##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2004
or[   ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
 to
 Commission File Number 014120 Advanta Corp.  Delaware
    
    231462070(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code) (215) 6574000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]   No   [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b2 of the Exchange Act). Yes   [X]   No   [   ]  Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes   [   ]   No [   ] Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class A
Common Stock, $.01 par value
    
    Outstanding at November 1,
20049,606,885 sharesClass B
Common Stock, $.01 par value
    
    Outstanding at November 1,
200418,276,336 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
    
    
    26Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    49PART
II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    49Item 6. Exhibits and Reports on Form 8-K
    
    
    50CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESCERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS ADVANTA CORP. AND
SUBSIDIARIES 
 CONSOLIDATED BALANCE
SHEETS (Unaudited)
 September 30,
    
    December 31,(In thousands, except share amounts)
    
    2004
    
    2003ASSETSCash
    
    $
    33,033
    
    
    $
    26,941Federal funds sold
    
    
    212,100
    
    
    
    258,311Restricted interest-bearing deposits
    
    
    2,937
    
    
    
    77,872Investments available for sale
    
    
    213,795
    
    
    
    222,624Receivables, net:Held for sale
    
    
    375,909
    
    
    
    214,664Other
    
    
    306,254
    
    
    
    291,109Total receivables, net
    
    
    682,163
    
    
    
    505,773Accounts receivable from securitizations
    
    
    230,547
    
    
    
    244,337Premises and equipment, net
    
    
    18,008
    
    
    
    20,414Other assets
    
    
    186,649
    
    
    
    278,703Assets of discontinued operations, net
    
    
    20,018
    
    
    
    63,469Total assets
    
    $
    1,599,250
    
    
    $
    1,698,444LIABILITIESDeposits
    
    $
    707,045
    
    
    $
    672,204Debt and other borrowings
    
    
    287,818
    
    
    
    314,817Subordinated debt payable to preferred securities trust
    
    
    103,093
    
    
    
    103,093Other liabilities
    
    
    121,742
    
    
    
    267,123Total liabilities
    
    
    1,219,698
    
    
    
    1,357,237Commitments and contingenciesSTOCKHOLDERS EQUITYClass A preferred stock, $1,000 par value:Authorized, issued and outstanding  1,010
shares in 2004 and 2003
    
    
    1,010
    
    
    
    1,010Class A voting common stock, $.01 par value:Authorized  200,000,000 shares; issued  10,041,017
shares in 2004 and 2003
    
    
    100
    
    
    
    100Class B non-voting common stock, $.01 par value:Authorized  200,000,000 shares; issued  21,451,214
shares in 2004 and 20,542,097 shares in 2003
    
    
    215
    
    
    
    206Additional paid-in capital
    
    
    257,213
    
    
    
    245,295Deferred compensation
    
    
    (10,362
    )
    
    
    (13,242
    )Unearned ESOP shares
    
    
    (10,047
    )
    
    
    (10,387
    )Accumulated other comprehensive income (loss)
    
    
    (86
    )
    
    
    63Retained earnings
    
    
    190,984
    
    
    
    167,783Less: Treasury stock at cost, 434,132 Class A common
shares in 2004 and 2003; 3,186,647 Class B common
shares in 2004 and 3,197,614 Class B common shares in
2003
    
    
    (49,475
    )
    
    
    (49,621
    )Total stockholders equity
    
    
    379,552
    
    
    
    341,207Total liabilities and stockholders equity
    
    $
    1,599,250
    
    
    $
    1,698,444
 See Notes to Consolidated Financial Statements 3




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##### Table of Contents



ADVANTA CORP. AND
SUBSIDIARIES 
 CONSOLIDATED INCOME STATEMENTS (Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands, except per share amounts)
    
    2004
    
    2003
    
    2004
    
    2003Interest income:Receivables
    
    $
    21,915
    
    
    $
    27,701
    
    
    $
    58,891
    
    
    $
    64,088Investments
    
    
    1,796
    
    
    
    1,794
    
    
    
    4,587
    
    
    
    5,883Other interest income
    
    
    4,139
    
    
    
    4,071
    
    
    
    13,017
    
    
    
    12,036Total interest income
    
    
    27,850
    
    
    
    33,566
    
    
    
    76,495
    
    
    
    82,007Interest expense:Deposits
    
    
    4,791
    
    
    
    7,134
    
    
    
    13,626
    
    
    
    20,774Debt and other borrowings
    
    
    4,159
    
    
    
    5,831
    
    
    
    13,122
    
    
    
    16,573Subordinated debt payable to preferred
securities trust
    
    
    2,289
    
    
    
    0
    
    
    
    6,868
    
    
    
    0Total interest expense
    
    
    11,239
    
    
    
    12,965
    
    
    
    33,616
    
    
    
    37,347Net interest income
    
    
    16,611
    
    
    
    20,601
    
    
    
    42,879
    
    
    
    44,660Provision for credit losses
    
    
    11,658
    
    
    
    16,563
    
    
    
    31,663
    
    
    
    35,274Net interest income after provision for credit
losses
    
    
    4,953
    
    
    
    4,038
    
    
    
    11,216
    
    
    
    9,386Noninterest revenues:Securitization income
    
    
    31,410
    
    
    
    28,558
    
    
    
    96,577
    
    
    
    89,920Servicing revenues
    
    
    12,382
    
    
    
    9,549
    
    
    
    37,014
    
    
    
    29,449Other revenues, net
    
    
    26,867
    
    
    
    25,977
    
    
    
    82,400
    
    
    
    76,338Total noninterest revenues
    
    
    70,659
    
    
    
    64,084
    
    
    
    215,991
    
    
    
    195,707Expenses:Operating expenses
    
    
    58,091
    
    
    
    54,762
    
    
    
    176,181
    
    
    
    167,479Minority interest in income of consolidated
subsidiary
    
    
    0
    
    
    
    2,220
    
    
    
    0
    
    
    
    6,660Total expenses
    
    
    58,091
    
    
    
    56,982
    
    
    
    176,181
    
    
    
    174,139Income before income taxes
    
    
    17,521
    
    
    
    11,140
    
    
    
    51,026
    
    
    
    30,954Income tax expense
    
    
    6,921
    
    
    
    4,289
    
    
    
    20,155
    
    
    
    11,917Income from continuing operations
    
    
    10,600
    
    
    
    6,851
    
    
    
    30,871
    
    
    
    19,037Gain (loss), net, on discontinuance of
mortgage and leasing businesses, net of tax
    
    
    0
    
    
    
    0
    
    
    
    160
    
    
    
    (1,968
    )Net income
    
    $
    10,600
    
    
    $
    6,851
    
    
    $
    31,031
    
    
    $
    17,069Basic income from continuing operations per
common shareClass A
    
    $
    0.40
    
    
    $
    0.27
    
    
    $
    1.18
    
    
    $
    0.74Class B
    
    
    0.43
    
    
    
    0.29
    
    
    
    1.26
    
    
    
    0.81Combined
    
    
    0.42
    
    
    
    0.28
    
    
    
    1.24
    
    
    
    0.79Diluted income from continuing operations per
common shareClass A
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    1.10
    
    
    $
    0.72Class B
    
    
    0.38
    
    
    
    0.28
    
    
    
    1.14
    
    
    
    0.79Combined
    
    
    0.38
    
    
    
    0.27
    
    
    
    1.13
    
    
    
    0.76Basic net income per common shareClass A
    
    $
    0.40
    
    
    $
    0.27
    
    
    $
    1.19
    
    
    $
    0.66Class B
    
    
    0.43
    
    
    
    0.29
    
    
    
    1.27
    
    
    
    0.73Combined
    
    
    0.42
    
    
    
    0.28
    
    
    
    1.24
    
    
    
    0.70Diluted net income per common shareClass A
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    1.11
    
    
    $
    0.64Class B
    
    
    0.38
    
    
    
    0.28
    
    
    
    1.15
    
    
    
    0.71Combined
    
    
    0.38
    
    
    
    0.27
    
    
    
    1.13
    
    
    
    0.68Basic weighted average common shares
outstandingClass A
    
    
    8,803
    
    
    
    8,978
    
    
    
    8,794
    
    
    
    9,104Class B
    
    
    16,479
    
    
    
    15,100
    
    
    
    16,088
    
    
    
    14,936Combined
    
    
    25,282
    
    
    
    24,078
    
    
    
    24,882
    
    
    
    24,040Diluted weighted average common shares
outstandingClass A
    
    
    8,803
    
    
    
    8,978
    
    
    
    8,794
    
    
    
    9,104Class B
    
    
    19,303
    
    
    
    16,251
    
    
    
    18,468
    
    
    
    15,639Combined
    
    
    28,106
    
    
    
    25,229
    
    
    
    27,262
    
    
    
    24,743
 See Notes to Consolidated Financial Statements 4




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##### Table of Contents



ADVANTA CORP. AND
SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
 Class A
    
    Class A
    
    Class B
    
    AdditionalComprehensive
    
    Preferred
    
    Common
    
    Common
    
    Paid-In($ in thousands)
    
    Income (Loss)
    
    Stock
    
    Stock
    
    Stock
    
    CapitalBalance at December 31, 2002
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    204
    
    
    $
    243,910Net income
    
    $
    28,245Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $66
    
    
    (123
    )Comprehensive income
    
    $
    28,122Preferred and common cash
dividends declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    2,310Stock option exchange program
stock distributionIssuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2,150Amortization of deferred
compensationForfeitures of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (2,976
    )Stock buybackESOP shares committed to be
released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )Balance at December 31, 2003
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    206
    
    
    $
    245,295Net income
    
    $
    31,031Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $80
    
    
    (149
    )Comprehensive income
    
    $
    30,882Preferred and common cash
dividends declaredExercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    7,630Modification of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option exchange program
stock distributionStock-based nonemployee
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Issuance of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    5,279Amortization of deferred
compensationForfeitures of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1,805
    )ESOP shares committed to be
released
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Balance at September 30, 2004
    
    
    
    
    
    $
    1,010
    
    
    $
    100
    
    
    $
    215
    
    
    $
    257,213
 See Notes to Consolidated Financial Statements 5




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##### Table of Contents



Deferred
    
    AccumulatedCompensation
    
    Other
    
    
    
    
    
    
    
    
    
    Total& Unearned
    
    Comprehensive
    
    Retained
    
    Treasury
    
    Stockholders($ in thousands)
    
    ESOP Shares
    
    Income (Loss)
    
    Earnings
    
    Stock
    
    EquityBalance at December 31, 2002
    
    $
    (28,668
    )
    
    $
    186
    
    
    $
    147,205
    
    
    $
    (42,634
    )
    
    $
    321,313Net income
    
    
    
    
    
    
    
    
    
    
    28,245
    
    
    
    
    
    
    
    28,245Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $66
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    (123
    )Comprehensive incomePreferred and common cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (7,667
    )
    
    
    
    
    
    
    (7,667
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,313Stock option exchange program
stock distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183
    
    
    
    183Issuance of restricted stock
    
    
    (2,152
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of deferred
compensation
    
    
    4,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,105Forfeitures of restricted stock
    
    
    2,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )Stock buyback
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,170
    )
    
    
    (7,170
    )ESOP shares committed to be released
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344Balance at December 31, 2003
    
    $
    (23,629
    )
    
    $
    63
    
    
    $
    167,783
    
    
    $
    (49,621
    )
    
    $
    341,207Net income
    
    
    
    
    
    
    
    
    
    
    31,031
    
    
    
    
    
    
    
    31,031Other comprehensive income (loss):Change in unrealized
appreciation (depreciation)
of investments, net of tax
benefit (expense) of $80
    
    
    
    
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    (149
    )Comprehensive incomePreferred and common cash dividends declared
    
    
    
    
    
    
    
    
    
    
    (7,830
    )
    
    
    
    
    
    
    (7,830
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,638Modification of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option exchange program
stock distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    146Stock-based nonemployee
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Issuance of restricted stock
    
    
    (5,282
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Amortization of deferred
compensation
    
    
    6,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,736Forfeitures of restricted stock
    
    
    1,426
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (381
    )ESOP shares committed to be released
    
    
    340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    476Balance at September 30, 2004
    
    $
    (20,409
    )
    
    $
    (86
    )
    
    $
    190,984
    
    
    $
    (49,475
    )
    
    $
    379,552
 See Notes to Consolidated Financial Statements 6




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##### Table of Contents



ADVANTA CORP. AND
SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months EndedSeptember 30,($ in thousands)
    
    2004
    
    2003OPERATING ACTIVITIES  CONTINUING OPERATIONSNet income
    
    $
    31,031
    
    
    $
    17,069Adjustments to reconcile net income to net cash (used in)
provided by operating activities:(Gain) loss, net, on discontinuance of mortgage and leasing
businesses, net of tax
    
    
    (160
    )
    
    
    1,968Investment securities losses, net
    
    
    2,008
    
    
    
    3,674Valuation adjustments on other receivables held for sale
    
    
    0
    
    
    
    (50
    )Depreciation and amortization
    
    
    7,382
    
    
    
    6,268Stock-based compensation expense
    
    
    7,033
    
    
    
    1,697Provision for credit losses
    
    
    31,663
    
    
    
    35,274Provision for interest and fee losses
    
    
    7,044
    
    
    
    8,787Change in deferred origination costs, net of deferred fees
    
    
    7,041
    
    
    
    11,804Change in receivables held for sale
    
    
    (256,606
    )
    
    
    (921,245
    )Proceeds from sale of receivables held for sale
    
    
    95,361
    
    
    
    866,657Change in accounts receivable from securitizations
    
    
    13,790
    
    
    
    (20,274
    )Change in other assets and other liabilities
    
    
    (49,019
    )
    
    
    54,624Net cash (used in) provided by operating activities
    
    
    (103,432
    )
    
    
    66,253INVESTING ACTIVITIES  CONTINUING OPERATIONSChange in federal funds sold and restricted interest-bearing
deposits
    
    
    121,146
    
    
    
    (148,360
    )Purchase of investments available for sale
    
    
    (483,670
    )
    
    
    (585,483
    )Proceeds from sales of investments available for sale
    
    
    485,781
    
    
    
    353,800Proceeds from maturing investments available for sale
    
    
    4,481
    
    
    
    167,366Change in receivables not held for sale
    
    
    (60,893
    )
    
    
    (67,398
    )(Purchases) sales of premises and equipment, net
    
    
    (4,063
    )
    
    
    26Net cash provided by (used in) investing activities
    
    
    62,782
    
    
    
    (280,049
    )FINANCING ACTIVITIES  CONTINUING OPERATIONSChange in demand and savings deposits
    
    
    (3,269
    )
    
    
    (3,786
    )Proceeds from issuance of time deposits
    
    
    394,431
    
    
    
    568,538Payments for maturing time deposits
    
    
    (360,818
    )
    
    
    (366,542
    )Proceeds from issuance of debt
    
    
    21,127
    
    
    
    72,251Payments on maturity and redemption of debt
    
    
    (69,577
    )
    
    
    (72,926
    )Change in other borrowings and cash overdraft
    
    
    19,753
    
    
    
    0Proceeds from exercise of stock options
    
    
    7,638
    
    
    
    1,833Cash dividends paid
    
    
    (7,830
    )
    
    
    (5,800
    )Stock buyback
    
    
    0
    
    
    
    (6,240
    )Net cash provided by financing activities
    
    
    1,455
    
    
    
    187,328DISCONTINUED OPERATIONSNet cash provided by operating activities
    
    
    45,287
    
    
    
    11,765Net cash provided by investing activities
    
    
    0
    
    
    
    26,559Net cash provided by discontinued operations
    
    
    45,287
    
    
    
    38,324Net increase in cash
    
    
    6,092
    
    
    
    11,856Cash at beginning of period
    
    
    26,941
    
    
    
