Advanta (ADVNQ) 10-Q 2004 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2004 or

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                   to                   

Commission File Number 0-14120

Advanta Corp.

(Exact name of registrant as specified in its charter)

Delaware	23-1462070
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Welsh and McKean Roads, P.O. Box 844, Spring House, PA 19477
(Address of Principal Executive Offices) (Zip Code)

(215) 657-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x  No o

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes o   No o

     Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A	Outstanding at August 2, 2004
Common Stock, $.01 par value	9,606,885 shares

Class B	Outstanding at August 2, 2004
Common Stock, $.01 par value	18,152,755 shares

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated Balance Sheets (Unaudited)		3
	Consolidated Income Statements (Unaudited)		4
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		5-6
	Consolidated Statements of Cash Flows (Unaudited)		7
	Notes to Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47
Item 4.	Controls and Procedures		47
PART II-OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 4.	Submission of Matters to a Vote of Security Holders		48
Item 6.	Exhibits and Reports on Form 8-K		49
AGREEMENT RELATING TO FLEET CREDIT CARD SERVICES, L.P. DATED 5/28/04
LETTER AGREEMENT DATED JUNE 8, 2004
RELOCATION AGREEMENT DATED MAY 20, 2004
LETTER AGREEMENT DATED JUNE 8, 2004
CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
CERTIFICATION OF CEO PURSUANT TO SECTION 302
CERTIFICATION OF CFO PURSUANT TO SECTION 302
CERTIFICATION OF CEO PURSUANT TO SECTION 906
CERTIFICATION OF CFO PURSUANT TO SECTION 906

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADVANTA CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30,			December 31,
(In thousands, except share amounts)	2004			2003
ASSETS
Cash	$	20,002		$	26,941
Federal funds sold		288,627			258,311
Restricted interest-bearing deposits		2,937			77,872
Investments available for sale		208,455			222,624
Receivables, net:
Held for sale		230,085			214,664
Other		295,943			291,109
Total receivables, net		526,028			505,773
Accounts receivable from securitizations		238,862			244,337
Premises and equipment, net		19,847			20,414
Other assets		179,131			278,703
Assets of discontinued operations, net		31,864			63,469
Total assets	$	1,515,753		$	1,698,444
LIABILITIES
Deposits	$	647,104		$	672,204
Debt and other borrowings		291,226			314,817
Subordinated debt payable to preferred securities trust		103,093			103,093
Other liabilities		107,718			267,123
Total liabilities		1,149,141			1,357,237
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Class A preferred stock, $1,000 par value:
Authorized, issued and outstanding – 1,010 shares in 2004 and 2003		1,010			1,010
Class A voting common stock, $.01 par value:
Authorized - 200,000,000 shares; issued - 10,041,017 shares in 2004 and 2003		100			100
Class B non-voting common stock, $.01 par value:
Authorized - 200,000,000 shares; issued - 21,279,431 shares in 2004 and 20,542,097 shares in 2003		213			206
Additional paid-in capital		254,898			245,295
Deferred compensation		(12,787	)		(13,242	)
Unearned ESOP shares		(10,164	)		(10,387	)
Accumulated other comprehensive income (loss)		(478	)		63
Retained earnings		183,295			167,783
Less: Treasury stock at cost, 434,132 Class A common shares in 2004 and 2003; 3,186,647 Class B common shares in 2004 and 3,197,614 Class B common shares in 2003		(49,475	)		(49,621	)
Total stockholders’ equity		366,612			341,207
Total liabilities and stockholders’ equity	$	1,515,753		$	1,698,444

See Notes to Consolidated Financial Statements

3

ADVANTA CORP. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (Unaudited)

	Three Months Ended					Six Months Ended
(In thousands, except per share amounts)	June 30,					June 30,
	2004		2003			2004		2003
Interest income:
Receivables	$	19,583	$	18,914		$	36,976	$	36,387
Investments		1,375		2,163			2,791		4,089
Other interest income		4,276		4,373			8,878		7,965
Total interest income		25,234		25,450			48,645		48,441
Interest expense:
Deposits		4,343		7,419			8,835		13,640
Debt and other borrowings		4,213		5,692			8,963		10,742
Subordinated debt payable to preferred securities trust		2,290		0			4,579		0
Total interest expense		10,846		13,111			22,377		24,382
Net interest income		14,388		12,339			26,268		24,059
Provision for credit losses		10,494		9,265			20,005		18,711
Net interest income after provision for credit losses		3,894		3,074			6,263		5,348
Noninterest revenues:
Securitization income		32,627		31,752			65,167		61,362
Servicing revenues		12,499		9,873			24,632		19,900
Other revenues, net		28,779		24,929			55,533		50,361
Total noninterest revenues		73,905		66,554			145,332		131,623
Expenses:
Operating expenses		59,896		57,195			118,090		112,717
Minority interest in income of consolidated subsidiary		0		2,220			0		4,440
Total expenses		59,896		59,415			118,090		117,157
Income before income taxes		17,903		10,213			33,505		19,814
Income tax expense		7,071		3,932			13,234		7,628
Income from continuing operations		10,832		6,281			20,271		12,186
Gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax		160		(1,968	)		160		(1,968	)
Net income	$	10,992	$	4,313		$	20,431	$	10,218
Basic income from continuing operations per common share
Class A	$	0.42	$	0.25		$	0.78	$	0.47
Class B		0.44		0.27			0.83		0.52
Combined		0.43		0.26			0.82		0.50
Diluted income from continuing operations per common share
Class A	$	0.39	$	0.24		$	0.73	$	0.46
Class B		0.40		0.26			0.76		0.51
Combined		0.40		0.26			0.75		0.49
Basic net income per common share
Class A	$	0.42	$	0.16		$	0.79	$	0.39
Class B		0.45		0.19			0.84		0.44
Combined		0.44		0.18			0.82		0.42
Diluted net income per common share
Class A	$	0.40	$	0.16		$	0.74	$	0.38
Class B		0.41		0.18			0.76		0.43
Combined		0.41		0.18			0.76		0.41
Basic weighted average common shares outstanding
Class A		8,794		9,151			8,790		9,168
Class B		16,172		14,893			15,891		14,854
Combined		24,966		24,044			24,681		24,022
Diluted weighted average common shares outstanding
Class A		8,794		9,151			8,790		9,168
Class B		18,329		15,445			18,046		15,329
Combined		27,123		24,596			26,836		24,497

See Notes to Consolidated Financial Statements

4

ADVANTA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

				Class A				Class B			Additional
	Comprehensive			Preferred		Class A		Common			Paid-In
($ in thousands)	Income (Loss)			Stock		Common Stock		Stock			Capital
Balance at December 31, 2002				$	1,010	$	100	$	204		$	243,910
Net income	$	28,245
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $66		(123	)
Comprehensive income	$	28,122
Preferred and common cash dividends declared
Exercise of stock options									3			2,310
Stock option exchange program stock distribution
Issuance of restricted stock									2			2,150
Amortization of deferred compensation
Forfeitures of restricted stock									(3	)		(2,976	)
Stock buyback
ESOP shares committed to be released												(99	)
Balance at December 31, 2003				$	1,010	$	100	$	206		$	245,295
Net income	$	20,431
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $291		(541	)
Comprehensive income	$	19,890
Preferred and common cash dividends declared
Exercise of stock options									6			5,525
Modification of stock options												196
Stock option exchange program stock distribution
Stock-based nonemployee compensation expense												482
Issuance of restricted stock									3			4,761
Amortization of deferred compensation
Forfeitures of restricted stock									(2	)		(1,421	)
ESOP shares committed to be released												60
Balance at June 30, 2004				$	1,010	$	100	$	213		$	254,898

