. (incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K dated
March 14, 2005)
    
    **10.2
    
    Master Agreement, dated as of March 15, 2005, between Dun & Bradstreet,
Inc. and Advanta Bank Corp. (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K dated March 14, 2005)
    
    **10.3
    
    Separation Agreement, dated as of April 15, 2005, between Advanta
Corp. and Brian Tierney (incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated April 15, 2005)
    
    **12
    
    Computation of Ratio of Earnings to Fixed Charges
    
    *31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    *31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    *32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    *32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    *
   *
    
    Filed electronically herewith.**
    
    Incorporated by reference. 42