    14,834Cash at end of period
    
    $
    33,033
    
    
    $
    26,690
 See Notes to Consolidated Financial Statements 7




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##### Table of Contents



ADVANTA CORP. AND
SUBSIDIARIES 
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)
 September 30, 2004
(Unaudited) In these notes to consolidated financial statements, Advanta, we,
us, and our refer to Advanta Corp. and its subsidiaries, unless the
context otherwise requires. Note 1) Basis of Presentation We have prepared the consolidated financial statements included herein
pursuant to the rules and regulations of the Securities and Exchange
Commission. We have condensed or omitted certain information and
footnote disclosures normally included in consolidated financial
statements prepared in accordance with U.S. generally accepted accounting
principles pursuant to such rules and regulations. In the opinion of
management, the statements include all adjustments (which include normal
recurring adjustments) required for a fair statement of financial
position, results of operations and cash flows for the interim periods
presented. These financial statements should be read in conjunction with
the financial statements and notes thereto included in our latest annual
report on Form 10-K. The results of operations for the interim periods
are not necessarily indicative of the results for the full year. The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant changes in the near term relate to the accounting for the
allowance for receivable losses, securitization income, business credit
card rewards programs, litigation contingencies, income taxes, and
discontinued operations. Certain prior period balances have been reclassified to conform to the
current period presentation. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based Compensation, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, defines a fair
value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is
usually the vesting period. However, it permits entities to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion
(Opinion) No. 25, Accounting for Stock Issued to Employees, whereby
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. We have elected to continue with
the accounting methodology in Opinion No. 25 and, as a result, have
provided pro forma disclosures of compensation expense for options
granted to employees under our stock option plans, net of related tax
effects, net income and earnings per share, as if the fair value based
method of accounting had been applied. Had compensation cost for these
plans been determined using the fair value based method, our compensation 8




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##### Table of Contents



expense for stock option plans, net of related tax effects, net income
and net income per common share would have changed to the following pro
forma amounts: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Stock-based employee compensation
expense for stock option plans,
net of related tax effectsAs reported
    
    $
    0
    
    
    $
    0
    
    
    $
    196
    
    
    $
    0Pro forma
    
    
    575
    
    
    
    576
    
    
    
    1,784
    
    
    
    1,792Net incomeAs reported
    
    $
    10,600
    
    
    $
    6,851
    
    
    $
    31,031
    
    
    $
    17,069Pro forma
    
    
    10,025
    
    
    
    6,275
    
    
    
    29,443
    
    
    
    15,277Basic net income per common shareAs reportedClass A
    
    $
    0.40
    
    
    $
    0.27
    
    
    $
    1.19
    
    
    $
    0.66Class B
    
    
    0.43
    
    
    
    0.29
    
    
    
    1.27
    
    
    
    0.73Combined
    
    
    0.42
    
    
    
    0.28
    
    
    
    1.24
    
    
    
    0.70Pro formaClass A
    
    $
    0.38
    
    
    $
    0.24
    
    
    $
    1.12
    
    
    $
    0.58Class B
    
    
    0.41
    
    
    
    0.27
    
    
    
    1.21
    
    
    
    0.66Combined
    
    
    0.40
    
    
    
    0.26
    
    
    
    1.18
    
    
    
    0.63Diluted net income per common shareAs reportedClass A
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    1.11
    
    
    $
    0.64Class B
    
    
    0.38
    
    
    
    0.28
    
    
    
    1.15
    
    
    
    0.71Combined
    
    
    0.38
    
    
    
    0.27
    
    
    
    1.13
    
    
    
    0.68Pro formaClass A
    
    $
    0.35
    
    
    $
    0.24
    
    
    $
    1.05
    
    
    $
    0.57Class B
    
    
    0.36
    
    
    
    0.26
    
    
    
    1.10
    
    
    
    0.64Combined
    
    
    0.36
    
    
    
    0.25
    
    
    
    1.08
    
    
    
    0.62
 Note 2) Recently Issued Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities  An
Interpretation of ARB No. 51 (FIN 46). This interpretation requires a
company to consolidate a variable interest entity if the company has
variable interests that give it a majority of the expected losses or a
majority of the expected residual returns of the entity. In December
2003, the FASB revised FIN 46 to clarify some of the provisions and
incorporate several FASB staff positions related to FIN 46 that were
already effective. This interpretation, as revised, did not have a
material effect on our financial position or results of operations since
qualifying special-purpose entities, as defined in SFAS No. 140, are
exempt from the consolidation requirements of FIN 46. However, our
adoption of the revised interpretation resulted in the deconsolidation of
the subsidiary trust that issued our company-obligated mandatorily
redeemable preferred securities (the trust preferred securities)
effective December 31, 2003. As a result of the deconsolidation of that
trust, the consolidated balance sheets include subordinated debt payable
to preferred securities trust of $103 million and an equity investment in
the trust of $3 million, rather than $100 million of trust preferred
securities. Also as a result of the deconsolidation of that trust, the
consolidated income statement includes interest expense on subordinated
debt payable to preferred securities trust beginning January 1, 2004, as
compared to periods through December 31, 2003 that included payments on
the trust preferred securities classified as minority interest in income
of consolidated subsidiary. 9




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




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##### Table of Contents



Investments available for sale consisted of the following: September 30, 2004
    
    December 31, 2003Amortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    ValueU.S. Treasury & other U.S.
Government securities
    
    $
    88,645
    
    
    $
    88,398
    
    
    $
    28,593
    
    
    $
    28,544State and municipal securities
    
    
    2,920
    
    
    
    2,973
    
    
    
    1,946
    
    
    
    2,014Mortgage-backed securities
    
    
    4,489
    
    
    
    4,525
    
    
    
    4,954
    
    
    
    4,996Corporate bonds
    
    
    9,354
    
    
    
    9,310
    
    
    
    0
    
    
    
    0Equity securities(1)
    
    
    18,388
    
    
    
    18,459
    
    
    
    20,018
    
    
    
    20,053Money market funds(2)
    
    
    90,019
    
    
    
    90,019
    
    
    
    166,875
    
    
    
    166,875Other
    
    
    112
    
    
    
    111
    
    
    
    142
    
    
    
    142Total investments available for sale
    
    $
    213,927
    
    
    $
    213,795
    
    
    $
    222,528
    
    
    $
    222,624
  (1)
    
    Includes venture capital investments of $8.0 million at September
30, 2004 and $9.5 million at December 31, 2003. The amount shown as
amortized cost represents estimated fair value for these
investments.(2)
    
    As of September 30, 2004, money market funds include investments in
the Reserve Primary Money Market Fund of $41.2 million and the
Barclays Global Investors Prime Money Market Fund of $47.3 million.
As of December 31, 2003, money market funds include an investment in
the Merrill Lynch Premier Institutional Money Market Fund of $163.8
million. Note 4) Receivables Receivables on the balance sheet, including those held for sale,
consisted of the following: September 30,
    
    December 31,2004
    
    2003Business credit card receivables
    
    $
    709,991
    
    
    $
    518,040Other receivables
    
    
    10,439
    
    
    
    16,976Gross receivables
    
    
    720,430
    
    
    
    535,016Add: Deferred origination costs, net of deferred fees
    
    
    12,170
    
    
    
    19,211Less: Allowance for receivable lossesBusiness credit cards
    
    
    (49,126
    )
    
    
    (47,041
    )Other receivables
    
    
    (1,311
    )
    
    
    (1,413
    )Total allowance for receivable losses
    
    
    (50,437
    )
    
    
    (48,454
    )Receivables, net
    
    $
    682,163
    
    
    $
    505,773
 In June 2001, Advanta Corp. provided a mortgage financing loan and a
revolving home equity line of credit to an executive officer as part of a
relocation agreement. Upon the termination of the executive officers
employment in February 2004, a repayment event under the terms of the
agreement occurred. The former executive officer sold the property in
May 2004 and used the net proceeds from the sale to satisfy his loan
obligations in accordance with the terms of the relocation agreement.
The outstanding balances on these loans were included in other
receivables and were $474 thousand at December 31, 2003. We recognized
$91 thousand of compensation expense in the second quarter of 2004
related to loan forgiveness, based on the net proceeds from the sale of
the property. 11




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##### Table of Contents



Note 5) Allowance for Receivable Losses The following table presents activity in the allowance for receivable
losses for the periods presented: Nine Months EndedSeptember 30,2004
    
    2003Beginning balance
    
    $
    48,454
    
    
    $
    46,159Provision for credit losses
    
    
    31,663
    
    
    
    35,274Provision for interest and fee losses
    
    
    7,044
    
    
    
    8,787Gross principal charge-offs:Business credit cards
    
    
    (31,448
    )
    
    
    (35,952
    )Other receivables
    
    
    (3
    )
    
    
    (28
    )Total gross principal charge-offs
    
    
    (31,451
    )
    
    
    (35,980
    )Principal recoveries:Business credit cards
    
    
    2,233
    
    
    
    2,445Other receivables
    
    
    4
    
    
    
    0Total principal recoveries
    
    
    2,237
    
    
    
    2,445Net principal charge-offs
    
    
    (29,214
    )
    
    
    (33,535
    )Interest and fee charge-offs:Business credit cards
    
    
    (7,510
    )
    
    
    (8,489
    )Ending balance
    
    $
    50,437
    
    
    $
    48,196
 Note 6) Securitization Activities Accounts receivable from securitizations consisted of the following: September 30,
    
    December 31,2004
    
    2003Retained interests in business credit card
securitizations
    
    $
    149,998
    
    
    $
    149,998Accrued interest and fees on securitized
business credit card receivables, net(1)
    
    
    51,172
    
    
    
    58,178Amounts due from the trust
    
    
    29,377
    
    
    
    36,161Total accounts receivable from securitizations
    
    $
    230,547
    
    
    $
    244,337
  (1)
    
    Reduced by an estimate for uncollectible interest and fees of $9.8
million at September 30, 2004 and $12.6 million at December 31,
2003. The following represents business credit card securitization data and the
key assumptions used in estimating the fair value of retained interests
in business credit card securitizations at the time of each new
securitization or replenishment if quoted market prices were not
available. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Average securitized
receivables
    
    $
    2,513,053
    
    
    $
    2,124,472
    
    
    $
    2,520,462
    
    
    $
    2,195,479Securitization income
    
    
    31,410
    
    
    
    28,558
    
    
    
    96,577
    
    
    
    89,920Discount accretion
    
    
    4,139
    
    
    
    4,071
    
    
    
    13,017
    
    
    
    12,036Interchange income
    
    
    28,613
    
    
    
    22,511
    
    
    
    83,358
    
    
    
    66,436Servicing revenues
    
    
    12,382
    
    
    
    9,549
    
    
    
    37,014
    
    
    
    29,449Proceeds from new
securitizations
    
    
    0
    
    
    
    562,347
    
    
    
    90,000
    
    
    
    861,723Proceeds from collections
reinvested in revolving-
period securitizations
    
    
    1,594,478
    
    
    
    1,272,035
    
    
    
    4,851,723
    
    
    
    3,040,980Cash flows received on
retained interests
    
    
    68,397
    
    
    
    93,453
    
    
    
    203,287
    
    
    
    226,455
 12




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Key assumptions:Discount rate
    
    
    10.33%  13.13
    %
    
    
    12.14%  14.55
    %
    
    
    10.33%  14.33
    %
    
    
    11.44%  14.56
    %Monthly payment rate
    
    
    20.67%  22.55
    %
    
    
    18.79%  21.00
    %
    
    
    20.63%  22.55
    %
    
    
    18.79%  21.00
    %Loss rate
    
    
    6.30%    7.37
    %
    
    
    8.45%     9.41
    %
    
    
    6.30%     8.47
    %
    
    
    8.45%  10.29
    %Interest yield, net
of interest earned
by noteholders
    
    
    12.19%  12.36
    %
    
    
    14.68%  14.95
    %
    
    
    12.19%  13.84
    %
    
    
    14.26%  15.00
    %
 There were no purchases of delinquent accounts from the securitization
trust during the three or nine months ended September 30, 2004 or 2003. The following assumptions were used in estimating the fair value of
retained interests in business credit card securitizations as of
September 30, 2004 and December 31, 2003. The assumptions listed
represent weighted averages of assumptions used for each securitization. September 30, 2004
    
    December 31, 2003Discount rate
    
    
    10.33%  11.93
    %
    
    
    12.44%  14.33
    %Monthly payment rate
    
    
    21.25%  22.55
    %
    
    
    20.80%  22.25
    %Loss rate
    
    
    6.30%     6.93
    %
    
    
    7.70%     8.47
    %Interest yield, net of interest earned by
noteholders
    
    
    12.19
    %
    
    
    13.84
    %
 In addition to the assumptions identified above, management also
considered qualitative factors, such as the impact of the current
economic environment on the performance of the business credit card
receivables sold and the potential volatility of the current market for
similar instruments, in assessing the fair value of retained interests in
business credit card securitizations. We have prepared sensitivity analyses of the valuations of retained
interests in business credit card 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 as of
September 30, 2004. Effect on estimated fair value of the following
hypothetical changes in key assumptions:Discount rate increased by 2%
    
    $
    (2,122
    )Discount rate increased by 4%
    
    
    (4,186
    )Monthly payment rate at 110% of base assumption
    
    
    (1,697
    )Monthly payment rate at 125% of base assumption
    
    
    (3,849
    )Loss rate at 110% of base assumption
    
    
    (3,780
    )Loss rate at 125% of base assumption
    
    
    (9,450
    )Interest yield, net of interest earned by noteholders,
decreased by 1%
    
    
    (6,000
    )Interest yield, net of interest earned by noteholders,
decreased by 2%
    
    
    (12,000
    )
 The objective of these hypothetical analyses is to measure the
sensitivity of the fair value of the retained interests to changes in
assumptions. The methodology used to calculate the estimated fair value
in the analyses is a discounted cash flow analysis, the same methodology
used to calculate the estimated fair value of the retained interests when
quoted market prices are not available at each 13




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##### Table of Contents



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: September 30,
    
    December 31,
    
    September 30,2004
    
    2003
    
    2003Owned business credit card receivables
    
    $
    709,991
    
    
    $
    518,040
    
    
    $
    533,398Securitized business credit card receivables
    
    
    2,511,030
    
    
    
    2,463,747
    
    
    
    2,343,221Total managed receivables
    
    
    3,221,021
    
    
    
    2,981,787
    
    
    
    2,876,619Receivables 30 days or more delinquent:Owned
    
    
    29,552
    
    
    
    25,301
    
    
    
    30,681Securitized
    
    
    112,674
    
    
    
    148,177
    
    
    
    146,206Total managed
    
    
    142,226
    
    
    
    173,478
    
    
    
    176,887Receivables 90 days or more delinquent:Owned
    
    
    14,305
    
    
    
    12,696
    
    
    
    14,225Securitized
    
    
    54,354
    
    
    
    74,762
    
    
    
    67,795Total managed
    
    
    68,659
    
    
    
    87,458
    
    
    
    82,020Nonaccrual receivables:Owned
    
    
    11,342
    
    
    
    7,866
    
    
    
    9,167Securitized
    
    
    43,531
    
    
    
    47,381
    
    
    
    44,824Total managed
    
    
    54,873
    
    
    
    55,247
    
    
    
    53,991Accruing receivables past due 90 days or more:Owned
    
    
    12,774
    
    
    
    11,320
    
    
    
    12,772Securitized
    
    
    48,122
    
    
    
    66,376
    
    
    
    60,755Total managed
    
    
    60,896
    
    
    
    77,696
    
    
    
    73,527Net principal charge-offs for the year-to-date
period ended September 30 and December 31:Owned
    
    
    29,215
    
    
    
    43,670
    
    
    
    33,507Securitized
    
    
    131,567
    
    
    
    179,538
    
    
    
    135,648Total managed
    
    
    160,782
    
    
    
    223,208
    
    
    
    169,155
 Note 7) Selected Balance Sheet Information Other assets consisted of the following: September 30,
    
    December 31,2004
    
    2003Deferred income taxes
    
    $
    73,352
    
    
    $
    82,175Investment in Fleet Credit Card Services, L.P.
    