See Notes to Consolidated Financial Statements

5

	Deferred			Accumulated
	Compensation			Other									Total
	& Unearned			Comprehensive			Retained			Treasury			Stockholders’
($ in thousands)	ESOP Shares			Income (Loss)			Earnings			Stock			Equity
Balance at December 31, 2002	$	(28,668	)	$	186		$	147,205		$	(42,634	)	$	321,313
Net income								28,245						28,245
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $66					(123	)								(123	)
Comprehensive income
Preferred and common cash dividends declared								(7,667	)					(7,667	)
Exercise of stock options														2,313
Stock option exchange program stock distribution											183			183
Issuance of restricted stock		(2,152	)											0
Amortization of deferred compensation		4,105												4,105
Forfeitures of restricted stock		2,643												(336	)
Stock buyback											(7,170	)		(7,170	)
ESOP shares committed to be released		443												344
Balance at December 31, 2003	$	(23,629	)	$	63		$	167,783		$	(49,621	)	$	341,207
Net income								20,431						20,431
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of $291					(541	)								(541	)
Comprehensive income
Preferred and common cash dividends declared								(4,919	)					(4,919	)
Exercise of stock options														5,531
Modification of stock options														196
Stock option exchange program stock distribution											146			146
Stock-based nonemployee compensation expense														482
Issuance of restricted stock		(4,764	)											0
Amortization of deferred compensation		4,061												4,061
Forfeitures of restricted stock		1,158												(265	)
ESOP shares committed to be released		223												283
Balance at June 30, 2004	$	(22,951	)	$	(478	)	$	183,295		$	(49,475	)	$	366,612

See Notes to Consolidated Financial Statements

6

ADVANTA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

($ in thousands)	Six Months Ended
	June 30,
	2004			2003
OPERATING ACTIVITIES – CONTINUING OPERATIONS
Net income	$	20,431		$	10,218
Adjustments to reconcile net income to net cash used in operating activities:
(Gain) loss, net, on discontinuance of mortgage and leasing businesses, net of tax		(160	)		1,968
Investment securities (gains) losses, net		(49	)		1,766
Valuation adjustments on other receivables held for sale		0			(450	)
Depreciation and amortization		4,948			4,217
Stock-based compensation expense		4,474			1,991
Provision for credit losses		20,005			18,711
Provision for interest and fee losses		4,539			5,013
Change in deferred origination costs, net of deferred fees		4,572			8,546
Change in receivables held for sale		(110,782	)		(278,811	)
Proceeds from sale of receivables held for sale		95,361			299,376
Change in accounts receivable from securitizations		5,475			(632,953	)
Change in other assets and other liabilities		(52,313	)		87,762
Net cash used in operating activities		(3,499	)		(472,646	)
INVESTING ACTIVITIES – CONTINUING OPERATIONS
Change in federal funds sold and restricted interest-bearing deposits		44,619			52,924
Purchase of investments available for sale		(370,058	)		(314,625	)
Proceeds from sales of investments available for sale		381,461			246,686
Proceeds from maturing investments available for sale		1,983			36,564
Change in receivables not held for sale		(33,950	)		(38,078	)
(Purchases) sales of premises and equipment, net		(3,788	)		2,820
Net cash provided by (used in) investing activities		20,267			(13,709	)
FINANCING ACTIVITIES – CONTINUING OPERATIONS
Change in demand and savings deposits		(2,433	)		(3,519	)
Proceeds from issuance of time deposits		247,040			561,659
Payments for maturing time deposits		(272,702	)		(71,629	)
Proceeds from issuance of debt		13,942			50,621
Payments on maturity and redemption of debt		(49,430	)		(50,224	)
Change in other borrowings and cash overdraft		5,823			0
Proceeds from exercise of stock options		5,531			850
Cash dividends paid		(4,919	)		(3,919	)
Stock buyback		0			(4,067	)
Net cash (used in) provided by financing activities		(57,148	)		479,772
DISCONTINUED OPERATIONS
Net cash provided by operating activities		33,441			10,109
Net cash provided by investing activities		0			26,559
Net cash provided by discontinued operations		33,441			36,668
Net (decrease) increase in cash		(6,939	)		30,085
Cash at beginning of period		26,941			14,834
Cash at end of period	$	20,002		$	44,919

See Notes to Consolidated Financial Statements

7

ADVANTA CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE NOTED)

June 30, 2004
(Unaudited)

In these notes to consolidated financial statements, “Advanta”, “we”, “us”, and “our” refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires.

Note 1) Basis of Presentation

We have prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These financial statements should be read in conjunction with the financial statements and notes thereto included in our latest annual report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the accounting for the allowance for receivable losses, securitization income, business credit card rewards programs, litigation contingencies, income taxes, and discontinued operations.

Certain prior period balances have been reclassified to conform to the current period presentation.

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” defines a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it permits entities to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (“Opinion”) No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. We have elected to continue with the accounting methodology in Opinion No. 25 and, as a result, have provided pro forma disclosures of compensation expense for options granted to employees under our stock option plans, net of related tax effects, net income and earnings per share, as if the fair value based method of accounting had been applied. Had compensation cost for

8

these plans been determined using the fair value method, our compensation expense for stock option plans, net of related tax effects, net income and net income per common share would have changed to the following pro forma amounts:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Stock-based employee compensation expense for stock option plans, net of related tax effects
As reported	$	196	$	0	$	196	$	0
Pro forma		763		603		1,209		1,216
Net income
As reported	$	10,992	$	4,313	$	20,431	$	10,218
Pro forma		10,425		3,710		19,418		9,002
Basic net income per common share
As reported
Class A	$	0.42	$	0.16	$	0.79	$	0.39
Class B		0.45		0.19		0.84		0.44
Combined		0.44		0.18		0.82		0.42
Pro forma
Class A	$	0.40	$	0.14	$	0.75	$	0.34
Class B		0.43		0.16		0.80		0.39
Combined		0.42		0.15		0.78		0.37
Diluted net income per common share
As reported
Class A	$	0.40	$	0.16	$	0.74	$	0.38
Class B		0.41		0.18		0.76		0.43
Combined		0.41		0.18		0.76		0.41
Pro forma
Class A	$	0.38	$	0.14	$	0.70	$	0.33
Class B		0.39		0.16		0.73		0.38
Combined		0.39		0.15		0.72		0.36

Note 2) Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” (“FIN 46”). This interpretation requires a company to consolidate a variable interest entity if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. In December 2003, the FASB revised FIN 46 to clarify some of the provisions and incorporate several FASB staff positions related to FIN 46 that were already effective. This interpretation, as revised, did not have a material effect on our financial position or results of operations since qualifying special-purpose entities, as defined in SFAS No. 140, are exempt from the consolidation requirements of FIN 46. However, our adoption of the revised interpretation resulted in the deconsolidation of the subsidiary trust that issued our company-obligated mandatorily redeemable preferred securities (the “trust preferred securities”) effective December 31, 2003. As a result of the deconsolidation of that trust, the consolidated balance sheets include subordinated debt payable to preferred securities trust of $103 million and an equity investment in the trust of $3 million, rather than $100 million of trust preferred securities. Also as a result of the deconsolidation of that trust, the consolidated income statement includes interest expense on subordinated debt payable to preferred securities trust beginning January 1, 2004, as compared to periods through December 31, 2003 that included payments on the trust preferred securities classified as minority interest in income of consolidated subsidiary.

9

In June 2003, the FASB issued an exposure draft, “Qualifying Special-Purpose Entities and Isolation of Transferred Assets — An Amendment of FASB Statement No. 140.” The changes and clarifications in the proposed statement would prevent derecognition by transferors that may continue to retain effective control of transferred assets by providing financial support other than a subordinated retained interest or making decisions about beneficial interests. The changes would also help to ensure that variable interest entities will not qualify for the qualifying special-purpose entity exception to FIN 46, as revised, if any party involved is in a position to enhance or protect the value of its own subordinated interest by providing financial support for or making decisions about reissuing beneficial interests. For public entities, this proposed statement would apply prospectively to transfers of assets occurring after the beginning of the first interim period after the issuance of the final statement. In June 2004, the FASB announced plans to issue a revised exposure draft in the fourth quarter of 2004 and a final standard in the second quarter of 2005. Management will evaluate any potential impact of this revised proposed statement when it is available.

In March 2004, the FASB issued an exposure draft, “Share-Based Payment - An Amendment of Statements No. 123 and 95” that addresses the accounting for equity-based compensation arrangements, including employee stock options. Upon implementation of the changes proposed in this statement, entities would no longer be able to account for equity-based compensation using the intrinsic value method under Opinion No. 25. Entities would be required to measure the cost of employee services received in exchange for awards of equity instruments at the grant date of the award using a fair value based method. The comment period for this proposed statement ended on June 30, 2004. For public entities, this proposed statement would apply prospectively for fiscal years beginning after December 15, 2004 as if all equity-based compensation awards granted, modified or settled after December 15, 1994 had been accounted for using a fair value based method of accounting. Management is currently evaluating the potential impact of the proposed statement.

Note 3) Restricted Interest-Bearing Deposits and Investments Available For Sale

At December 31, 2003, restricted interest-bearing deposits included amounts held in escrow in connection with our litigation with Fleet Financial Group, Inc. (“Fleet”) of $74.2 million. On February 2, 2004, the court issued its final judgment and order in the Delaware Chancery Court litigation with Fleet. In early February 2004, the escrow agent released $63.8 million from the escrow account to Fleet in satisfaction of all amounts due to Fleet in connection with this litigation and the $10.5 million of funds remaining in the escrow account were released and transferred from the restricted escrow account to an unrestricted cash account. See Note 8 for further discussion of this litigation.

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Investments available for sale consisted of the following:

	June 30, 2004				December 31, 2003
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
U.S. Treasury & other U.S. Government securities	$	80,179	$	79,582	$	28,593	$	28,544
State and municipal securities		2,361		2,396		1,946		2,014
Mortgage-backed securities		4,538		4,497		4,954		4,996
Corporate bonds		9,473		9,407		0		0
Equity securities(1)		19,894		19,828		20,018		20,053
Money market funds(2)		92,632		92,632		166,875		166,875
Other		113		113		142		142
Total investments available for sale	$	209,190	$	208,455	$	222,528	$	222,624

(1)	Includes venture capital investments of $9.5 million at June 30, 2004 and December 31, 2003. The amount shown as amortized cost represents fair value for these investments.
(2)	As of June 30, 2004, money market funds include investments in the Reserve Primary Money Market Fund of $48.1 million and the Barclays Global Investors Prime Money Market Fund of $34.1 million. As of December 31, 2003, money market funds include an investment in the Merrill Lynch Premier Institutional Money Market Fund of $163.8 million.

Note 4) Receivables

Receivables on the balance sheet, including those held for sale, consisted of the following:

	June 30,			December 31,
	2004			2003
Business credit card receivables	$	549,862		$	518,040
Other receivables		10,858			16,976
Gross receivables		560,720			535,016
Add: Deferred origination costs, net of deferred fees		14,639			19,211
Less: Allowance for receivable losses
Business credit cards		(47,981	)		(47,041	)
Other receivables		(1,350	)		(1,413	)
Total allowance for receivable losses		(49,331	)		(48,454	)
Receivables, net	$	526,028		$	505,773

In June 2001, Advanta Corp. provided a mortgage financing loan and a revolving home equity line of credit to an executive officer as part of a relocation agreement. Upon the termination of the executive officer’s employment in February 2004, a repayment event under the terms of the agreement occurred. The former executive officer sold the property in May 2004 and used the net proceeds from the sale to satisfy his loan obligations in accordance with the terms of the relocation agreement. The outstanding balances on these loans were included in other receivables and were $474 thousand at December 31, 2003. We recognized $91 thousand of compensation expense in the second quarter of 2004 related to loan forgiveness, based on the net proceeds from the sale of the property.

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Note 5) Allowance for Receivable Losses

The following table presents activity in the allowance for receivable losses for the periods presented:

	Six Months Ended
	June 30,
	2004			2003
Beginning balance	$	48,454		$	46,159
Provision for credit losses		20,005			18,711
Provision for interest and fee losses		4,539			5,013
Gross principal charge-offs:
Business credit cards		(20,169	)		(19,442	)
Other receivables		(3	)		(28	)
Total gross principal charge-offs		(20,172	)		(19,470	)
Principal recoveries:
Business credit cards		1,402			1,479
Other receivables		4			0
Total principal recoveries		1,406			1,479
Net principal charge-offs		(18,766	)		(17,991	)
Interest and fee charge-offs:
Business credit cards		(4,901	)		(4,566	)
Ending balance	$	49,331		$	47,326

Note 6) Securitization Activities

Accounts receivable from securitizations consisted of the following:

	June 30,		December 31,
	2004		2003
Retained interests in business credit card securitizations	$	149,998	$	149,998
Accrued interest and fees on securitized business credit card receivables, net(1)		53,016		58,178
Amounts due from the trust		35,848		36,161
Total accounts receivable from securitizations	$	238,862	$	244,337

(1) Reduced by an estimate for uncollectible interest and fees of $10.8 million at June 30, 2004 and $12.6 million at December 31, 2003.

The following represents business credit card securitization data and the key assumptions used in estimating the fair value of retained interests in securitizations at the time of each new securitization or replenishment if quoted market prices were not available.

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2004		2003		2004		2003
Average securitized receivables	$	2,532,885	$	2,290,671	$	2,524,208	$	2,231,572
Securitization income		32,627		31,752		65,167		61,362
Discount accretion		4,276		4,373		8,878		7,965
Interchange income		28,801		23,521		54,745		43,925
Servicing revenues		12,499		9,873		24,632		19,900
Proceeds from new securitizations		0		226,851		90,000		299,376
Proceeds from collections reinvested in revolving-period securitizations		1,633,689		710,553		3,257,245		1,768,945
Cash flows received on retained interests		68,208		84,702		134,890		133,002

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	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2004			2003			2004			2003
Key assumptions:
Discount rate		10.98% - 13.13	%		12.14% - 14.56	%		10.98% - 14.33	%		11.44% - 14.56	%
Monthly payment rate		20.63% - 22.25	%		18.79% - 21.00	%		20.63% - 22.25	%		18.79% - 21.00	%
Loss rate		6.70% - 8.20	%		8.55% - 9.68	%		6.70% - 8.47	%		8.55% - 10.29	%
Interest yield, net of interest earned by noteholders		12.36% - 13.47	%		14.26% - 14.95	%		12.36% - 13.84	%		14.26% - 14.95	%

There were no purchases of delinquent accounts from the securitization trust during the three or six months ended June 30, 2004 or 2003.