    
    32,095
    
    
    
    35,988Cash surrender value of insurance contracts
    
    
    20,925
    
    
    
    21,792Intangible assets
    
    
    3,618
    
    
    
    4,295Investment in preferred securities trust
    
    
    3,163
    
    
    
    3,093Amounts due from transfer of consumer credit
card business
    
    
    0
    
    
    
    70,545Other assets
    
    
    53,496
    
    
    
    60,815Total other assets
    
    $
    186,649
    
    
    $
    278,703
 14




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##### Table of Contents



Other liabilities consisted of the following: September 30,
    
    December 31,2004
    
    2003Accounts payable and accrued expenses
    
    $
    33,288
    
    
    $
    28,458Business credit card rewards
    
    
    19,274
    
    
    
    24,785Accrued interest payable
    
    
    15,101
    
    
    
    4,008Current income taxes
    
    
    14,660
    
    
    
    13,449Amounts due to the securitization trust
    
    
    4,048
    
    
    
    4,021Other(1)
    
    
    35,371
    
    
    
    192,402Total other liabilities
    
    $
    121,742
    
    
    $
    267,123
  (1)
    
    A substantial portion of other liabilities at December 31, 2003
represented our litigation reserves. In February 2004, the court issued its final judgment and order in the
Delaware Chancery Court litigation with Fleet, and a payment was made to
Fleet in satisfaction of all amounts due in connection with this
litigation. In accordance with the courts February 2004 order, the
payment to Fleet was net of amounts due to Advanta from Fleet. As a
result of the courts order and payment to Fleet in February 2004, there
was a decrease in other assets and other liabilities as of the payment
date. There was no impact to our results of operations since, based on
the final judgment and order, our reserves at December 31, 2003 were
adequate. In March 2004, we filed a notice of appeal to commence the
appeals process related to this final judgment and order. On May 28,
2004, we reached an agreement with Bank of America Corp. (Bank of
America) to resolve all outstanding litigation, including partnership
tax disputes, between Advanta and FleetBoston Financial Corporation,
which was recently acquired by Bank of America. See Note 8. In
connection with the combination of Bank of Americas and Fleets consumer
credit card businesses and the May 28, 2004 agreement, our partnership
interest in Fleet Credit Card Services, L.P. represents an interest in
the combined business. Subsequent to the date of the agreement, we have
accounted for our investment in the partnership interest in Fleet Credit
Card Services, L.P. using the cost method. Eligible cardholders earn cash back rewards or business rewards based on
net purchases charged on their business credit card accounts. The costs
of future reward redemptions are estimated and a liability is recorded at
the time cash back rewards or business rewards are earned by the
cardholder. In each reporting period, we adjust our estimate of the
percentage of earned rewards that will ultimately be redeemed by
cardholders and the cost of rewards based on our experience with each
program. In the second quarter of 2004, we expanded our business rewards
program to include offers of gift certificates and merchandise, in
addition to our traditional travel awards. We anticipate that the
expanded program will have the effect of increasing the volume of future
reward redemptions while decreasing the associated costs per redemption.
In the first quarter of 2003, we changed the redemption terms of certain
business reward programs resulting in a decrease in the anticipated costs
of future reward redemptions. The impact of the changes in the estimated
percentage of earned rewards that will ultimately be redeemed by
cardholders and other changes in anticipated costs of future period
reward redemptions for these programs in the three and nine months ended
September 30, 2004 and 2003 was as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Increase (decrease) in other
revenues
    
    $
    0
    
    
    $
    1,600
    
    
    $
    (1,400
    )
    
    $
    2,800Increase (decrease) in net income
    
    
    0
    
    
    
    980
    
    
    
    (850
    )
    
    
    1,720Amount per combined diluted share
    
    $
    0
    
    
    $
    0.04
    
    
    $
    (0.03
    )
    
    $
    0.07
 15




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##### Table of Contents



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




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##### Table of Contents



2004, we filed an opening brief with the Supreme Court of Delaware
setting forth the basis for our appeal. Fleet filed its answering brief
with the Supreme Court of Delaware on May 17, 2004, and we filed our
reply brief on June 1, 2004. Pursuant to the May 28, 2004 agreement
between Advanta and Bank of America described above, Advanta and Fleet
filed a joint motion with the Delaware Supreme Court to stay the appeal
and on June 28, 2004 the court granted the motion and stayed the appeal,
pending fulfillment of all conditions of the agreement. In an ongoing element of Fleets disputes with us, Fleet has claimed $508
million of tax deductions from its partnership with us in connection with
the Consumer Credit Card Transaction, which are required under the law to
be allocated solely to Advanta. As required, we reported these
deductions on our 1998 corporate tax return. However, we have not used
or booked the benefit from most of these deductions because for tax
purposes we have a very substantial net operating loss carryforward. We
have $457 million of net operating loss carryforwards from all sources at
September 30, 2004, and have booked no benefit from approximately $405
million of these net operating loss carryforwards. If the deductions are
ultimately allocated as claimed by Fleet, the impact on our equity at
September 30, 2004 would be a decrease of approximately $35 million. The
deductions are attributable to deductions for bad debt reserves that we
expensed in computing our book income or loss before the Consumer Credit
Card Transaction, but which were not deductible by Advanta for tax
purposes until after the closing of the transaction in 1998. The tax law
requires built in losses like these to be deducted by the party who
contributed the assets to the partnership, in this case, Advanta. The
Internal Revenue Service agents who have examined the returns at issue
have to ensure that both parties do not obtain the deductions and
therefore, following standard practice, proposed to disallow the
deductions to both parties until there is a final resolution. The
deductions, as well as the allocation of a gain from the sale of a
partnership asset of approximately $47 million, were before the IRS
Regional Office of Appeals. If the conditions of the May 28, 2004
agreement between Advanta and Bank of America are fulfilled, this matter
would also be resolved in accordance with the terms of the agreement. On January 15, 2003, Fleet filed a complaint in Rhode Island Superior
Court seeking a declaratory judgment that we indemnify Fleet under the
applicable partnership agreement for any damage Fleet incurs by not being
entitled to the $508 million of tax deductions. Fleet is also seeking a
declaratory judgment that it should not indemnify us for any damages that
we incur due to any allocation to Advanta of the $47 million gain on the
sale of a partnership asset. On February 28, 2003, we filed a motion to
dismiss the complaint. On August 13, 2003, the court denied the motion
to dismiss on procedural grounds. We answered the complaint and filed a
counterclaim against Fleet on September 19, 2003. The discovery phase of
the case has concluded. We believe that the indemnification provision in
the partnership agreement does not indemnify Fleet for damages incurred
related to the tax deductions and that the lawsuit is frivolous, having
no legal basis whatsoever and therefore, we do not have any reserves for
this litigation. If the conditions of the May 28, 2004 agreement between
Advanta and Bank of America are fulfilled, this matter would also be
resolved in accordance with the terms of the agreement. Although the IRS is expected to approve the settlement of the tax
disputes, in the event the settlement is not consummated, management does
not expect the lawsuits or the tax disputes with Fleet, described above,
to have a material adverse effect on our financial position or results of
operations. On July 26, 2001, Chase Manhattan Mortgage Corporation (Chase) filed a
complaint against Advanta Corp. and certain of its subsidiaries in the
United States District Court for the District of Delaware alleging, among
other things, that we breached our contract with Chase in connection with
the Mortgage Transaction. Chase claims 17




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##### Table of Contents



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. The trial was originally
scheduled to begin in January 2004. In the second quarter of 2003, the
parties extended the discovery period and the court delayed the scheduled
trial date to April 2004. In September 2003, we filed a motion for
summary judgment with the court with respect to all claims raised in
Chases complaint and Chase filed a motion for partial summary judgment
with respect to certain of its claims. On March 4, 2004, the court
denied both parties motions for summary judgment. On April 26, 2004, a
non-jury trial commenced; at trial, Chase asserted damages totaling
approximately $88 million. The trial concluded on May 26, 2004, and the
court 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. 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 motion. These filings relate to contractual
claims under the purchase and sale agreement governing the Mortgage
Transaction and are a continuation of the ongoing dispute associated with
the Mortgage Transaction. 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 alleged failure to provide information
and documentation under the former mortgage program. On September 5,
2001, AMCUSA and AMCSI filed an answer to the demand for arbitration, and
from December 2001, have provided information and documentation
responsive to the 18




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##### Table of Contents



program participants requests in the arbitration proceeding. In
February and June 2004, GPMF filed additional statements of claim, each
alleging contractual and other related claims. The amount of damages
sought by GPMF is not known because, at this time, no cognizable damage
amount has been specified in its pleadings. The arbitration hearing
commenced on November 2, 2004. Since this arbitration relates to a
discontinued operation, we have established reserves for estimated future
litigation 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 our control, it is reasonably possible that our
estimated liability under these proceedings may change or that actual
results will differ from our estimates. Note 9) Capital Stock In 2001 and 2002, the Board of Directors of Advanta Corp. authorized
management to purchase up to an aggregate 3.0 million shares of Advanta
Corp. common stock. In 2003, we repurchased 434 thousand shares of our
Class A Common Stock and 315 thousand shares of our Class B Common Stock,
which substantially completed our purchases under the authorizations. Cash dividends per share of common stock declared were as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Class A Common Stock
    
    $
    0.095
    
    
    $
    0.063
    
    
    $
    0.252
    
    
    $
    0.189Class B Common Stock
    
    
    0.113
    
    
    
    0.076
    
    
    
    0.302
    
    
    
    0.227
 19




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##### Table of Contents



Note 10) Segment Information AdvantaBusiness
    
    VentureCards
    
    Capital
    
    Other(1)
    
    TotalThree months ended September 30, 2004Interest income
    
    $
    25,916
    
    
    $
    1
    
    
    $
    1,933
    
    
    $
    27,850Interest expense
    
    
    9,224
    
    
    
    85
    
    
    
    1,930
    
    
    
    11,239Noninterest revenues (losses)
    
    
    72,641
    
    
    
    (2,058
    )
    
    
    76
    
    
    
    70,659Pretax income (loss) from continuing
operations
    
    
    19,668
    
    
    
    (2,147
    )
    
    
    0
    
    
    
    17,521Total assets at end of period
    
    
    939,704
    
    
    
    8,591
    
    
    
    650,955
    
    
    
    1,599,250Three months ended September 30, 2003Interest income
    
    $
    31,597
    
    
    $
    0
    
    
    $
    1,969
    
    
    $
    33,566Interest expense
    
    
    12,339
    
    
    
    117
    
    
    
    509
    
    
    
    12,965Noninterest revenues (losses)
    
    
    65,054
    
    
    
    (1,985
    )
    
    
    1,015
    
    
    
    64,084Pretax income (loss) from continuing
operations
    
    
    13,785
    
    
    
    (2,645
    )
    
    
    0
    
    
    
    11,140Total assets at end of period
    
    
    748,179
    
    
    
    10,380
    
    
    
    1,190,968
    
    
    
    1,949,527Nine months ended September 30, 2004Interest income
    
    $
    71,500
    
    
    $
    1
    
    
    $
    4,994
    
    
    $
    76,495Interest expense
    
    
    26,937
    
    
    
    259
    
    
    
    6,420
    
    
    
    33,616Noninterest revenues (losses)
    
    
    216,018
    
    
    
    (2,026
    )
    
    
    1,999
    
    
    
    215,991Pretax income (loss) from continuing
operations
    
    
    54,331
    
    
    
    (3,305
    )
    
    
    0
    
    
    
    51,026Nine months ended September 30, 2003Interest income
    
    $
    75,358
    
    
    $
    1
    
    
    $
    6,648
    
    
    $
    82,007Interest expense
    
    
    34,342
    
    
    
    392
    
    
    
    2,613
    
    
    
    37,347Noninterest revenues (losses)
    
    
    196,286
    
    
    
    (3,837
    )
    
    
    3,258
    
    
    
    195,707Pretax income (loss) from continuing
operations
    
    
    37,409
    
    
    
    (6,455
    )
    
    
    0
    
    
    
    30,954
  (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) Income Taxes Income tax expense (benefit) was as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Income tax expense (benefit)
attributable to:Continuing operations
    
    $
    6,921
    
    
    $
    4,289
    
    
    $
    20,155
    
    
    $
    11,917Discontinued operations
    
    
    0
    
    
    
    0
    
    
    
    105
    
    
    
    (1,232
    )Total income tax expense
    
    $
    6,921
    
    
    $
    4,289
    
    
    $
    20,260
    
    
    $
    10,685
 20




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##### Table of Contents



Income tax expense (benefit) on income from continuing operations
consisted of the following components: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Current:Federal
    
    $
    9,712
    
    
    $
    898
    
    
    $
    9,712
    
    
    $
    898State
    
    
    1,147
    
    
    
    275
    
    
    
    2,046
    
    
    
    840Total current
    
    
    10,859
    
    
    
    1,173
    
    
    
    11,758
    
    
    
    1,738Deferred:Federal
    
    
    (3,463
    )
    
    
    2,617
    
    
    
    8,477
    
    
    
    9,624State
    
    
    (475
    )
    
    
    499
    
    
    
    (80
    )
    
    
    555Total deferred
    
    
    (3,938
    )
    
    
    3,116
    
    
    
    8,397
    
    
    
    10,179Income tax expense
attributable
to continuing operations
    
    $
    6,921
    
    
    $
    4,289
    
    
    $
    20,155
    
    
    $
    11,917
 The reconciliation of the statutory federal income tax to income tax
expense on income from continuing operations is as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Statutory federal income tax
    
    $
    6,132
    
    
    $
    3,899
    
    
    $
    17,859
    
    
    $
    10,834State income taxes, net of
federal income tax benefit
    
    
    437
    
    
    
    503
    
    
    
    1,278
    
    
    
    907Nondeductible expenses
    
    
    431
    
    
    
    (38
    )
    
    
    764
    
    
    
    232Compensation limitation
    
    
    209
    
    
    
    49
    
    
    
    384
    
    
    
    147Other
    
    
    (288
    )
    
    
    (124
    )
    
    
    (130
    )
    
    
    (203
    )Income tax expense attributable
to continuing operations
    
    $
    6,921
    
    
    $
    4,289
    
    
    $
    20,155
    
    
    $
    11,917
 Our effective tax rate was 39.5% for the three and nine months ended
September 30, 2004 and 38.5% for the three and nine months ended
September 30, 2003. Our effective tax rate increased in 2004 due to
higher state income taxes. We provide deferred taxes to reflect the estimated future tax effects of
the differences between the financial statement and tax bases of assets
and liabilities and currently enacted tax laws. The net deferred tax
asset is comprised of the following: September 30,
    
    December 31,2004
    
    2003Deferred tax assets
    
    $
    84,463
    
    
    $
    107,329Deferred tax
liabilities
    
    
    (11,111
    )
    
    
    (25,154
    )Net deferred tax asset
    
    $
    73,352
    
    
    $
    82,175
 21




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##### Table of Contents



A summary of deferred tax assets and liabilities follows: September 30,
    
    December 31,2004
    
    2003Net operating loss carryforwards
    
    $
    159,922
    
    
    $
    191,308Valuation allowance
    
    
    (141,891
    )
    
    
    (139,783
    )Allowance for receivable losses
    
    
    21,380
    
    
    
    17,759Alternative minimum tax credit
carryforwards
    
    
    11,759
    
    
    
    2,047Unrealized venture capital investment
losses
    
    
    9,112
    
    
    