The following assumptions were used in estimating the fair value of retained interests in business credit card securitizations as of June 30, 2004 and December 31, 2003. The assumptions listed represent weighted averages of assumptions used for each securitization.

	June 30,			December 31,
	2004			2003
Discount rate		11.15% - 13.13	%		12.44% - 14.33	%
Monthly payment rate		20.67% - 22.25	%		20.80% - 22.25	%
Loss rate		6.70% - 7.37	%		7.70% - 8.47	%
Interest yield, net of interest earned by noteholders		12.36	%		13.84	%

In addition to the assumptions identified above, management also considered qualitative factors, such as the impact of the current economic environment on the performance of the business credit card receivables sold and the potential volatility of the current market for similar instruments, in assessing the fair value of retained interests in business credit card securitizations.

We have prepared sensitivity analyses of the valuations of retained interests in securitizations estimated using the assumptions identified above. The sensitivity analyses show the hypothetical effect on the fair value of those assets of two unfavorable variations from the expected levels for each key assumption, independently from any change in another key assumption. Set forth below are the results of those sensitivity analyses on the valuation as of June 30, 2004.

Effect on fair value of the following hypothetical changes in key assumptions:
Discount rate increased by 2%	$	(2,256	)
Discount rate increased by 4%		(4,444	)
Monthly payment rate at 110% of base assumption		(1,618	)
Monthly payment rate at 125% of base assumption		(3,647	)
Loss rate at 110% of base assumption		(4,075	)
Loss rate at 125% of base assumption		(10,188	)
Interest yield, net of interest earned by noteholders, decreased by 1%		(6,082	)
Interest yield, net of interest earned by noteholders, decreased by 2%		(12,164	)

The objective of these hypothetical analyses is to measure the sensitivity of the fair value of the retained interests to changes in assumptions. The methodology used to calculate the fair value in the analyses is a discounted cash flow analysis, the same methodology used to estimate the fair value of the retained interests when quoted market prices are not available at each reporting date. These estimates do not factor in the impact of simultaneous changes in other key

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assumptions. The above scenarios do not reflect management’s expectation regarding the future direction of these rates, and they depict only certain possibilities out of a large set of possible scenarios.

Managed receivable data

Our managed business credit card receivable portfolio is comprised of both owned and securitized business credit card receivables. Performance on a managed receivable portfolio basis is useful and relevant because we retain interests in the securitized receivables and, therefore, we have a financial interest in and exposure to the performance of the securitized receivables. Credit quality data on the managed business credit card receivable portfolio was as follows:

	June 30,		December 31,		June 30,
	2004		2003		2003
Owned business credit card receivables	$	549,862	$	518,040	$	442,769
Securitized business credit card receivables		2,546,777		2,463,747		2,365,176
Total managed receivables		3,096,639		2,981,787		2,807,945
Receivables 30 days or more delinquent:
Owned		25,493		25,301		25,839
Securitized		123,123		148,177		150,380
Total managed		148,616		173,478		176,219
Receivables 90 days or more delinquent:
Owned		13,309		12,696		13,184
Securitized		63,980		74,762		76,459
Total managed		77,289		87,458		89,643
Nonaccrual receivables:
Owned		10,081		7,866		7,091
Securitized		48,966		47,381		42,162
Total managed		59,047		55,247		49,253
Accruing receivables past due 90 days or more:
Owned		11,677		11,320		11,741
Securitized		56,111		66,376		67,804
Total managed		67,788		77,696		79,545
Net principal charge-offs for the year-to-date period ended June 30 and December 31:
Owned		18,767		43,670		17,963
Securitized		90,827		179,538		92,060
Total managed		109,594		223,208		110,023

Note 7) Selected Balance Sheet Information

Other assets consisted of the following:

	June 30,		December 31,
	2004		2003
Deferred income taxes	$	69,969	$	82,175
Investment in Fleet Credit Card Services, L.P.		32,453		35,988
Cash surrender value of insurance contracts		20,419		21,792
Intangible assets		3,875		4,295
Investment in preferred securities trust		3,093		3,093
Amounts due from transfer of consumer credit card business		0		70,545
Other assets		49,322		60,815
Total other assets	$	179,131	$	278,703

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Other liabilities consisted of the following:

	June 30,		December 31,
	2004		2003
Accounts payable and accrued expenses	$	31,916	$	28,458
Business credit card rewards		19,431		24,785
Current income taxes		12,936		13,449
Accrued interest payable		9,783		4,008
Amounts due to the securitization trust		3,664		4,021
Other(1)		29,988		192,402
Total other liabilities	$	107,718	$	267,123

(1) A substantial portion of other liabilities at December 31, 2003 represented our litigation reserves.

In February 2004, the court issued its final judgment and order in the Delaware Chancery Court litigation with Fleet, and a payment was made to Fleet in satisfaction of all amounts due in connection with this litigation. In accordance with the court’s February 2004 order, the payment to Fleet was net of amounts due to Advanta from Fleet. As a result of the court’s order and payment to Fleet in February 2004, there was a decrease in other assets and other liabilities as of the payment date. There was no impact to the results of our operations since, based on the final judgment and order, our reserves at December 31, 2003 were adequate. In March 2004, we filed a notice of appeal to commence the appeals process related to this final judgment and order. On May 28, 2004, we reached an agreement with Bank of America Corp. (“Bank of America”) to resolve all outstanding litigation, including partnership tax disputes, between Advanta and FleetBoston Financial Corporation, which was recently acquired by Bank of America. See Note 8. In connection with the anticipated combination of Bank of America’s and Fleet’s consumer credit card businesses and the May 28, 2004 agreement, our partnership interest in Fleet Credit Card Services, L.P. would represent an interest in the combined business. Subsequent to the date of the agreement, we have accounted for our investment in the partnership interest in Fleet Credit Card Services, L.P. using the cost method.

Eligible cardholders earn cash back rewards or business rewards based on net purchases charged on their business credit card accounts. The costs of future reward redemptions are estimated and a liability is recorded at the time cash back rewards or business rewards are earned by the cardholder. In each reporting period, we adjust our estimate of the percentage of earned rewards that will ultimately be redeemed by cardholders and the cost of rewards based on our experience with each program. In the three months ended June 30, 2004, we expanded our business rewards program to include offers of gift certificates and merchandise, in addition to our traditional travel awards. We anticipate that the expanded program will have the effect of increasing the volume of future reward redemptions while decreasing the associated costs per redemption. In the first quarter of 2003, we changed the redemption terms of certain business reward programs resulting in a decrease in the anticipated costs of future reward redemptions. The impact of the changes in the estimated percentage of earned rewards that will ultimately be redeemed by cardholders and other changes in anticipated costs of future period reward redemptions for these programs in the three and six months ended June 30, 2004 and 2003 was as follows:

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
Increase (decrease) in other revenues	$	(900	)	$	(70	)	$	(1,400	)	$	1,200
Increase (decrease) in net income		(545	)		(40	)		(850	)		740
Amount per combined diluted share	$	(0.02	)	$	0.00		$	(0.03	)	$	0.03

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Note 8) Commitments and Contingencies

On May 28, 2004, Advanta Corp. and certain of its subsidiaries and Bank of America signed an agreement to resolve all outstanding litigation, including partnership tax disputes, between Advanta and Fleet, which was recently acquired by Bank of America, relating to the transfer of our consumer credit card business to Fleet Credit Card Services, L.P. (the “Consumer Credit Card Transaction”) in 1998. The agreement is subject to the Internal Revenue Service’s (“IRS”) final approval of the settlement of the tax disputes, which the IRS is expected to approve. Under the agreement, Bank of America will pay Advanta $63.8 million in cash which represents a return of the payments made to Fleet in the Delaware state court litigation in February 2004, as described below. That payment will be made following IRS approval of the settlement of the tax disputes. At that time, Advanta and Fleet will dismiss all outstanding litigation. Advanta and Bank of America have agreed to resolve the tax disputes between Advanta and Fleet by allocating approximately $125 million of the disputed $508 million of partnership deductions to Advanta and by Advanta recognizing for tax purposes approximately $600 thousand of the disputed $47 million partnership taxable gain. As a result of the agreement, Advanta expects to record a net after-tax gain from the settlement of the litigation of approximately $61 million in the quarter that the IRS approval is received. The disputes involving Fleet that are described below would all be resolved under the agreement with Bank of America if IRS approval of the settlement of the tax disputes is obtained.

On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court. Fleet’s allegations, which we denied, centered around Fleet’s assertions that we failed to complete certain post-closing adjustments to the value of the assets and liabilities we contributed to Fleet Credit Card Services, L.P. in connection with the Consumer Credit Card Transaction. We filed an answer to the complaint, and we also filed a countercomplaint against Fleet for damages we believe have been caused by certain actions of Fleet. As a result of related litigation with Fleet, $70.1 million of our reserves in connection with this litigation were funded in an interest-bearing escrow account in February 2001. On January 22, 2003, the trial court issued a ruling on all but one of the remaining issues, and ordered further briefing on the remaining outstanding issue. Effective December 31, 2002, we recognized a $43.0 million pretax loss on the transfer of our consumer credit card business, representing the estimated impact of implementing the court’s January 2003 decisions. This amount represented the amount in excess of the reserves we had been carrying for the litigation, which was based on our expectations of the outcome of the litigation. On November 7, 2003, the court ruled on the remaining outstanding issue, the method for calculating the interest to be awarded, and ordered the parties to submit revised calculations in accordance with this ruling before it issued a judgment. On February 2, 2004, the court issued its final judgment and order. In early February 2004, the escrow agent released $63.8 million from the escrow account to Fleet in satisfaction of all amounts due to Fleet in connection with this litigation and the $10.5 million of funds remaining in the escrow account were released and transferred from the restricted escrow account to an unrestricted cash account. At December 31, 2003, the escrow account was included in restricted interest-bearing deposits on the consolidated balance sheet. There was no impact to the results of our operations since, based on the final judgment and order, our reserves at December 31, 2003 were adequate. On March 1, 2004, we filed a notice of appeal to commence the appeals process relating to orders made by the Delaware Chancery Court during the litigation, and on April 15, 2004, we filed an opening brief with the Supreme Court of Delaware setting forth the basis for our appeal. Fleet filed its answering brief with the Supreme Court of Delaware on May 17, 2004, and we filed our reply brief on June 1, 2004.

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Pursuant to the May 28, 2004 agreement between Advanta and Bank of America described above, Advanta and Fleet filed a joint motion with the Delaware Supreme Court to stay the appeal and on June 28, 2004 the court granted the motion and stayed the appeal, pending fulfillment of all conditions of the agreement.

In an ongoing element of Fleet’s disputes with us, Fleet has claimed $508 million of tax deductions from its partnership with us in connection with the Consumer Credit Card Transaction, which are required under the law to be allocated solely to Advanta. As required, we reported these deductions on our 1998 corporate tax return. However, we have not used or booked the benefit from most of these deductions because for tax purposes we have a very substantial net operating loss carryforward. We have $482 million of net operating loss carryforwards from all sources at June 30, 2004, and have booked no benefit from approximately $400��million of these net operating loss carryforwards. If the deductions are ultimately allocated as claimed by Fleet, the impact on our equity at June 30, 2004 would be a decrease of approximately $35 million. The deductions are attributable to deductions for bad debt reserves that we expensed in computing our book income or loss before the Consumer Credit Card Transaction, but which were not deductible by Advanta for tax purposes until after the closing of the transaction in 1998. The tax law requires “built in losses” like these to be deducted by the party who contributed the assets to the partnership, in this case, Advanta. The Internal Revenue Service agents who have examined the returns at issue have to ensure that both parties do not obtain the deductions and therefore, following standard practice, proposed to disallow the deductions to both parties until there is a final resolution. The deductions, as well as the allocation of a gain from the sale of a partnership asset of approximately $47 million, were before the IRS Regional Office of Appeals. If the conditions of the May 28, 2004 agreement between Advanta and Bank of America are fulfilled, this matter would also be resolved in accordance with the terms of the agreement.

On January 15, 2003, Fleet filed a complaint in Rhode Island Superior Court seeking a declaratory judgment that we indemnify Fleet under the applicable partnership agreement for any damage Fleet incurs by not being entitled to the $508 million of tax deductions. Fleet is also seeking a declaratory judgment that it should not indemnify us for any damages that we incur due to any allocation to Advanta of the $47 million gain on the sale of a partnership asset. On February 28, 2003, we filed a motion to dismiss the complaint. On August 13, 2003, the court denied the motion to dismiss on procedural grounds. We answered the complaint and filed a counterclaim against Fleet on September 19, 2003. The discovery phase of the case has concluded. We believe that the indemnification provision in the partnership agreement does not indemnify Fleet for damages incurred related to the tax deductions and that the lawsuit is frivolous, having no legal basis whatsoever and therefore, we do not have any reserves for this litigation. If the conditions of the May 28, 2004 agreement between Advanta and Bank of America are fulfilled, this matter would also be resolved in accordance with the terms of the agreement.

Although the IRS is expected to approve the settlement of the tax disputes, in the event the settlement is not consummated, management does not expect the lawsuits or the tax disputes with Fleet, described above, to have a material adverse effect on our financial condition or results of operations.

On July 26, 2001, Chase Manhattan Mortgage Corporation (“Chase”) filed a complaint against Advanta Corp. and certain of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, that we breached our contract with Chase in connection with the Mortgage Transaction. Chase claims that we misled Chase concerning the value of certain of the assets sold to Chase and claims damages of approximately $70 million. In September 2001, we filed an answer to the complaint in which we denied all of the substantive allegations of

17

the complaint and asserted a counterclaim against Chase for breach of contract relating to funds owed by Chase to us in connection with the transaction. The trial was originally scheduled to begin in January 2004. In the second quarter of 2003, the parties extended the discovery period and the court delayed the scheduled trial date to April 2004. In September 2003, we filed a motion for summary judgment with the court with respect to all claims raised in Chase’s complaint and Chase filed a motion for partial summary judgment with respect to certain of its claims. On March 4, 2004, the court denied both parties’ motions for summary judgment. On April 26, 2004, a non-jury trial commenced; at trial, Chase asserted damages totaling approximately $88 million. The trial concluded on May 26, 2004, and the court has ordered the parties to make certain post-trial filings with the court. Post-trial filings were filed on July 30, 2004 and additional filings are expected to be made on September 17, 2004. We believe that the lawsuit is without merit and will vigorously defend Advanta in this litigation and therefore, we do not have any reserves for future judgments or rulings in this litigation. However, since this litigation relates to a discontinued operation, we have established reserves for estimated future litigation costs. We do not expect this lawsuit to have any impact on our continuing business and, based on the complete lack of merit, we do not anticipate that the lawsuit will have a material adverse effect on our financial condition or results of operations.