    10,220Rewards programs
    
    
    6,746
    
    
    
    8,769Deferred compensation
    
    
    5,958
    
    
    
    4,618Deferred origination fees and costs
    
    
    (3,910
    )
    
    
    (7,096
    )Securitization income
    
    
    (2,624
    )
    
    
    (1,818
    )Capital loss carryforwards
    
    
    1,750
    
    
    
    2,275Other
    
    
    5,150
    
    
    
    (6,124
    )Net deferred tax asset
    
    $
    73,352
    
    
    $
    82,175
 At September 30, 2004, net operating loss carryforwards were $457
million. The scheduled expirations of these net operating loss
carryforwards were as follows at September 30, 2004: Year Ended December 31,2018
    
    $
    182,9632019
    
    
    40,4892020
    
    
    02021
    
    
    233,466
 We utilized net operating loss carryforwards of $86.4 million in the nine
months ended September 30, 2004 and $67.0 million in the same period of
2003. Our capital loss carryforwards of $5.0 million at September 30, 2004 are
scheduled to expire in the year ended December 31, 2009. Alternative
minimum tax credit carryforwards do not expire. See Note 8 for a discussion of tax matters currently before the Internal
Revenue Service Regional Office of Appeals. As more fully described in
Note 8, on May 28, 2004, we reached an agreement with Bank of America to
resolve all outstanding litigation, including partnership tax disputes,
between Advanta and Fleet, which was recently acquired by Bank of
America. Advanta and Bank of America have agreed to resolve the tax
disputes between Advanta and Fleet by allocating approximately $125
million of the disputed $508 million of partnership deductions to Advanta
and by Advanta recognizing for tax purposes approximately $600 thousand
of the disputed $47 million partnership taxable gain. The agreement is
subject to the IRS final approval of the settlement of the tax disputes.
In the third quarter of 2004, the documentation for settling the tax
disputes was cleared with the IRS, executed by Bank of America and
Advanta, and then submitted by both parties to the IRS for its execution.
We expect the IRS to approve the settlement of the tax disputes in the
fourth quarter of 2004. The agreement would result in an approximate
$134 million reduction in both the net operating loss carryforward and
valuation allowance components of our deferred tax asset. Upon receiving
the IRS approval, management will evaluate the remaining valuation
allowance. In connection with the agreement, Bank of America would pay
Advanta $63.8 million in cash which represents a return of the payments
made to Fleet in the Delaware state court litigation in February 2004. A
substantial portion of this payment will not be taxable since the gain
associated with the original transfer of assets to the partnership in the
1998 22




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##### Table of Contents



Consumer Credit Card Transaction was not subject to income tax. After
receipt of this payment, the cumulative Consumer Credit Card Transaction
gain for which no deferred taxes will have been provided would be
approximately $600 million, as the transaction structure remains
non-taxable under current tax law. The net deferred tax asset is included in other assets on the
consolidated balance sheets. Note 12) Discontinued Operations There was no gain (loss) on discontinuance of our mortgage and leasing
businesses for the three months ended September 30, 2004 or 2003. The
components of the gain (loss) on discontinuance of our mortgage and
leasing businesses for the nine months ended September 30, 2004 and 2003
were as follows: Nine Months EndedSeptember 30, 2004
    
    September 30, 2003Advanta
    
    
    
    
    
    AdvantaAdvanta
    
    Leasing
    
    Advanta
    
    LeasingMortgage
    
    Services
    
    Mortgage
    
    ServicesPretax gain (loss) on
discontinuance of mortgage
and leasing businesses
    
    $
    (2,770
    )
    
    $
    3,035
    
    
    $
    (2,600
    )
    
    $
    (600
    )Income tax (expense) benefit
    
    
    1,094
    
    
    
    (1,199
    )
    
    
    1,001
    
    
    
    231Gain (loss) on
discontinuance of mortgage
and leasing businesses, net
of tax
    
    $
    (1,676
    )
    
    $
    1,836
    
    
    $
    (1,599
    )
    
    $
    (369
    )
 In the nine months ended September 30, 2004, we recorded a $2.8 million
pretax loss on discontinuance of the mortgage business representing an
increase in our estimated future costs of mortgage business-related
contingent liabilities, due primarily to recent litigation with Chase and
disputes related to one of our former mortgage programs. In the nine months ended September 30, 2004, we adjusted our estimate of
operating results of the leasing segment over the remaining life of the
lease portfolio and recorded a $3.0 million pretax gain on leasing
discontinuance. The increase in estimated operating results was
principally associated with favorable performance in revenues and an
insurance settlement, partially offset by increased operating expenses
due to a lengthening of the anticipated timeframe over which we expect to
incur certain operating expenses related to the lease portfolio. In the nine months ended September 30, 2003, we recorded a $2.6 million
pretax loss on discontinuance of the mortgage business for an increase in
our estimated future costs of mortgage business-related contingent
liabilities, due primarily to a lengthening of the anticipated timeframe
of the resolution for those contingent liabilities, which included an
extension of the discovery process and a delay in the scheduled trial
date in the original litigation with Chase. In the nine months ended September 30, 2003, we adjusted our estimate of
operating results of the leasing segment over the remaining life of the
lease portfolio and recorded a $600 thousand pretax loss on leasing
discontinuance. The decrease in estimated operating results of the
leasing segment was primarily associated with an unfavorable sales tax
assessment, partially offset by favorable credit performance on the
leasing portfolio. 23




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##### Table of Contents



Per share data was as follows: Nine Months EndedSeptember 30,Advanta
    
    Advanta LeasingMortgage
    
    Services2004
    
    2003
    
    2004
    
    2003Basic gain (loss), net, on discontinuance of mortgage and leasing
businesses, net of tax, per common shareClass A
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    0.07
    
    
    $
    (0.02
    )Class B
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    0.07
    
    
    
    (0.02
    )Combined
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    0.07
    
    
    
    (0.02
    )Diluted gain (loss), net, on discontinuance of mortgage and leasing
businesses, net of tax, per common shareClass A
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    (0.01
    )Class B
    
    
    (0.06
    )
    
    
    (0.06
    )
    
    
    0.07
    
    
    
    (0.01
    )Combined
    
    
    (0.06
    )
    
    
    (0.06
    )
    
    
    0.07
    
    
    
    (0.01
    )
 The components of assets of discontinued operations, net, were as follows: September 30, 2004
    
    December 31, 2003Lease receivables, net
    
    $
    25,081
    
    
    $
    68,860Other assets
    
    
    1,398
    
    
    
    1,719Liabilities
    
    
    (6,461
    )
    
    
    (7,110
    )Assets of discontinued operations, net
    
    $
    20,018
    
    
    $
    63,469
 We are continuing to service the existing lease portfolio. Based on the
terms of the remaining leases, we expect assets of discontinued operations
to be less than $10 million by June 2005 and the wind down of the lease
portfolio to be complete by January 2007. 24




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##### Table of Contents



Note 13) Calculation of Earnings Per Share The following table shows the calculation of basic earnings per common
share and diluted earnings per common share. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Income from continuing operations
    
    $
    10,600
    
    
    $
    6,851
    
    
    $
    30,871
    
    
    $
    19,037Less: Preferred A dividends
    
    
    0
    
    
    
    0
    
    
    
    (141
    )
    
    
    (141
    )Income from continuing operations
available to common stockholders
    
    
    10,600
    
    
    
    6,851
    
    
    
    30,730
    
    
    
    18,896Gain (loss), net, on discontinuance
of mortgage and leasing businesses,
net of tax
    
    
    0
    
    
    
    0
    
    
    
    160
    
    
    
    (1,968
    )Net income available to common
stockholders
    
    
    10,600
    
    
    
    6,851
    
    
    
    30,890
    
    
    
    16,928Less: Class A dividends declared
    
    
    (830
    )
    
    
    (560
    )
    
    
    (2,237
    )
    
    
    (1,715
    )Less: Class B dividends declared
    
    
    (2,081
    )
    
    
    (1,321
    )
    
    
    (5,452
    )
    
    
    (3,944
    )Undistributed net income
    
    $
    7,689
    
    
    $
    4,970
    
    
    $
    23,201
    
    
    $
    11,269Basic income from continuing
operations per common shareClass A
    
    $
    0.40
    
    
    $
    0.27
    
    
    $
    1.18
    
    
    $
    0.74Class B
    
    
    0.43
    
    
    
    0.29
    
    
    
    1.26
    
    
    
    0.81Combined(1)
    
    
    0.42
    
    
    
    0.28
    
    
    
    1.24
    
    
    
    0.79Diluted income from continuing
operations per common shareClass A
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    1.10
    
    
    $
    0.72Class B
    
    
    0.38
    
    
    
    0.28
    
    
    
    1.14
    
    
    
    0.79Combined(1)
    
    
    0.38
    
    
    
    0.27
    
    
    
    1.13
    
    
    
    0.76Basic net income per common shareClass A
    
    $
    0.40
    
    
    $
    0.27
    
    
    $
    1.19
    
    
    $
    0.66Class B
    
    
    0.43
    
    
    
    0.29
    
    
    
    1.27
    
    
    
    0.73Combined(1)
    
    
    0.42
    
    
    
    0.28
    
    
    
    1.24
    
    
    
    0.70Diluted net income per common shareClass A
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    1.11
    
    
    $
    0.64Class B
    
    
    0.38
    
    
    
    0.28
    
    
    
    1.15
    
    
    
    0.71Combined(1)
    
    
    0.38
    
    
    
    0.27
    
    
    
    1.13
    
    
    
    0.68Basic weighted average common shares
outstandingClass A
    
    
    8,803
    
    
    
    8,978
    
    
    
    8,794
    
    
    
    9,104Class B
    
    
    16,479
    
    
    
    15,100
    
    
    
    16,088
    
    
    
    14,936Combined
    
    
    25,282
    
    
    
    24,078
    
    
    
    24,882
    
    
    
    24,040Dilutive effect ofOptions Class B
    
    
    1,897
    
    
    
    641
    
    
    
    1,488
    
    
    
    328Restricted stock Class B
    
    
    927
    
    
    
    510
    
    
    
    892
    
    
    
    375Diluted weighted average common
shares outstandingClass A
    
    
    8,803
    
    
    
    8,978
    
    
    
    8,794
    
    
    
    9,104Class B
    
    
    19,303
    
    
    
    16,251
    
    
    
    18,468
    
    
    
    15,639Combined
    
    
    28,106
    
    
    
    25,229
    
    
    
    27,262
    
    
    
    24,743Antidilutive sharesOptions Class B
    
    
    10
    
    
    
    1,349
    
    
    
    166
    
    
    
    1,911Restricted stock Class B
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    84
  (1)
    
    Combined represents income available to common stockholders divided
by the combined total of Class A and Class B weighted average common
shares outstanding. 25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS In this Form 10-Q, Advanta, we, us, and our refer to Advanta
Corp. and its subsidiaries, unless the context otherwise requires. OVERVIEW Income from continuing operations includes the following business segment
results: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Pretax income (loss):Advanta Business Cards
    
    $
    19,668
    
    
    $
    13,785
    
    
    $
    54,331
    
    
    $
    37,409Venture Capital
    
    
    (2,147
    )
    
    
    (2,645
    )
    
    
    (3,305
    )
    
    
    (6,455
    )Total pretax income
    
    
    17,521
    
    
    
    11,140
    
    
    
    51,026
    
    
    
    30,954Income tax expense
    
    
    (6,921
    )
    
    
    (4,289
    )
    
    
    (20,155
    )
    
    
    (11,917
    )Income from continuing
operations
    
    $
    10,600
    
    
    $
    6,851
    
    
    $
    30,871
    
    
    $
    19,037Per combined common share,
assuming dilution
    
    $
    0.38
    
    
    $
    0.27
    
    
    $
    1.13
    
    
    $
    0.76
 Advanta Business Cards pretax income increased for the three and nine
months ended September 30, 2004 as compared to the same periods of 2003
due primarily to growth in average securitized receivables and a decrease
in net principal charge-off rates, partially offset by a decline in
yields. The decrease in yields reflects our array of
competitively-priced offerings and products, including promotional
pricing and rewards, designed to selectively attract and retain more high
credit quality customers and to respond to the competitive environment.
We are experiencing the benefits of these types of customers in lower
delinquency and charge-off rates and increased transaction volume, and we
expect these benefits to continue in future periods. Venture Capital pretax losses include investment losses of $2.1 million
in the three months ended September 30, 2004 as compared to $2.0 million
in the same period of 2003, and investment losses of $2.0 million in the
nine months ended September 30, 2004 as compared to $3.8 million in the
same period of 2003. The investment losses reflect the market conditions
for our venture capital investments in those periods. Venture Capital
pretax loss in the nine months ended September 30, 2004 also includes
$807 thousand of expenses relating to lease commitments and severance
costs associated with the closure of an operational location of our
Venture Capital segment in the first quarter of 2004. For the nine months ended September 30, 2004, we recorded a net after-tax
gain on the discontinuance of our mortgage and leasing businesses of $160
thousand, or $0.01 per combined diluted common share. For the nine
months ended September 30, 2003, we recorded a net after-tax loss on the
discontinuance of our mortgage and leasing businesses of $2.0 million, or
$0.08 per combined diluted common share. There was no gain (loss) on
discontinuance of our mortgage and leasing businesses for the three
months ended September 30, 2004 or 2003. See Discontinued Operations
in this Managements Discussion and Analysis of Financial Condition and
Results of Operations for further discussion. 26




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. We have identified accounting for allowance for receivable
losses, securitization 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 such 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, 2003. ADVANTA BUSINESS CARDS Advanta Business Cards originates new accounts directly and through the
use of third parties. The following table provides key statistical
information on our business credit card portfolio for the three and nine
months ended September 30. Credit quality statistics for the business
credit card portfolio are included in the Provision and Allowance for
Receivable Losses section of this Managements Discussion and Analysis
of Financial Condition and Results of Operations. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Average owned receivables
    
    $
    646,934
    
    
    $
    734,715
    
    
    $
    594,249
    
    
    $
    586,259Average securitized receivables
    
    $
    2,513,053
    
    
    $
    2,124,472
    
    
    $
    2,520,462
    
    
    $
    2,195,479Cardholder transaction volume
    
    $
    2,125,757
    
    
    $
    1,816,195
    
    
    $
    6,042,337
    
    
    $
    5,096,497New account originations
    
    
    24,578
    
    
    
    38,368
    
    
    
    89,900
    
    
    
    128,461Average number of active
accounts(1)
    
    
    578,162
    
    
    
    585,130
    
    
    
    584,991
    
    
    
    583,494Ending number of accounts at
September 30
    
    
    770,195
    
    
    
    783,811
    
    
    
    770,195
    
    
    
    783,811
  (1)
    
    Active accounts are defined as accounts with a balance at
month-end. Active account statistics do not include charged-off
accounts. The statistics reported above are the average number of
active accounts for the three and nine months ended September 30. We continually enhance our targeting and decision models used in
identifying prospective customers. We expect that our current targeting
approach will continue to result in acquiring more engaged customers, but
may result in somewhat lower account growth rates. The decrease in new
account originations in the three and nine months ended September 30,
2004 as compared to the same periods of 2003 is due primarily to
refinements in our targeting and decision models that increased the
selectivity of our customer acquisitions. The timing of marketing
campaigns and the competitive environment also impact the number of
account originations. Through our focus on the small business market, we
have identified numerous market segments distinguishable by
characteristics such as size of business and industry. 27




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##### Table of Contents



We will continue to use a targeted approach to these market segments,
aiming to anticipate the distinct needs of various business owners,
executives and small businesses by offering them products and services
geared to their needs. We have expanded our activities to identify and
establish strategic relationships with organizations focused on certain
business owners, executives and small businesses. We also plan to
strengthen and deepen our relationships with our existing customers by
providing value based on factors other than pricing in order to build
lasting, profitable relationships. We expect the volume of new account
originations in three months ended December 31, 2004 to be higher than
the volume of new account originations in the three months ended
September 30, 2004, based on the number and timing of planned marketing
campaigns. We estimate that managed receivables growth for the year ended December
31, 2004 will be approximately 10% and that the percentage of receivables
that are held on balance sheet will be between 20% and 25% of managed
receivables at December 31, 2004. The following is a reconciliation of
projected estimated owned business credit card receivable growth to
managed business credit card receivable growth: ProjectedActual at
    
    Estimate atDecember 31,
    
    December 31,
    
    Percentage($ in thousands)
    
    2003
    
    2004
    
    IncreaseOwned receivables
    
    $
    518,040
    
    
    $
    738,000
    
    
    
    42.5
    %Securitized
receivables
    
    
    2,463,747
    
    
    
    2,542,000
    
    
    
    3.2
    %Managed receivables
    
    $
    2,981,787
    
    
    $
    3,280,000
    
    
    
    10.0
    %
 Pretax income and its components for Advanta Business Cards are as
follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net interest income on owned
interest-earning assets
    
    $
    16,692
    
    
    $
    19,258
    
    
    $
    44,563
    
    
    $
    41,016Noninterest revenues
    
    
    72,641
    
    
    
    65,054
    
    
    
    216,018
    
    
    
    196,286Provision for credit losses
    
    
    (11,698
    )
    
    
    (16,544
    )
    
    
    (31,765
    )
    
    
    (35,507
    )Operating expenses
    
    
    (57,967
    )
    
    
    (53,983
    )
    
    
    (174,485
    )
    
    
    (164,386
    )Pretax income
    
    $
    19,668
    
    
    $
    13,785
    
    
    $
    54,331
    
    
    $
    37,409
 Net interest income on owned interest-earning assets decreased by $2.6
million for the three months ended September 30, 2004 as compared to the
same period of 2003 due primarily to a decrease in average owned business
credit card receivables of $87.8 million and a decrease in the average
yield earned on our business credit card receivables, partially offset by
a decrease in the cost of funding on-balance sheet assets. Net interest
income on owned interest-earning assets increased by $3.5 million for the
nine months ended September 30, 2004 as compared to the same period of
2003 due primarily to a decrease in the cost of funding on-balance sheet
assets, partially offset by a decrease in the average yield earned on our
business credit card receivables. Average owned business credit card
receivables in the three months ended September 30, 2003 reflected the
receipt of $600 million of receivables on balance sheet after the
noteholders from the Series 2000-B securitization had been paid in full
in July 2003. We temporarily held those receivables on balance sheet
until the next securitization, which resulted in higher average levels of
on-balance sheet receivables in the three months ended September 30,
2003. The principal collections of receivables allocated to the Series
2000-B securitization during its amortization period also resulted in
higher levels of on-balance sheet assets and therefore, higher costs of
funding in the three and nine months ended September 30, 2003. The
decreases in yields earned on 28




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##### Table of Contents



our business credit cards in both the three-month and nine-month periods
were a result of our competitively-priced offerings and products. Noninterest revenues include securitization income, servicing revenues,
interchange income, business credit card rewards costs and other fee
revenues. The increases in noninterest revenues in the three and nine
months ended September 30, 2004 as compared to the same periods of 2003
are due primarily to higher transaction volume that resulted in higher
interchange income and the increased volume of securitized business
credit card receivables that produced higher securitization income and
servicing fees. Noninterest revenues also include the impact of changes
in estimated costs of future reward redemptions. See further discussion
in the Other Revenues section of this Managements Discussion and
Analysis of Financial Condition and Results of Operations. The decreases in provision for credit losses in the three and nine months
ended September 30, 2004 as compared to the same periods of 2003 reflect
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 periods of 2003.
The decrease in the three months ended September 30, 2004 also resulted
from a decrease in average owned business credit card receivables as
compared to the same period of 2003. The increases in operating expenses in the three and nine months ended
September 30, 2004 as compared to the same periods of 2003 were due
primarily to an increase in salaries and employee benefits expense
including higher incentive compensation expense resulting from improved
earnings and collections performance, and personnel hired in connection
with initiatives to originate and retain relationships with high credit
quality customers. In addition, salaries and employee benefits expenses
in the nine months ended September 30, 2004 include executive
compensation expense incurred related to changes in senior management.
Marketing expenses also increased in the three and nine months ended
September 30, 2004 as compared to the same periods of 2003 due primarily
to costs incurred related to our development of alliances with other
organizations serving segments of the small business market and
amortization expense on marketing rights related to certain of these
alliances, as well as increased marketing activity in response to the
competitive environment. Operating expenses reflect decreases in the
amortization of deferred origination costs, due to the number and timing
of new account originations in prior periods. VENTURE CAPITAL Pretax loss and its components for our Venture Capital segment are as
follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net interest expense
    
    $
    (84
    )
    
    $
    (117
    )
    
    $
    (258
    )
    
    $
    (391
    )Realized gains (losses), net
    
    
    104
    
    
    
    (2,000
    )
    
    
    104
    
    
    
    (1,803
    )Unrealized gains (losses), net
    
    
    (2,162
    )
    
    
    15
    
    
    
    (2,130
    )
    
    
    (2,034
    )Operating expenses
    
    
    (5
    )
    
    
    (543
    )
    
    
    (1,021
    )
    
    
    (2,227
    )Pretax loss
    
    $
    (2,147
    )
    
    $
    (2,645
    )
    
    $
    (3,305
    )
    
    $
    (6,455
    )
 The estimated fair value of our venture capital investments was $8.0
million as of September 30, 2004 and $9.5 million as of December 31,
2003. Unrealized gains (losses) on our venture capital investments
reflect the market conditions for those investments in each respective
period. 29




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##### Table of Contents



In recent years, we have limited our new venture capital investment
activity and we presently do not expect to make significant additional
investments. Operating expenses for the nine months ended September 30,
2004 include expenses associated with the closure of an operational
location of our Venture Capital segment in the first quarter of 2004,
consisting of $571 thousand of expense relating to lease commitments and
$236 thousand of severance costs. Due to the closure of the operational
location, we expect to incur minimal operating expenses in the Venture
Capital segment in future periods. Operating expenses for the nine
months ended September 30, 2003 include approximately $410 thousand of
lease termination costs paid in June 2003. INTEREST INCOME AND EXPENSE Interest income decreased $5.7 million to $27.9 million for the three
months ended September 30, 2004 as compared to the same period of 2003
and decreased $5.5 million to $76.5 million for the nine months ended
September 30, 2004 as compared to the same period of 2003. The decrease
in the three-month period was due primarily to a decrease in average
owned business credit card receivables of $87.8 million to $647 million
and a decrease in average yield earned on our business credit card
receivables. The decrease in the nine-month period was due primarily to
a decrease in the average yield earned on our business credit card
receivables and a decrease in the average balance of investments of $166
million to $458 million. The average yield earned on our business credit
card receivables decreased in the three and nine months ended September
30, 2004 as compared to the same period of 2003 as a result of our
competitively-priced offerings and products. Interest expense includes $2.3 million for the three months ended
September 30, 2004 and $6.9 million for the nine months ended September
30, 2004 of interest expense on subordinated debt payable to preferred
securities trust. Our adoption of FIN 46, as revised, resulted in the
deconsolidation of the subsidiary trust that issued our trust preferred
securities effective December 31, 2003. As a result of the
deconsolidation of that trust, the consolidated income statement includes
interest expense on subordinated debt payable to preferred securities
trust beginning January 1, 2004, as compared to periods through December
31, 2003 that included payments on the trust preferred securities
classified as minority interest in income of consolidated subsidiary. Interest expense decreased $1.7 million to $11.2 million for the three
months ended September 30, 2004 and decreased $3.7 million to $33.6
million for the nine months ended September 30, 2004 as compared to the
same periods of 2003. The decrease in interest expense is due primarily
to decreases in our average deposits and debt outstanding, partially
offset by increases of $2.3 million for the three months ended September
30, 2004 and $6.9 million for the nine months ended September 30, 2004
related to interest expense on subordinated debt payable to preferred
securities trust described above. Average balances of deposits and debt
outstanding decreased $456 million in the three months ended September
30, 2004 and $361 million in the nine months ended September 30, 2004 as
compared to the same periods of 2003. Average debt and deposits in the
three and nine months ended September 30, 2003 reflected the funding of
higher levels of on-balance sheet receivables and assets as a result of
securitizations in their amortization periods in 2003. We expect our
average cost of funds on deposits and debt to increase in future periods
based on the current market expectations for future interest rates. The following tables provide an analysis of interest income and expense
data, average balance sheet data, net interest spread and net interest
margin for both continuing and discontinued operations. The net interest
spread represents the difference between the yield on interest-earning
assets and the average rate paid on interest-bearing liabilities. The
net interest margin represents the difference 30




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##### Table of Contents



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. INTEREST RATE ANALYSIS AND AVERAGE BALANCES Three Months Ended September 30,2004
    
    2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateOwned receivables:Business credit cards(1)
    
    $
    646,934
    
    
    $
    21,777
    
    
    
    13.39
    %
    
    $
    734,715
    
    
    $
    27,526
    
    
    
    14.86
    %Other receivables
    
    
    10,427
    
    
    
    138
    
    
    
    5.24
    
    
    
    18,062
    
    
    
    175
    
    
    
    3.82Total owned receivables
    
    
    657,361
    
    
    
    21,915
    
    
    
    13.26
    
    
    
    752,777
    
    
    
    27,701
    
    
    
    14.60Investments(2)
    
    
    439,067
    
    
    
    1,802
    
    
    
    1.62
    
    
    
    635,312
    
    
    
    1,798
    
    
    
    1.12Retained interests in
securitizations
    
    
    149,998
    
    
    
    4,139
    
    
    
    11.03
    
    
    
    134,762
    
    
    
    4,071
    
    
    
    12.08Interest-earning assets of
discontinued operations
    
    
    32,173
    
    
    
    807
    
    
    
    10.04
    
    
    
    84,178
    
    
    
    2,260
    
    
    
    10.74Total interest-earning
assets(3)
    
    
    1,278,599
    
    
    $
    28,663
    
    
    
    8.92
    %
    
    
    1,607,029
    
    
    $
    35,830
    
    
    
    8.86
    %Noninterest-earning assets
    
    
    283,244
    
    
    
    
    
    
    
    
    
    
    
    511,809Total assets
    
    $
    1,561,843
    
    
    
    
    
    
    
    
    
    
    $
    2,118,838Deposits
    
    $
    680,457
    
    
    $
    4,951
    
    
    
    2.89
    %
    
    $
    1,090,112
    
    
    $
    7,527
    
    
    
    2.74
    %Debt
    
    
    275,627
    
    
    
    4,297
    
    
    
    6.20
    
    
    
    322,069
    
    
    
    5,210
    
    
    
    6.42Subordinated debt payable
to preferred securities
trust
    
    
    103,093
    
    
    
    2,289
    
    
    
    8.88
    
    
    
    0
    
    
    
    0
    
    
    
    0.00Other borrowings
    
    
    256
    
    
    
    1
    
    
    
    1.89
    
    
    
    1,957
    
    
    
    7
    
    
    
    1.37Total interest-bearing
liabilities(4)
    
    
    1,059,433
    
    
    $
    11,538
    
    
    
    4.34
    %
    
    
    1,414,138
    
    
    $
    12,744
    
    
    
    3.58
    %Noninterest-bearing
liabilities
    
    
    128,761
    
    
    
    
    
    
    
    
    
    
    
    275,737Total liabilities
    
    
    1,188,194
    
    
    
    
    
    
    
    
    
    
    
    1,689,875Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely subordinated
debentures of Advanta
Corp. (trust preferred
securities)
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    100,000Stockholders equity
    
    
    373,649
    
    
    
    
    
    
    
    
    
    
    
    328,963Total liabilities and
stockholders equity
    
    $
    1,561,843
    
    
    
    
    
    
    
    
    
    
    $
    2,118,838Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.58
    %
    
    
    
    
    
    
    
    
    
    
    5.28
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.33
    %
    
    
    
    
    
    
    
    
    
    
    5.70
    %
  (1)
    
    Interest income includes late fees for owned business credit cards
receivables of $1.5 million for the three months ended September 30,
2004 and $2.1 million for the three months ended September 30, 2003.  (2)
    
    Interest and average rate for tax-free securities are computed on a
tax equivalent basis using a statutory rate of 35%.  (3)
    
    Includes assets held and available for sale and nonaccrual
receivables.  (4)
    
    Includes funding of assets for both continuing and discontinued
operations. 31




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##### Table of Contents



Nine Months Ended September 30,2004
    
    2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average($ in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateOwned receivables:Business credit cards(1)
    
    $
    594,249
    
    
    $
    58,483
    
    
    
    13.15
    %
    
    $
    586,259
    
    
    $
    63,322
    
    
    
    14.44
    %Other receivables
    
    
    11,791
    
    
    
    408
    
    
    
    4.62
    
    
    
    22,098
    
    
    
    766
    
    
    
    4.63Total owned receivables
    
    
    606,040
    
    
    
    58,891
    
    
    
    12.98
    
    
    
    608,357
    
    
    
    64,088
    
    
    
    14.08Investments(2)
    
    
    458,299
    
    
    
    4,599
    
    
    
    1.32
    
    
    
    624,024
    
    
    
    5,900
    
    
    
    1.25Retained interests in
securitizations
    
    
    149,998
    
    
    
    13,017
    
    
    
    11.57
    
    
    
    142,192
    
    
    
    12,036
    
    
    
    11.16Interest-earning assets of
discontinued operations
    
    
    46,895
    
    
    
    3,475
    
    
    
    9.88
    
    
    
    55,158
    
    
    
    4,949
    
    
    
    11.96Total interest-earning
assets(3)
    
    
    1,261,232
    
    
    $
    79,982
    
    
    
    8.46
    %
    
    
    1,429,731
    
    
    $
    86,973
    
    
    
    8.11
    %Noninterest-earning assets
    
    
    308,948
    
    
    
    
    
    
    
    
    
    
    
    569,446Total assets
    
    $
    1,570,180
    
    
    
    
    
    
    
    
    
    
    $
    1,999,177Deposits
    
    $
    662,241
    
    
    $
    14,159
    
    
    
    2.86
    %
    
    $
    992,334
    
    
    $
    21,971
    
    
    
    2.96
    %Debt
    
    
    288,602
    
    
    
    13,318
    
    
    
    6.16
    
    
    
    319,585
    
    
    
    15,334
    
    
    
    6.42Subordinated debt payable
to preferred securities
trust
    
    
    103,093
    
    
    
    6,868
    
    
    
    8.88
    
    
    
    0
    
    
    
    0
    
    
    
    0.00Other borrowings
    
    
    194
    
    
    
    2
    
    
    
    1.56
    
    
    
    752
    
    
    
    8
    
    
    
    1.41Total interest-bearing
liabilities(4)
    
    
    1,054,130
    
    
    $
    34,347
    
    
    
    4.35
    %
    
    
    1,312,671
    
    
    $
    37,313
    
    
    
    3.80
    %Noninterest-bearing
liabilities
    
    
    155,327
    
    
    
    
    
    
    
    
    
    
    
    260,739Total liabilities
    
    
    1,209,457
    
    
    
    
    
    
    
    
    
    
    
    1,573,410Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely subordinated
debentures of Advanta
Corp. (trust preferred
securities)
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    100,000Stockholders equity
    
    
    360,723
    
    
    
    
    
    
    
    
    
    
    
    325,767Total liabilities and
stockholders equity
    
    $
    1,570,180
    
    
    