On February 13, 2004, Advanta Corp. filed a Writ of Summons against Chase in Montgomery County, Pennsylvania Court of Common Pleas, which was amended on March 4, 2004; and on March 8, 2004, Advanta Corp. and certain of its subsidiaries filed a Second Amended Writ of Summons and a Complaint against Chase in Montgomery County, Pennsylvania Court of Common Pleas seeking damages of at least $17.7 million. In May 2004, Chase filed an answer to the complaint and asserted a new matter and counterclaims seeking damages of at least $5 million. On August 2, 2004, we filed our reply to Chase’s new matter and counterclaims. On February 23, 2004 and June 4, 2004, Chase filed a complaint and a first amended complaint against us in the United States District Court for the District of Delaware seeking damages of at least $7 million. These filings relate to contractual claims under the purchase and sale agreement governing the Mortgage Transaction and are a continuation of the ongoing dispute associated with the Mortgage Transaction. We do not expect the lawsuit filed by Chase on February 23, 2004, as amended on June 4, 2004, or Chase’s new matter and counterclaims in the action brought by us in the Pennsylvania Court of Common Pleas to have a material adverse effect on our financial condition or results of operations.

Advanta Mortgage Corp. USA (“AMCUSA”) and Advanta Mortgage Conduit Services, Inc. (“AMCSI”), subsidiaries of Advanta Corp., have been involved in arbitration before the American Arbitration Association with Goodrich & Pennington Mortgage Fund, Inc. (“GPMF”), a participant in one of the programs of our former mortgage business. The arbitration process commenced June 28, 2001 in San Francisco, California with GPMF serving a demand for arbitration relating to alleged failure to provide information and documentation under the former mortgage program. On September 5, 2001, AMCUSA and AMCSI filed an answer to the Demand for Arbitration, and from December 2001, have provided information and documentation responsive to the program participant’s requests in the arbitration proceeding. In February and June 2004, GPMF filed additional Statements of Claim, each alleging contractual and other related claims. The amount of damages sought by GPMF is not known because at this time no damage amount has been specified in its pleadings. Discovery in this matter is ongoing and more recently, since June 2004, the parties have filed a number of motions and briefs with the Arbitrator in anticipation of the arbitration hearing which is presently scheduled to commence on November 2, 2004. We do not expect this arbitration to have a material adverse effect on our financial condition or results of operations. However, since this arbitration relates to a

18

discontinued operation, we have established reserves for estimated future legal costs.

In addition to the cases described above, Advanta Corp. and its subsidiaries are involved in class action lawsuits, other litigation, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to our exit from that business in the first quarter of 2001.

Management believes that the aggregate loss, if any, resulting from existing litigation, claims and other legal proceedings will not have a material adverse effect on our financial position or results of our operations based on the level of litigation reserves we have established and our current expectations regarding the ultimate resolutions of these existing actions. We estimate our litigation reserves based on the status of litigation and our assessment of the ultimate resolution of each action after consultation with our attorneys. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of our litigation, claims and other legal proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates.

Note 9) Capital Stock

In 2001 and 2002, the Board of Directors of Advanta Corp. authorized management to purchase up to an aggregate 3.0 million shares of Advanta Corp. common stock. In 2003, we repurchased 434 thousand shares of our Class A Common Stock and 315 thousand shares of our Class B Common Stock, which substantially completed our purchases under the authorizations.

Cash dividends per share of common stock declared were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Class A Common Stock	$	0.095	$	0.063	$	0.158	$	0.126
Class B Common Stock		0.113		0.076		0.189		0.151

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Note 10) Segment Information

	Advanta Business		Venture
	Cards		Capital			Other(1)		Total
Three months ended June 30, 2004
Interest income	$	23,735	$	0		$	1,499	$	25,234
Interest expense		8,590		86			2,170		10,846
Noninterest revenues		73,115		0			790		73,905
Pretax income (loss) from continuing operations		17,998		(95	)		0		17,903
Total assets at end of period		780,492		10,518			724,743		1,515,753
Three months ended June 30, 2003
Interest income	$	23,007	$	1		$	2,442	$	25,450
Interest expense		11,269		135			1,707		13,111
Noninterest revenues (losses)		66,283		(1,242	)		1,513		66,554
Pretax income (loss) from continuing operations		12,647		(2,434	)		0		10,213
Total assets at end of period		1,329,072		12,695			938,709		2,280,476
Six months ended June 30, 2004
Interest income	$	45,584	$	0		$	3,061	$	48,645
Interest expense		17,713		174			4,490		22,377
Noninterest revenues		143,377		32			1,923		145,332
Pretax income (loss) from continuing operations		34,663		(1,158	)		0		33,505
Six months ended June 30, 2003
Interest income	$	43,761	$	1		$	4,679	$	48,441
Interest expense		22,003		275			2,104		24,382
Noninterest revenues (losses)		131,232		(1,852	)		2,243		131,623
Pretax income (loss) from continuing operations		23,624		(3,810	)		0		19,814

(1) Other includes investment and other activities not attributable to reportable segments. Total assets in the “Other” segment include assets of discontinued operations.

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Note 11) Income Taxes

Income tax expense (benefit) was as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004		2003			2004		2003
Income tax expense (benefit) attributable to:
Continuing operations	$	7,071	$	3,932		$	13,234	$	7,628
Discontinued operations		105		(1,232	)		105		(1,232	)
Total income tax expense	$	7,176	$	2,700		$	13,339	$	6,396

Income tax expense (benefit) on income from continuing operations consisted of the following components:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004		2003			2004		2003
Current:
Federal	$	0	$	(860	)	$	0	$	0
State		379		31			899		565
Total current		379		(829	)		899		565
Deferred:
Federal		6,488		4,710			11,940		7,007
State		204		51			395		56
Total deferred		6,692		4,761			12,335		7,063
Income tax expense attributable to continuing operations	$	7,071	$	3,932		$	13,234	$	7,628

The reconciliation of the statutory federal income tax to income tax expense on income from continuing operations is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Statutory federal income tax	$	6,266	$	3,575	$	11,727	$	6,935
State income taxes, net of federal income tax benefit		379		53		841		404
Nondeductible expenses		165		158		333		270
Compensation limitation		126		49		175		98
Other		135		97		158		(79	)
Income tax expense attributable to continuing operations	$	7,071	$	3,932	$	13,234	$	7,628

Our effective tax rate was 39.5% for the three and six months ended June 30, 2004 and 38.5% for the three and six months ended June 30, 2003. Our effective tax rate increased in 2004 due to higher state income taxes.