    
    
    
    
    
    
    
    $
    1,999,177Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.11
    %
    
    
    
    
    
    
    
    
    
    
    4.31
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.83
    %
    
    
    
    
    
    
    
    
    
    
    4.64
    %
  (1)
    
    Interest income includes late fees for owned business credit cards
receivables of $4.3 million for the nine months ended September 30,
2004 and $5.1 million for the nine months ended September 30, 2003.  (2)
    
    Interest and average rate for tax-free securities are computed on a
tax equivalent basis using a statutory rate of 35%.  (3)
    
    Includes assets held and available for sale and nonaccrual
receivables.  (4)
    
    Includes funding of assets for both continuing and discontinued
operations. 32




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##### Table of Contents



PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES For the three months ended September 30, 2004, provision for credit
losses on a consolidated basis decreased $4.9 million to $11.7 million as
compared to the same period of 2003. For the nine months ended September
30, 2004, provision for credit losses on a consolidated basis decreased
$3.6 million to $31.7 million as compared to the same period of 2003.
The decreases in provision for credit losses were due primarily to a
reduction in the estimate of losses inherent in the portfolio based on
delinquency and principal charge-off trends and the current composition
of the portfolio that included more high credit quality customers. A
decrease in average owned business credit card receivables of $87.8
million in the three months ended September 30, 2004 as compared to the
same period of 2003 also contributed to the decrease in provision for
credit losses in that period. For the three months ended September 30, 2004, the provision for interest
and fee losses, which is recorded as a direct reduction to interest and
fee income, decreased by $1.3 million to $2.5 million as compared to the
same period of 2003. For the nine months ended September 30, 2004, the
provision for interest and fee losses decreased by $1.7 million to $7.0
million as compared to the same period of 2003. The decreases were due
to the reduction in the estimate of losses inherent in the portfolio
described above. The decrease in average owned business credit card
receivables in the three months ended September 30, 2004 as compared to
the same period of 2003 also contributed to the decrease in provision for
interest and fee losses in that period. The allowance for receivable losses on business credit card receivables
was $49.1 million as of September 30, 2004, or 6.92% of owned
receivables, which was lower as a percentage of owned receivables than
the allowance of $47.0 million, or 9.08% of owned receivables, as of
December 31, 2003. Owned business credit card receivables increased to
$710 million at September 30, 2004 from $518 million at December 31,
2003. The decrease in allowance as a percentage of owned receivables is
due to a reduction in the estimate of losses inherent in the portfolio
based on delinquency and principal charge-off trends and the current
composition of the portfolio that included more high credit quality
customers as compared to December 31, 2003. 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, 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 three months ended December 31, 2004
will be lower than those experienced in the three months ended September
30, 2004. We base this expectation on the level of receivables 90 days
or more delinquent at September 30, 2004 and the current composition of
the portfolio that reflects our strategic initiative to selectively
attract and retain more high credit quality customers. The following table provides credit quality data as of and for the
periods indicated for our owned receivable portfolio including a summary
of allowances for receivable losses, delinquencies, nonaccrual
receivables, accruing receivables past due 90 days or more, and net
principal charge-offs. Consolidated data includes business credit cards
and other receivables. 33




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##### Table of Contents



September 30,
    
    December 31,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2003CONSOLIDATED  OWNEDAllowance for receivable losses
    
    $
    50,437
    
    
    $
    48,454
    
    
    $
    48,196Receivables 30 days or more delinquent
    
    
    29,634
    
    
    
    25,413
    
    
    
    30,800Receivables 90 days or more delinquent
    
    
    14,305
    
    
    
    12,808
    
    
    
    14,344Nonaccrual receivables
    
    
    11,342
    
    
    
    7,978
    
    
    
    9,286Accruing receivables past due 90 days or more
    
    
    12,774
    
    
    
    11,320
    
    
    
    12,772As a percentage of gross receivables:Allowance for receivable losses
    
    
    7.00
    %
    
    
    9.06
    %
    
    
    8.75
    %Receivables 30 days or more delinquent
    
    
    4.11
    
    
    
    4.75
    
    
    
    5.59Receivables 90 days or more delinquent
    
    
    1.99
    
    
    
    2.39
    
    
    
    2.60Nonaccrual receivables
    
    
    1.57
    
    
    
    1.49
    
    
    
    1.69Accruing receivables past due 90 days or more
    
    
    1.77
    
    
    
    2.12
    
    
    
    2.32Net principal charge-offs for the year-to-date
period ended September 30 and December 31
    
    $
    29,214
    
    
    $
    43,704
    
    
    $
    33,535Net principal charge-offs for the three months
ended September 30 and December 31
    
    
    10,448
    
    
    
    10,169
    
    
    
    15,544As a percentage of average gross receivables
(annualized):Net principal charge-offs for the year-to-date
period ended September 30 and December 31
    
    
    6.43
    %
    
    
    7.18
    %
    
    
    7.35
    %Net principal charge-offs for the three months
ended September 30 and December 31
    
    
    6.36
    
    
    
    6.66
    
    
    
    8.26BUSINESS CREDIT CARDS  OWNEDAllowance for receivable losses
    
    $
    49,126
    
    
    $
    47,041
    
    
    $
    46,764Receivables 30 days or more delinquent
    
    
    29,552
    
    
    
    25,301
    
    
    
    30,681Receivables 90 days or more delinquent
    
    
    14,305
    
    
    
    12,696
    
    
    
    14,225Nonaccrual receivables
    
    
    11,342
    
    
    
    7,866
    
    
    
    9,167Accruing receivables past due 90 days or more
    
    
    12,774
    
    
    
    11,320
    
    
    
    12,772As a percentage of gross receivables:Allowance for receivable losses
    
    
    6.92
    %
    
    
    9.08
    %
    
    
    8.77
    %Receivables 30 days or more delinquent
    
    
    4.16
    
    
    
    4.88
    
    
    
    5.75Receivables 90 days or more delinquent
    
    
    2.01
    
    
    
    2.45
    
    
    
    2.67Nonaccrual receivables
    
    
    1.60
    
    
    
    1.52
    
    
    
    1.72Accruing receivables past due 90 days or more
    
    
    1.80
    
    
    
    2.19
    
    
    
    2.39Net principal charge-offs for the year-to-date
period ended September 30 and December 31
    
    $
    29,215
    
    
    $
    43,670
    
    
    $
    33,507Net principal charge-offs for the three months
ended September 30 and December 31
    
    
    10,448
    
    
    
    10,163
    
    
    
    15,544As a percentage of average gross receivables
(annualized):Net principal charge-offs for the year-to-date
period ended September 30 and December 31
    
    
    6.56
    %
    
    
    7.42
    %
    
    
    7.62
    %Net principal charge-offs for the three months
ended September 30 and December 31
    
    
    6.46
    
    
    
    6.84
    
    
    
    8.46
 34




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##### Table of Contents



SECURITIZATION INCOME Advanta Business Cards recognized securitization income as follows: ($ in thousands)
    
    2004
    
    2003Three months ended September 30
    
    $
    31,410
    
    
    $
    28,558Nine months ended September 30
    
    
    96,577
    
    
    
    89,920
 Securitization income increased for the three and nine months ended
September 30, 2004 as compared to the same periods of 2003, due to the
positive impacts from increased volume of securitized receivables and a
decrease in the net principal charge-off rate on securitized receivables,
partially offset by a decrease in yields on securitized receivables and an
increase in the floating interest rates earned by noteholders. 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
other fluctuations in yields and net principal charge-off rates are
similar to those experienced in owned business credit card receivables as
discussed in the Interest Income and Expense and Provision and
Allowance for Receivable Losses sections of this Managements Discussion
and Analysis of Financial Condition and Results of Operations. Managed Receivable Data In addition to evaluating the financial performance of the Advanta
Business Cards segment under U.S. generally accepted accounting
principles (GAAP), we evaluate Advanta Business Cards performance on a
managed basis. Our managed business credit card receivable portfolio is
comprised of both owned and securitized business credit card receivables.
We sell business credit card receivables through securitizations
accounted for as sales under GAAP. We continue to own and service the
accounts that generate the securitized receivables. Managed data
presents performance as if the securitized receivables had not been sold.
We believe that performance on a managed basis provides useful
supplemental information because we retain interests in the securitized
receivables and, therefore, we have a financial interest in and exposure
to the performance of the securitized receivables. Revenue and credit
data on the managed portfolio provides additional information useful in
understanding the performance of the retained interests in business
credit card 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: 35




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##### Table of Contents



INCOME STATEMENT MEASURES AND STATISTICS AdvantaBusiness
    
    GAAP
    
    Securitization
    
    Advanta Business($ in thousands)
    
    Cards GAAP
    
    Ratio(3)
    
    Adjustments
    
    Cards Managed
    
    Managed Ratio(3)Three Months Ended September 30, 2004:Interest income
    
    $
    25,916
    
    
    
    13.01
    %
    
    $
    90,108
    
    
    $
    116,024
    
    
    
    14.69
    %Interest expense
    
    
    9,224
    
    
    
    4.63
    
    
    
    13,739
    
    
    
    22,963
    
    
    
    2.91Net interest income
    
    
    16,692
    
    
    
    8.38
    
    
    
    76,369
    
    
    
    93,061
    
    
    
    11.78Noninterest revenues
    
    
    72,641
    
    
    
    36.46
    
    
    
    (35,629
    )
    
    
    37,012
    
    
    
    4.69Provision for credit losses
    
    
    11,698
    
    
    
    5.87
    
    
    
    40,740
    (2)
    
    
    52,438
    
    
    
    6.64Risk-adjusted
revenues(1)
    
    
    77,635
    
    
    
    38.97
    
    
    
    0
    
    
    
    77,635
    
    
    
    9.83Average interest-earning
assets
    
    
    796,932
    
    
    
    
    
    
    
    2,363,055
    
    
    
    3,159,987Average business credit
card receivables
    
    
    646,934
    
    
    
    
    
    
    
    2,513,053
    
    
    
    3,159,987Net principal charge-offs
    
    
    10,448
    
    
    
    6.46
    
    
    
    40,740
    
    
    
    51,188
    
    
    
    6.48Three Months Ended September 30, 2003:Interest income
    
    $
    31,597
    
    
    
    14.54
    %
    
    $
    83,380
    
    
    $
    114,977
    
    
    
    16.09
    %Interest expense
    
    
    12,339
    
    
    
    5.68
    
    
    
    9,357
    
    
    
    21,696
    
    
    
    3.04Net interest income
    
    
    19,258
    
    
    
    8.86
    
    
    
    74,023
    
    
    
    93,281
    
    
    
    13.05Noninterest revenues
    
    
    65,054
    
    
    
    29.93
    
    
    
    (30,435
    )
    
    
    34,619
    
    
    
    4.84Provision for credit losses
    
    
    16,544
    
    
    
    7.61
    
    
    
    43,588
    (2)
    
    
    60,132
    
    
    
    8.41Risk-adjusted
revenues(1)
    
    
    67,768
    
    
    
    31.18
    
    
    
    0
    
    
    
    67,768
    
    
    
    9.48Average interest-earning
assets
    
    
    869,477
    
    
    
    
    
    
    
    1,989,710
    
    
    
    2,859,187Average business credit
card receivables
    
    
    734,715
    
    
    
    
    
    
    
    2,124,472
    
    
    
    2,859,187Net principal charge-offs
    
    
    15,544
    
    
    
    8.46
    
    
    
    43,588
    
    
    
    59,132
    
    
    
    8.27
  (1)
    
    Risk-adjusted revenues represent net interest income and
noninterest revenues, less provision for credit losses.  (2)
    
    Includes the amount by which the credit losses would have been
higher had the securitized receivables remained as owned and the
provision for credit losses on securitized receivables been equal to
actual reported charge-offs.  (3)
    
    Ratios are as a percentage of average business credit card
interest-earning assets except net principal charge-off ratios,
which are as a percentage of average business credit card
receivables. 36




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##### Table of Contents



INCOME STATEMENT MEASURES AND STATISTICS AdvantaAdvanta
    
    
    
    
    
    
    
    
    
    BusinessBusiness
    
    GAAP
    
    Securitization
    
    Cards
    
    Managed($ in thousands)
    
    Cards GAAP
    
    Ratio(3)
    
    Adjustments
    
    Managed
    
    Ratio(3)Nine Months Ended September 30, 2004:Interest income
    
    $
    71,500
    
    
    
    12.81
    %
    
    $
    275,261
    
    
    $
    346,761
    
    
    
    14.84
    %Interest expense
    
    
    26,937
    
    
    
    4.83
    
    
    
    36,446
    
    
    
    63,383
    
    
    
    2.71Net interest income
    
    
    44,563
    
    
    
    7.98
    
    
    
    238,815
    
    
    
    283,378
    
    
    
    12.13Noninterest revenues
    
    
    216,018
    
    
    
    38.70
    
    
    
    (107,248
    )
    
    
    108,770
    
    
    
    4.66Provision for credit losses
    
    
    31,765
    
    
    
    5.69
    
    
    
    131,567
    (2)
    
    
    163,332
    
    
    
    6.99Risk-adjusted revenues(1)
    
    
    228,816
    
    
    
    40.99
    
    
    
    0
    
    
    
    228,816
    
    
    
    9.80Average interest-earning
assets
    
    
    744,247
    
    
    
    
    
    
    
    2,370,464
    
    
    
    3,114,711Average business credit
card receivables
    
    
    594,249
    
    
    
    
    
    
    
    2,520,462
    
    
    
    3,114,711Net principal charge-offs
    
    
    29,215
    
    
    
    6.56
    
    
    
    131,567
    
    
    
    160,782
    
    
    
    6.88Nine Months Ended September 30, 2003:Interest income
    
    $
    75,358
    
    
    
    13.79
    %
    
    $
    260,294
    
    
    $
    335,652
    
    
    
    16.09
    %Interest expense
    
    
    34,342
    
    
    
    6.28
    
    
    
    28,562
    
    
    
    62,904
    
    
    
    3.02Net interest income
    
    
    41,016
    
    
    
    7.51
    
    
    
    231,732
    
    
    
    272,748
    
    
    
    13.07Noninterest revenues
    
    
    196,286
    
    
    
    35.93
    
    
    
    (96,084
    )
    
    
    100,202
    
    
    
    4.80Provision for credit losses
    
    
    35,507
    
    
    
    6.50
    
    
    
    135,648
    (2)
    
    
    171,155
    
    
    
    8.20Risk-adjusted revenues(1)
    
    
    201,795
    
    
    
    36.94
    
    
    
    0
    
    
    
    201,795
    
    
    
    9.67Average interest-earning
assets
    
    
    728,451
    
    
    
    
    
    
    
    2,053,287
    
    
    
    2,781,738Average business credit
card receivables
    
    
    586,259
    
    
    
    
    
    
    
    2,195,479
    
    
    
    2,781,738Net principal charge-offs
    
    
    33,507
    
    
    
    7.62
    
    
    
    135,648
    
    
    
    169,155
    
    
    
    8.11
  (1)
    
    Risk-adjusted revenues represent net interest income and
noninterest revenues, less provision for credit losses.(2)
    
    Includes the amount by which the credit losses would have been
higher had the securitized receivables remained as owned and the
provision for credit losses on securitized receivables been equal to
actual reported charge-offs.(3)
    
    Ratios are as a percentage of average business credit card
interest-earning assets except net principal charge-off ratios,
which are as a percentage of average business credit card
receivables. 37




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##### Table of Contents



BALANCE SHEET MEASURES AND STATISTICS Advanta
    
    
    
    
    
    
    
    
    
    AdvantaBusiness
    
    GAAP
    
    Securitization
    
    Business
    
    Managed($ in thousands)
    
    Cards GAAP
    
    Ratio(1)
    
    Adjustments
    
    Cards Managed
    
    Ratio(1)As of September 30, 2004Number of business
credit card accounts
    
    
    770,195
    
    
    
    
    
    
    
    N/A
    
    
    
    770,195Ending business credit
card receivables
    
    $
    709,991
    
    
    
    
    
    
    $
    2,511,030
    
    
    $
    3,221,021Receivables 30 days or
more delinquent
    
    
    29,552
    
    
    
    4.16
    %
    
    
    112,674
    
    
    
    142,226
    
    
    
    4.42
    %Receivables 90 days or
more delinquent
    
    
    14,305
    
    
    
    2.01
    
    
    
    54,354
    
    
    
    68,659
    
    
    
    2.13Nonaccrual receivables
    
    
    11,342
    
    
    
    1.60
    
    
    
    43,531
    
    
    
    54,873
    
    
    
    1.70Accruing receivables past
due 90 days or more
    
    
    12,774
    
    
    
    1.80
    
    
    
    48,122
    
    
    
    60,896
    
    
    
    1.89As of December 31, 2003Number of business
credit card accounts
    
    
    786,700
    
    
    
    
    
    
    
    N/A
    
    
    
    786,700Ending business credit
card receivables
    
    $
    518,040
    
    
    
    
    
    
    $
    2,463,747
    
    
    $
    2,981,787Receivables 30 days or
more delinquent
    
    
    25,301
    
    
    
    4.88
    %
    
    
    148,177
    
    
    
    173,478
    
    
    
    5.82
    %Receivables 90 days or
more delinquent
    
    
    12,696
    
    
    
    2.45
    
    
    
    74,762
    
    
    
    87,458
    
    
    
    2.93Nonaccrual receivables
    
    
    7,866
    
    
    
    1.52
    
    
    
    47,381
    
    
    
    55,247
    
    
    
    1.85Accruing receivables past
due 90 days or more
    
    
    11,320
    
    
    
    2.19
    
    
    
    66,376
    
    
    
    77,696
    
    
    
    2.61As of September 30, 2003Number of business
credit card accounts
    
    
    783,811
    
    
    
    
    
    
    
    N/A
    
    
    
    783,811Ending business credit
card receivables
    
    $
    533,398
    
    
    
    
    
    
    $
    2,343,221
    
    
    $
    2,876,619Receivables 30 days or
more delinquent
    
    
    30,681
    
    
    
    5.75
    %
    
    
    146,206
    
    
    
    176,887
    
    
    
    6.15
    %Receivables 90 days or
more delinquent
    
    
    14,225
    
    
    
    2.67
    
    
    
    67,795
    
    
    
    82,020
    
    
    
    2.85Nonaccrual receivables
    
    
    9,167
    
    
    
    1.72
    
    
    
    44,824
    
    
    
    53,991
    
    
    
    1.88Accruing receivables past
due 90 days or more
    
    
    12,772
    
    
    
    2.39
    
    
    
    60,755
    
    
    
    73,527
    
    
    
    2.56
  (1)
    
    Ratios are as a percentage of ending business credit card
receivables. 38




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##### Table of Contents



SERVICING REVENUES Advanta Business Cards recognized servicing revenue as follows: ($ in thousands)
    
    2004
    
    2003Three months ended September 30
    
    $
    12,382
    
    
    $
    9,549Nine months ended September 30
    
    
    37,014
    
    
    
    29,449
 The increase in servicing revenue in both the three and nine months ended
September 30, 2004 as compared to the same periods of 2003 was due to
increased volume of securitized business credit card receivables. OTHER REVENUES Three Months Ended
    
    Nine Months Ended($ in thousands)
    
    September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interchange income
    
    $
    35,986
    
    
    $
    30,805
    
    
    $
    103,074
    
    
    $
    86,232Business credit cards cash back rewards
    
    
    (6,451
    )
    
    
    (5,798
    )
    
    
    (18,135
    )
    
    
    (12,573
    )Business credit cards business rewards
    
    
    (3,605
    )
    
    
    (1,958
    )
    
    
    (11,370
    )
    
    
    (6,849
    )Investment securities losses, net
    
    
    (2,057
    )
    
    
    (1,908
    )
    
    
    (2,008
    )
    
    
    (3,674
    )Balance transfer fees
    
    
    952
    
    
    
    1,279
    
    
    
    3,341
    
    
    
    3,495Cash usage fees
    
    
    756
    
    
    
    878
    
    
    
    2,324
    
    
    
    2,249Other fee revenues
    
    
    1,295
    
    
    
    1,892
    
    
    
    3,766
    
    
    
    4,939Earnings allocable to partnership interest
    
    
    0
    
    
    
    1,050
    
    
    
    1,000
    
    
    
    2,050Valuation adjustments on other receivables
held for sale
    
    
    0
    
    
    
    (400
    )
    
    
    0
    
    
    
    50Other, net
    
    
    (9
    )
    
    
    137
    
    
    
    408
    
    
    
    419Total other revenues, net
    
    $
    26,867
    
    
    $
    25,977
    
    
    $
    82,400
    
    
    $
    76,338
 Interchange income includes interchange fees on both owned and
securitized business credit cards. The increases in interchange income
in the three and nine months ended September 30, 2004 as compared to the
same periods of 2003 were due primarily to higher transaction volume. In
the three months ended September 30, 2004, the increase in interchange
income also includes the impact of increased interchange rates
established by MasterCard®* in April 2004. The average interchange
rate was 2.2% in the three-month period ended September 30, 2004 as
compared to 2.1% in the three-month period ended September 30, 2003 and
2.1% in each of the nine-month periods ended September 30, 2004 and 2003. The increases in business credit cards cash back rewards in the three and
nine months ended September 30, 2004 as compared to the same periods of
2003 were due primarily to the increase in average business credit card
accounts in the cash back rewards programs.  *
    
    MasterCard® is a federally registered service mark of MasterCard
International, Inc. 39




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##### Table of Contents



The increases in business credit cards business rewards in the three and
nine months ended September 30, 2004 as compared to the same periods of
2003 were due primarily to changes in estimate of anticipated costs of
future rewards redemptions. Although there were no changes in estimates
of anticipated costs of future reward redemptions in the three months
ended September 30, 2004, business credit cards business rewards included
a $1.5 million decrease in estimated costs in the three months ended
September 30, 2003. Estimates of costs of future reward redemptions
increased by $1.4 million in the nine months ended September 30, 2004, as
compared to a decrease of $2.6 million in the nine months ended September
30, 2003. See Note 7 to the consolidated financial statements for
further discussion. Investment securities losses, net, primarily represent decreases in
valuations of venture capital investments reflecting the market
conditions for the investments. The decrease in balance transfer fees in the three months ended September
30, 2004 as compared to the same period of 2003 was due primarily to the
types of promotional offers included in our marketing campaigns in the
three months ended September 30, 2004. In connection with the combination of Bank of Americas and Fleets
consumer credit card businesses and our May 28, 2004 agreement with Bank
of America, our partnership interest in Fleet Credit Card Services, L.P.
represents an interest in the combined business. See Note 8 to the
consolidated financial statements. Subsequent to the date of the
agreement, we have accounted for our investment in the partnership
interest in Fleet Credit Card Services, L.P. using the cost method.
Prior to the date of the agreement, we recognized earnings allocable to
our partnership interest. OPERATING EXPENSES Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Salaries and employee benefits
    
    $
    22,970
    
    
    $
    17,561
    
    
    $
    68,677
    
    
    $
    54,443Amortization of deferred
origination costs, net
    
    
    8,013
    
    
    
    12,501
    
    
    
    26,146
    
    
    
    39,658Marketing
    
    
    5,527
    
    
    
    3,882
    
    
    
    14,997
    
    
    
    11,253External processing
    
    
    4,993
    
    
    
    5,311
    
    
    
    15,349
    
    
    
    15,579Professional fees
    
    
    3,203
    
    
    
    2,867
    
    
    
    11,126
    
    
    
    8,942Equipment
    
    
    2,718
    
    
    
    2,597
    
    
    
    8,444
    
    
    
    8,524Occupancy
    
    
    1,922
    
    
    
    2,126
    
    
    
    6,499
    
    
    
    6,388Travel and entertainment
    
    
    1,521
    
    
    
    857
    
    
    
    3,230
    
    
    
    2,407Credit
    
    
    1,338
    
    
    
    1,329
    
    
    
    4,410
    
    
    
    3,511Insurance
    
    
    1,124
    
    
    
    1,293
    
    
    
    3,303
    
    
    
    3,020Fraud
    
    
    931
    
    
    
    939
    
    
    
    2,787
    
    
    
    2,890Postage
    
    
    854
    
    
    
    897
    
    
    
    2,661
    
    
    
    2,701Telephone
    
    
    770
    
    
    
    846
    
    
    
    2,351
    
    
    
    2,692Other
    
    
    2,207
    
    
    
    1,756
    
    
    
    6,201
    
    
    
    5,471Total operating expenses
    
    $
    58,091
    
    
    $
    54,762
    
    
    $
    176,181
    
    
    $
    167,479
 Salaries and employee benefits increased in the three and nine months
ended September 30, 2004 as compared to the same periods of 2003 due to
higher incentive compensation expense resulting from improved earnings
and collections performance and personnel hired in connection with
initiatives to originate and retain relationships with high credit
quality customers. In addition, salaries and employee benefits in the
nine months ended September 30, 2004 include $1.6 million 40




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of expense associated with executive compensation expense incurred in
connection with changes in senior management and Venture Capital segment
severance costs. Amounts paid to third parties to acquire business credit card accounts
and certain other origination costs are deferred and netted against any
related business credit card origination fee, and the net amount is
amortized on a straight-line basis over the privilege period of one year.
Amortization of deferred origination costs, net, decreased in the three
and nine months ended September 30, 2004 as compared to the same periods
of 2003 due primarily to the number and timing of new account
originations in prior periods. We originated a significant volume of new
accounts in the fourth quarter of 2002, and the costs to originate those
accounts increased amortization expense throughout most of 2003. Marketing expense increased in the three and nine months ended September
30, 2004 as compared to the same periods of 2003 due primarily to costs
incurred related to our development of alliances with other organizations
serving segments of the small business market and amortization expense on
marketing rights related to certain of these alliances, as well as
increased marketing activity in response to the competitive environment. Professional fees increased in the nine months ended September 30, 2004
as compared to the same period of 2003 due primarily to an increase in
the use of external consultants for initiatives to originate and retain
relationships with high credit quality customers and for other
corporate matters, partially offset by a reduction in legal expenses. Occupancy expense in the nine months ended September 30, 2004 includes
approximately $571 thousand of expense relating to lease commitments
associated with the closure of an operational location of our Venture
Capital segment in the first quarter of 2004 and occupancy expense in the
nine months ended September 30, 2003 included approximately $410 thousand
of lease termination costs paid relating to office space formerly used in
our Venture Capital segment. Travel and entertainment expense increased in the three and nine months
ended September 30, 2004 as compared to the same periods of 2003 due to
increased travel and related costs associated with sponsorship activities
relating to cultural events. Credit expense increased in the nine months ended September 30, 2004 as
compared to the same period of 2003 due primarily to increased recoveries through outsourced individual account
recovery efforts. Credit expense also increased in the nine months
ended September 30, 2004 due to the utilization of additional services
from credit information service providers. The decrease in insurance expense in the three months ended September
30, 2004 as compared to the same period of 2003 is primarily a result
of a decrease in Federal Deposit Insurance Corporation insurance costs
resulting from a lower assessment rate and a decrease in average
outstanding deposits in the three months ended September 30, 2004 as
compared to the same period of 2003. Insurance expense increased in
the nine months ended September 30, 2004 as compared to the same period
of 2003 due to an increase in directors and officers professional
liability insurance costs as a result of market rates for this type of
insurance. 41




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##### Table of Contents



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. INCOME TAXES Our effective tax rate increased to 39.5% in 2004 due to higher state
income taxes. Income tax expense on income from continuing operations
was as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Income tax expense
    
    $
    6,921
    
    
    $
    4,289
    
    
    $
    20,155
    
    
    $
    11,917Effective tax rate
    
    
    39.5
    %
    
    
    38.5
    %
    
    
    39.5
    %
    
    
    38.5
    %
 See Note 8 for a discussion of tax matters currently before the Internal
Revenue Service Regional Office of Appeals and the agreement with Bank of
America signed in the second quarter of 2004. DISCONTINUED OPERATIONS There was no gain (loss) on discontinuance of our mortgage and leasing
businesses for the three months ended September 30, 2004 or 2003. For
the nine months ended September 30, 2004, we recorded an after-tax gain
on the discontinuance of our mortgage and leasing businesses of $160
thousand. The components of this net gain include a $2.8 million pretax
loss on the discontinuance of the mortgage business, a $3.0 million
pretax gain on the discontinuance of the leasing business, and tax
expense of $105 thousand. The loss on the discontinuance of the mortgage
business was the result of an increase in our estimated future costs of
mortgage business-related contingent liabilities, due primarily to recent
litigation with Chase and disputes related to one of our former mortgage
programs. The gain on the discontinuance of the leasing business was
principally associated with favorable performance in revenues and an
insurance settlement, partially offset by increased operating expenses
due to a lengthening of the anticipated timeframe over which we expect to
incur certain operating expenses related to the lease portfolio. For the nine months ended September 30, 2003, we recorded an after-tax
loss on the discontinuance of our mortgage and leasing businesses of
$2.0 million. The components of this net loss include a pretax loss on
the discontinuance of the mortgage business of $2.6 million, a pretax
loss on the discontinuance of the leasing business of $600 thousand, and
a tax benefit of $1.2 million. The loss on the discontinuance of the
mortgage business represented an increase in our estimated future costs
of mortgage business-related contingent liabilities, due primarily to a
lengthening of the anticipated timeframe of the resolution for those
contingent liabilities, which included an extension of the discovery
process 42




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##### Table of Contents



and a delay in the scheduled trial date in the original
litigation with Chase.
The loss on the discontinuance of the leasing business represented an
adjustment in our estimate of operating results of the leasing segment
over the remaining life of the lease portfolio. The decrease in
estimated operating results of the leasing segment was primarily
associated with an unfavorable sales tax assessment, partially offset by
favorable credit performance on the leasing portfolio. OFF-BALANCE SHEET ARRANGEMENTS Off-balance sheet securitizations provide a significant portion of our
funding and are one of our primary sources of liquidity. At September
30, 2004, off-balance sheet securitized receivables represented 62% of
our funding. These transactions enable us to limit our credit risk in
the securitized receivables to the amount of our retained interests in
business credit card securitizations. We had $150.0 million of retained
interests in business credit card securitizations at September 30, 2004
and at December 31, 2003. The following table summarizes business credit card securitization data
including income and cash flows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,($ in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Average securitized
receivables
    
    $
    2,513,053
    
    
    $
    2,124,472
    
    
    $
    2,520,462
    
    
    $
    2,195,479Securitization income
    
    
    31,410
    
    
    
    28,558
    
    
    
    96,577
    
    
    
    89,920Discount accretion
    
    
    4,139
    
    
    
    4,071
    
    
    
    13,017
    
    
    
    12,036Interchange income
    
    
    28,613
    
    
    
    22,511
    
    
    
    83,358
    
    
    
    66,436Servicing revenues
    
    
    12,382
    
    
    
    9,549
    
    
    
    37,014
    
    
    
    29,449Proceeds from new
securitizations
    
    
    0
    
    
    
    562,347
    
    
    
    90,000
    
    
    
    861,723Proceeds from
collections
reinvested in
revolving-period
securitizations
    
    
    1,594,478
    
    
    
    1,272,035
    
    
    
    4,851,723
    
    
    
    3,040,980Cash flows received
on retained
interests
    
    
    68,397
    
    
    