We provide deferred taxes to reflect the estimated future tax effects of the differences between the financial statement and tax bases of assets and liabilities and currently enacted tax laws. The net deferred tax asset is comprised of the following:

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	June 30,			December 31,
	2004			2003
Deferred tax assets	$	84,438		$	107,329
Deferred tax liabilities		(14,469	)		(25,154	)
Net deferred tax asset	$	69,969		$	82,175

A summary of deferred tax assets and liabilities follows:

	June 30,			December 31,
	2004			2003
Net operating loss carryforwards	$	168,601		$	191,308
Valuation allowance		(139,783	)		(139,783	)
Allowance for receivable losses		17,166			17,759
Rewards programs		6,865			8,769
Deferred origination fees and costs		(5,459	)		(7,096	)
Deferred compensation		4,306			4,618
Capital loss carryforwards		4,025			2,275
Securitization income		(1,818	)		(1,818	)
Other		16,066			6,143
Net deferred tax asset	$	69,969		$	82,175

At June 30, 2004, net operating loss carryforwards were $482 million. The scheduled expirations of these net operating loss carryforwards were as follows at June 30, 2004:

Year Ended December 31,
2018	$	231,480
2019		33,437
2020		1,427
2021		215,374

We utilized net operating loss carryforwards of $57.8 million in the six months ended June 30, 2004 and $44.0 million in the same period of 2003.

At June 30, 2004, capital loss carryforwards were $11.5 million, of which $6.5 million are scheduled to expire in the year ended December 31, 2007 and $5.0 million are scheduled to expire in the year ended December 31, 2009.

See Note 8 for a discussion of tax matters currently before the Internal Revenue Service Regional Office of Appeals. As more fully described in Note 8, on May 28, 2004, we reached an agreement with Bank of America to resolve all outstanding litigation, including partnership tax disputes, between Advanta and Fleet, which was recently acquired by Bank of America. Advanta and Bank of America have agreed to resolve the tax disputes between Advanta and Fleet by allocating approximately $125 million of the disputed $508 million of partnership deductions to Advanta and by Advanta recognizing for tax purposes approximately $600 thousand of the disputed $47 million partnership taxable gain. The agreement is subject to the IRS’ final approval of the settlement of the tax disputes, which the IRS is expected to approve. The agreement would result in an approximate $134 million reduction in both the net operating loss carryforward and valuation allowance components of our deferred tax asset. Upon receiving the IRS approval, management will evaluate the remaining valuation allowance. In connection with the agreement, Bank of America would pay Advanta $63.8 million in cash which represents a return of the payments made to Fleet in the Delaware state court litigation in February 2004. A substantial portion of this payment will not be taxable since the gain associated with the original transfer of assets to the partnership in the 1998 Consumer Credit Card Transaction was not subject to income tax. After receipt of this payment, the

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cumulative Consumer Credit Card Transaction gain would be approximately $600 million, for which no deferred taxes will have been provided as the transaction structure remains non-taxable under current tax law.

The net deferred tax asset is included in other assets on the consolidated balance sheets.

Note 12) Discontinued Operations

The components of the gain (loss) on discontinuance of our mortgage and leasing businesses for the three and six months ended June 30, 2004 and 2003 were as follows:

	Three and Six Months Ended
	June 30, 2004						June 30, 2003
										Advanta
	Advanta			Advanta			Advanta			Leasing
	Mortgage			Leasing Services			Mortgage			Services
Pretax 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			231
Gain (loss) on discontinuance of mortgage and leasing businesses, net of tax	$	(1,676	)	$	1,836		$	(1,599	)	$	(369	)

In the three months ended June 30, 2004, we recorded a $2.8 million pretax loss on discontinuance of the mortgage business representing an increase in our estimated future costs of mortgage business-related contingent liabilities, due primarily to recent litigation with Chase and disputes related to one of our former mortgage programs.

In the three months ended June 30, 2004, we adjusted our estimate of operating results of the leasing segment over the remaining life of the lease portfolio and recorded a $3.0 million pretax gain on leasing discontinuance. The increase in estimated operating results was principally associated with favorable performance in revenues and an insurance settlement, partially offset by increased operating expenses due to a lengthening of the anticipated timeframe over which we expect to incur certain operating expenses related to the lease portfolio.

In the three months ended June 30, 2003, we recorded a $2.6 million pretax loss on discontinuance of the mortgage business for an increase in our estimated future costs of mortgage business-related contingent liabilities, due primarily to a lengthening of the anticipated timeframe of the resolution for those contingent liabilities, which included an extension of the discovery process and a delay in the scheduled trial date in the original litigation with Chase.

In the three months ended June 30, 2003, we adjusted our estimate of operating results of the leasing segment over the remaining life of the lease portfolio and recorded a $600 thousand pretax loss on leasing discontinuance. The decrease in estimated operating results of the leasing segment was primarily associated with an unfavorable sales tax assessment, partially offset by favorable credit performance on the leasing portfolio.

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Per share data was as follows:

	Three and Six Months Ended June 30,
	Advanta						Advanta Leasing
	Mortgage						Services
	2004			2003			2004		2003
Basic gain (loss), net, on discontinuance of mortgage and leasing businesses, net of tax, per common share
Class 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 share
Class A	$	(0.06	)	$	(0.07	)	$	0.07	$	(0.02	)
Class B		(0.06	)		(0.07	)		0.07		(0.02	)
Combined		(0.06	)		(0.07	)		0.07		(0.02	)

The components of assets of discontinued operations, net, were as follows:

	June 30,			December 31,
	2004			2003
Lease receivables, net	$	35,843		$	68,860
Other assets		1,424			1,719
Liabilities		(5,403	)		(7,110	)
Assets of discontinued operations, net	$	31,864		$	63,469

We are continuing to service the existing lease portfolio. Based on the terms of the remaining leases, we expect assets of discontinued operations to be less than $10 million by June 2005 and the wind down of the lease portfolio to be complete by January 2007.

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Note 13) Calculation of Earnings Per Share

The following table shows the calculation of basic earnings per common share and diluted earnings per common share.

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

(1) Combined represents income available to common stockholders divided by the combined total of Class A and Class B weighted average common shares outstanding.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Form 10-Q, “Advanta”, “we”, “us”, and “our” refer to Advanta Corp. and its subsidiaries, unless the context otherwise requires.

OVERVIEW

Income from continuing operations includes the following business segment results:

	Three Months Ended						Six Months Ended
($ in thousands)	June 30,						June 30,
	2004			2003			2004			2003
Pretax income (loss):
Advanta Business Cards	$	17,998		$	12,647		$	34,663		$	23,624
Venture Capital		(95	)		(2,434	)		(1,158	)		(3,810	)
Total pretax income		17,903			10,213			33,505			19,814
Income tax expense		(7,071	)		(3,932	)		(13,234	)		(7,628	)
Income from continuing operations	$	10,832		$	6,281		$	20,271		$	12,186
Per combined common share, assuming dilution	$	0.40		$	0.26		$	0.75		$	0.49

Advanta Business Cards pretax income increased for the three and six months ended June 30, 2004 as compared to the same periods of 2003 due primarily to growth in both owned and securitized receivables, a decrease in cost of funds and net principal charge-off rates and a decrease in operating expenses as a percentage of owned and securitized receivables, partially offset by a decline in yields. The decrease in yields reflects our array of competitively-priced offerings and products, including promotional pricing and rewards, designed to selectively attract and retain more high credit quality customers and to respond to the competitive environment. We anticipate that these types of customers will have lower credit losses in future periods. Although there may be month-to-month or quarterly variations, we expect yields on our business credit cards to decline modestly for the remainder of 2004 as compared to 2003, because we anticipate the continued transition of the portfolio to higher credit quality customers.

Venture Capital pretax loss in the six months ended June 30, 2004 includes $807 thousand of expenses relating to lease commitments and severance costs associated with the closure of an operational location of our Venture Capital segment in the first quarter of 2004. Venture Capital segment results include pretax investment gains of $32 thousand in the six months ended June 30, 2004 and net pretax investment losses of $1.2 million in the three months ended June 30, 2003 and $1.9 million in the six months ended June 30, 2003, which reflect the market conditions for our venture capital investments in those periods.