    93,453
    
    
    
    203,287
    
    
    
    226,455
 See Note 6 to the consolidated financial statements for the key
assumptions used in estimating the fair value of retained interests in
business credit card securitizations as of September 30, 2004 and
December 31, 2003 and for the three and nine months ended September 30,
2004 and 2003. Our Series 1997-A securitization represents a $280 million committed
commercial paper conduit facility that provides off-balance sheet
funding, $55 million of which was used at September 30, 2004. This
facilitys term extends through June 14, 2005. Each of our business credit card securitization series has a date that
the revolving period is scheduled to end. The revolving periods for each
of the series in our securitization trust, except Series 1997-A, may be
extended for up to seven months past the scheduled end of the revolving
period, if the payment rates on the receivables in the trust meet certain
thresholds. Based on current payment rates, we do not anticipate that
any of our business credit card securitization series will end their
revolving period before March 31, 2005. 43




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Based on the planned level of growth in business credit card receivables,
we currently anticipate completing one public business credit card
securitization in the fourth quarter of 2004. We expect this transaction to occur in
November 2004 using a new structure that de-links the issuance of senior
and subordinated securities. This structure will provide 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 the initial offering to be approximately
$100 million of BBB-rated securities, with an interest rate spread to
LIBOR lower than the current outstanding BBB-rated securities in our
securitizations due to the asset quality performance of our business
credit card portfolio and market demand for these securities. In June 2003, the FASB issued an exposure draft, Qualifying
Special-Purpose Entities and Isolation of Transferred Assets  An
Amendment of FASB Statement No. 140. The changes and clarifications in
the proposed statement would prevent derecognition by transferors that
may continue to retain effective control of transferred assets by
providing financial support other than a subordinated retained interest
or making decisions about beneficial interests. The changes would also
help to ensure that variable interest entities will not qualify for the
qualifying special-purpose entity exception to FASB Interpretation No.
46, as revised, if any party involved is in a position to enhance or
protect the value of its own subordinated interest by providing financial
support for or making decisions about reissuing beneficial interests.
For public entities, this proposed 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 October 2004, the
FASB announced plans to issue a revised exposure draft in the second
quarter of 2005 and a final standard in the fourth quarter of 2005.
Management will evaluate any potential impact of this revised proposed
statement when it is available. MARKET RISK SENSITIVITY Market risk is the potential for loss or diminished financial performance
arising from adverse changes in market forces including interest rates
and market prices. Market risk sensitivity is the degree to which a
financial instrument, or a company that owns financial instruments, is
exposed to market forces. Fluctuations in interest rates, changes in
economic conditions, shifts in customer behavior, and other factors can
affect our financial performance. Changes in economic conditions and
shifts in customer behavior are difficult to predict, and our financial
performance generally cannot be completely insulated from these forces. 44




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We measure our interest rate risk using a rising rate scenario and a
declining rate scenario. Net interest income is estimated using a third
party software model that uses standard income modeling techniques. We
measure the effect of interest rate risk on our managed net interest
income, which includes net interest income on owned assets and net
interest income on securitized receivables. The measurement of managed
net interest income in addition to net interest income on owned assets is
meaningful because our securitization income fluctuates with yields on
securitized receivables and interest rates earned by noteholders. Both
increasing and decreasing rate scenarios assume an instantaneous shift in
rates and measure the corresponding change in expected net interest
income as compared to a base case scenario. As of September 30, 2004 and
December 31, 2003, we estimated that our net interest income would change
as follows over a twelve-month period: September 30,
    
    December 31,2004
    
    2003Estimated percentage increase (decrease) in net interest
income on owned receivables:Assuming 200 basis point increase in interest rates
    
    
    13
    %
    
    
    11
    %Assuming 200 basis point decrease in interest rates
    
    
    (8
    )%
    
    
    3
    %Estimated percentage increase (decrease) in net interest
income on securitized receivables:Assuming 200 basis point increase in interest rates
    
    
    (5
    )%
    
    
    (5
    )%Assuming 200 basis point decrease in interest rates
    
    
    10
    %
    
    
    9
    %Estimated percentage increase (decrease) in net interest
income on managed receivables:Assuming 200 basis point increase in interest rates
    
    
    (1
    )%
    
    
    (2
    )%Assuming 200 basis point decrease in interest rates
    
    
    6
    %
    
    
    8
    %
 Our business credit card receivables include interest rate floors that
cause our net interest income on managed receivables to rise in the
declining rate scenario. Our net interest income on managed receivables
decreases in a rising rate scenario due to the variable rate funding of
off-balance sheet securitized receivables and the portion of the business
credit card portfolio that is effectively at a fixed rate because of the
nature of the pricing of the accounts or because the cardholder pays
their balance in full each month resulting in an effective fixed yield of
0%. Changes in the composition of our balance sheet and the interest
rate environment have also impacted the results of the net interest
income sensitivity analyses. The above estimates of net interest income sensitivity alone do not
provide a comprehensive view of our exposure to interest rate risk. The
quantitative risk information is limited by the parameters and
assumptions utilized in generating the results. These analyses are
useful only when viewed within the context of the parameters and
assumptions used. The above rate scenarios do not reflect managements
expectation regarding the future direction of interest rates, and they
depict only two possibilities out of a large set of possible scenarios. 45




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LIQUIDITY, CAPITAL RESOURCES AND ANALYSIS OF FINANCIAL CONDITION Our goal is to maintain an adequate level of liquidity, for both
long-term and short-term needs, through active management of both assets
and liabilities. Since Advanta Corp.s debt rating is not investment
grade, our access to unsecured, institutional debt is limited. However,
we do have access to diverse funding sources as described below, and had
a high level of liquidity at September 30, 2004. At September 30, 2004,
we had $212 million of federal funds sold, $376 million of receivables
held for sale, and $186 million of investments, which could be sold to
generate additional liquidity. Components of funding were as follows: September 30, 2004
    
    December 31, 2003($ in thousands)
    
    Amount
    
    %
    
    Amount
    
    %Off-balance sheet securitized
receivables(1)
    
    $
    2,419,103
    
    
    
    62
    %
    
    $
    2,371,819
    
    
    
    62
    %Deposits
    
    
    707,045
    
    
    
    18
    
    
    
    672,204
    
    
    
    18Debt and other borrowings
    
    
    287,818
    
    
    
    7
    
    
    
    314,817
    
    
    
    8Subordinated debt payable to
preferred securities trust
    
    
    103,093
    
    
    
    3
    
    
    
    103,093
    
    
    
    3Equity
    
    
    379,552
    
    
    
    10
    
    
    
    341,207
    
    
    
    9Total
    
    $
    3,896,611
    
    
    
    100
    %
    
    $
    3,803,140
    
    
    
    100
    %
  (1)
    
    Includes off-balance sheet business credit card receivables.
Excludes our ownership interests in the noteholder principal balance
of securitizations (subordinated trust assets) that are held on
balance sheet and classified as retained interests in
securitizations. As shown above in the components of funding table, off-balance sheet
securitizations provide a significant portion of our funding and are one
of our primary sources of liquidity. See the Off-Balance Sheet
Arrangements section of this Managements Discussion and Analysis of
Financial Condition and Results of Operations for further discussion of
off-balance sheet securitizations and their impact on our liquidity,
capital resources and financial condition. We increased the percentage
of receivables that were held on balance sheet in the three months ended
September 30, 2004 to further diversify our sources of funding. As a
result, off-balance sheet securitized receivables represent 62% of our
funding at September 30, 2004 as compared to 64% at June 30, 2004. We continue to offer unsecured debt securities of Advanta Corp., in the
form of RediReserve Certificates and Investment Notes, to retail
investors through our retail note program. We change the interest rates
we offer frequently, depending on market conditions and our funding
needs. In 2004, we reduced originations of retail notes due to our
liquidity position and, as a result, the balance of RediReserve
Certificates and Investment Notes outstanding decreased by $45.5 million
in the nine months ended September 30, 2004 to $269 million at September
30, 2004. In June 2004, we exercised an option to extend the term of an existing
operating lease for five years through 2010 for office space used for
certain business card operations and general business purposes. The
minimum lease payments under the extension will be $2.5 million in each
of the years 2006 through 2009 and $2.0 million in 2010. 46




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On February 2, 2004, the court issued its final judgment and order in the
Delaware Chancery Court litigation with Fleet. In early February 2004,
the escrow agent released $63.8 million from the escrow account to Fleet
in satisfaction of all amounts due to Fleet in connection with this
litigation and the $10.5 million of funds remaining in the escrow account
were released and transferred from the restricted escrow account to an
unrestricted cash account. At December 31, 2003, the escrow account was
included in restricted interest-bearing deposits on the consolidated
balance sheet. In accordance with the courts order, the payment to
Fleet was net of amounts due to Advanta from Fleet. As a result of the
courts order and payment to Fleet in February 2004, there was a decrease
in other assets and other liabilities as of the payment date. There was
no impact to our results of operations since, based on the final judgment
and order, our reserves at December 31, 2003 were adequate. In March
2004, we filed a notice of appeal to commence the appeals process related
to this final judgment and order. On May 28, 2004, we reached an
agreement with Bank of America to resolve all outstanding litigation,
including partnership tax disputes, between Advanta and FleetBoston
Financial Corporation, which was recently acquired by Bank of America.
Under the agreement, Bank of America will pay Advanta $63.8 million in
cash which represents a return of the payments made to Fleet in February
2004 described above. That payment will be made following IRS approval
of the settlement of the tax disputes. We expect our book value would
increase by approximately $2.45 per share as a result of the agreement
and other considerations associated with the agreement. We anticipate
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 Note 8 to the consolidated financial statements for further
discussion. Advanta Corp. and its subsidiaries are involved in other litigation,
including litigation relating to the Mortgage Transaction, class action
lawsuits, claims and legal proceedings arising in the ordinary course of
business or discontinued operations, including litigation arising from
our operation of the mortgage business prior to our exit from that
business in the first quarter of 2001. See Note 8 to the consolidated
financial statements for further discussion. Management believes that
the aggregate loss, if any, resulting from existing litigation, claims
and other legal proceedings will not have a material adverse effect on
our liquidity or capital resources based on our current expectations
regarding the ultimate resolutions of these actions. However, due to the
inherent uncertainty in litigation and since the ultimate resolutions of
these proceedings are influenced by factors outside of our control, it is
reasonably possible that the estimated cash flow related to these
proceedings may change or that actual results will differ from our
estimates. In February 2004, the Board of Directors of Advanta Corp. approved a 50%
increase in the regular quarterly cash dividends per common share
beginning in the second quarter of 2004. We are funding the increase in
dividends with operating cash flows. Our bank subsidiaries are subject to regulatory capital requirements and
other regulatory provisions that restrict their ability to lend and/or
pay dividends to Advanta Corp. and its affiliates. Advanta Bank Corp.
issues and funds our business credit cards and is the servicer of our
discontinued leasing business. Advanta Bank Corp. paid dividends to
Advanta Corp. of $20 million in March 2004, $5 million in June 2004 and
$5 million in September 2004. At September 30, 2004, Advanta Bank
Corp.s combined total capital ratio (combined Tier I and Tier II capital
to risk-weighted assets) was 25.55% as compared to 26.28% at December 31,
2003. At both dates, Advanta Bank Corp. had capital in excess of levels
a bank is required to maintain to be classified as well-capitalized under
the regulatory framework for prompt corrective action. Prior to our exit
from the mortgage business in the 47




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##### Table of Contents



first quarter of 2001, Advanta National Bank issued and funded a large
portion of our mortgage business. Advanta National Banks operations are
currently not material to our consolidated operating results. Our
insurance subsidiaries are also subject to certain capital and dividend
rules and regulations as prescribed by state jurisdictions in which they
are authorized to operate. Management believes that these restrictions,
for both bank and insurance subsidiaries, will not have an adverse effect
on Advanta Corp.s ability to meet its cash obligations due to the
current levels of liquidity and diversity of funding sources. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. These forward-looking statements may be
identified by the use of forward-looking phrases such as will likely
result, may, are expected to, is anticipated, estimate,
projected, intends to or other similar words or phrases. The most
significant among these risks and uncertainties are:  (1)
    
    our managed net interest income including changes
resulting from fluctuations in the volume of receivables and
the range and timing of pricing offers to cardholders;(2)
    
    competitive pressures;(3)
    
    political conditions, social conditions, monetary and
fiscal policies and general economic conditions that affect the
level of new account originations, customer spending,
delinquencies and charge-offs;(4)
    
    factors affecting fluctuations in the number of accounts
or receivable balances including the retention of cardholders
after promotional pricing periods have expired;(5)
    
    interest rate fluctuations;(6)
    
    the level of expenses;(7)
    
    the timing of the securitizations of our receivables;(8)
    
    factors affecting the value of investments that we hold;(9)
    
    the effects of government regulation, including
restrictions and limitations imposed by banking laws,
regulators, examinations, and Advanta National Banks
agreements with its regulators;(10)
    
    effect of, and changes in, tax laws, rates, regulations
and policies;(11)
    
    relationships with customers, significant vendors and
business partners;(12)
    
    difficulties or delays in the development, production,
testing and marketing of products or services;(13)
    
    the amount and cost of financing available to us;(14)
    
    the ratings on our debt and the debt of our subsidiaries;(15)
    
    revisions to estimates associated with the discontinuance
of our mortgage and leasing businesses;(16)
    
    obtaining Internal Revenue Service approval of the
settlement of the tax disputes, as required under the agreement
with Bank of America;(17)
    
    the impact of litigation;(18)
    
    the proper design and operation of our disclosure
controls and procedures; and(19)
    
    the ability to attract and retain key personnel. Additional risks that may affect our future performance are set forth
elsewhere in this Quarterly Report on Form 10-Q, in our Annual Report on
Form 10-K for the year ended December 31, 2003 and in our other filings
with the Securities and Exchange Commission. 48




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set forth in Item
2-Managements Discussion and Analysis of Financial Condition and Results
of Operations in this Report on Form 10-Q. See Market Risk
Sensitivity. 
 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any disclosure controls and
procedures, no matter how well designed and operated, can provide only
reasonable, rather than absolute, assurance of achieving the desired
control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls
and procedures. An evaluation was performed by management with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures.
Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of September 30, 2004, our disclosure
controls and procedures are effective to ensure that information required
to be disclosed in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions rules and
forms. There have been no changes in our internal controls over
financial reporting that occurred during the period covered by this
report that have materially affected, or are reasonably likely to
materially affect, these internal controls over financial reporting. 
 PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS The legal proceedings and claims described under the heading captioned
Commitments and Contingencies in Note 8 of the Notes to Consolidated
Financial Statements set forth in Part I, Item 1 of this Quarterly Report
are hereby incorporated by reference. 49




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits  The following exhibits are being filed with this report on
Form 10-Q. ExhibitNumber
    
    Description of Document12
    
    Consolidated Computation of Ratio of Earnings to Fixed Charges31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K  (b) (1)
    
    A Current Report on Form 8-K, dated July 29, 2004, was filed by
Advanta setting forth the financial highlights of Advantas results of
operations for the quarter ended June 30, 2004.(b) (2)
    
    A Current Report on Form 8-K, dated September 8, 2004, was filed by
Advanta announcing the resignation of Joseph G. Reichner from Advanta Corp.s Board of Directors. 50




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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 andChief Financial OfficerNovember 8, 2004By
    
    /s/ David B. WeinstockVice President andChief Accounting OfficerNovember 8, 2004
 51




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EXHIBIT INDEX Manner ofExhibit
    
    Description
    
    Filing12
    
    Consolidated Computation of Ratio of Earnings to Fixed Charges
    
    *31.1
    
    Certification of Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    *31.2
    
    Certification of Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    *32.1
    
    Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    *32.2
    
    Certification of Chief 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. 52