For the three months ended June 30, 2004, we recorded a net after-tax gain on the discontinuance of our mortgage and leasing businesses of $160 thousand, or $0.01 per combined diluted common share. For the three months ended June 30, 2003, we recorded a net after-tax loss on the discontinuance of our mortgage and leasing businesses of $2.0 million, or $0.08 per combined diluted common share. See “Discontinued Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We have identified accounting for allowance for receivable losses, securitization transactions, business credit card rewards programs, litigation contingencies, income taxes, and discontinued operations as our most critical accounting policies and estimates because they require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Estimates are inherently subjective and are susceptible to significant revision as more information becomes available. Changes in such estimates could have a material impact on our financial condition or results of operations. These accounting policies are described in our Annual Report on Form 10-K for the year ended December 31, 2003.

ADVANTA BUSINESS CARDS

Advanta Business Cards originates new accounts directly and through the use of third parties. The following table provides key statistical information on our business credit card portfolio for the three and six months ended June 30. Credit quality statistics for the business credit card portfolio are included in the “Provision and Allowance for Receivable Losses” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

	Three Months Ended				Six Months Ended
($ in thousands)	June 30,				June 30,
	2004		2003		2004		2003
Average owned receivables	$	583,581	$	506,200	$	567,617	$	510,800
Average securitized receivables	$	2,532,885	$	2,290,671	$	2,524,208	$	2,231,572
Cardholder transaction volume	$	1,994,647	$	1,677,804	$	3,916,580	$	3,280,302
New account originations		26,187		36,162		65,322		90,093
Average number of active accounts(1)		585,519		585,780		588,063		582,542
Ending number of accounts at June 30		780,415		788,470		780,415		788,470

(1) Active accounts are defined as accounts with a balance at month-end. Active account statistics do not include charged-off accounts. The statistic reported above is the average number of active accounts for the three and six months ended June 30.

In the second quarter of 2003, we enhanced our targeting and decision models used in identifying prospective customers. We have also expanded our activities to identify and establish strategic relationships with organizations focused on certain business owners, executives and small businesses. We expect that our targeted approach will result in acquiring more engaged customers, but may result in somewhat lower account growth rates. We also plan to strengthen and deepen our relationships with our existing customers by providing value based on factors other than pricing in order to build lasting, profitable relationships. The decrease in new account originations in the three and six months ended June 30, 2004 as compared to the same period of 2003 is due primarily to refinements that increased the selectivity of our customer acquisition targeting. We expect the volume of new account originations in the second half of 2004 to be higher than the volume of new

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account originations in the first half of 2004 and comparable to the volume in the second half of 2003, based on the number and timing of planned marketing campaigns. We estimate that managed receivables growth for the year ended December 31, 2004 will be approximately 10%. We also anticipate increasing the percentage of receivables that are held on-balance sheet to between 20% and 25% of managed receivables in the second half of 2004, as compared to 18% in the six months ended June 30, 2004 in order to further diversify our sources of funding. The following is a reconciliation of projected estimated owned business credit card receivable growth to managed business credit card receivable growth:

			Projected
	Actual at		Estimate at
	December 31,		December 31,		Percentage
($ in thousands)	2003		2004		Increase
Owned receivables	$	518,040	$	738,000		42.5	%
Securitized receivables		2,463,747		2,542,000		3.2	%
Managed receivables	$	2,981,787	$	3,280,000		10.0	%

The components of pretax income for Advanta Business Cards are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
($ in thousands)	2004			2003			2004			2003
Net interest income on owned interest-earning assets	$	15,145		$	11,738		$	27,871		$	21,758
Noninterest revenues		73,115			66,283			143,377			131,232
Provision for credit losses		(10,654	)		(9,555	)		(20,067	)		(18,963	)
Operating expenses		(59,608	)		(55,819	)		(116,518	)		(110,403	)
Pretax income	$	17,998		$	12,647		$	34,663		$	23,624

Net interest income on owned interest-earning assets increased by $3.4 million for the three months ended June 30, 2004 as compared to the same period of 2003 and increased by $6.1 million for the six months ended June 30, 2004 as compared to the same period in 2003. The increases were due primarily to decreases in our cost of funds and increases in average owned business credit card receivables of $77.4 million for the three months ended June 30, 2004 and $56.8 for the six months ended June 30, 2004, partially offset by decreases in the average yields earned on our business credit card receivables. The decrease in yields is a result of our competitively-priced offerings and products. Average owned business credit card receivables increased in the three and six months ended June 30, 2004 as compared to the same period of 2003 due to growth and the level of securitization activity.

Noninterest revenues include securitization income, interchange income, business credit card rewards costs and other fee revenues. The increases in noninterest revenues in the three and six months ended June 30, 2004 as compared to the same period of 2003 are due primarily to higher transaction volume that yielded higher interchange income and the increased volume of securitized business credit card receivables that produced higher servicing fees and securitization income. Noninterest revenues also include the impact of changes in estimated costs of future reward redemptions in all periods. See further discussion in the “Other Revenues” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The increases in provision for credit losses in the three and six months ended June 30, 2004 as compared to the same periods of 2003 primarily reflect the increases in average owned business credit card receivables, partially offset by a reduction in the estimate of losses inherent in the portfolio based on the delinquency and

28

principal charge-off trends and the current composition of the portfolio as compared to the same periods of 2003.

The increases in operating expenses in the three and six months ended June 30, 2004 as compared to the same periods of 2003 were due primarily to an increase in salaries and employee benefits expense including higher incentive compensation expense resulting from improved earnings and collections performance, and personnel hired in connection with initiatives to originate and retain relationships with high credit quality customers. In addition, salaries and employee benefits expenses in the six months ended June 30, 2004 include executive compensation expense incurred related to changes in senior management. Marketing expenses also increased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due primarily to costs incurred related to our development of alliances with other organizations serving segments of the small business market and amortization expense on marketing rights related to certain of these alliances, as well as increased marketing activity in response to the competitive environment. Operating expenses reflect decreases in the amortization of deferred origination costs, due to the number and timing of new account originations in prior periods.

VENTURE CAPITAL

The components of pretax loss for our Venture Capital segment are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
($ in thousands)	2004			2003			2004			2003
Net interest expense	$	(86	)	$	(134	)	$	(174	)	$	(274	)
Realized gains		0			197			0			197
Unrealized gains (losses), net		0			(1,439	)		32			(2,049	)
Operating expenses		(9	)		(1,058	)		(1,016	)		(1,684	)
Pretax loss	$	(95	)	$	(2,434	)	$	(1,158	)	$	(3,810	)

The estimated fair value of our venture capital investments was $9.5 million as of June 30, 2004 and December 31, 2003. Unrealized gains (losses) on our venture capital investments reflect the market conditions for those investments in each respective period.

In recent years, we have limited our new venture capital investment activity and we presently do not expect to make significant additional investments. Operating expenses for the six months ended June 30, 2004 include expenses associated with the closure of an operational location of our Venture Capital segment in the first quarter of 2004, consisting of $571 thousand of expense relating to lease commitments and $236 thousand of severance costs. Due to the closure of the operational location, we expect to incur minimal operating expenses in the Venture Capital segment in future periods. Operating expenses for the three and six months ended June 30, 2003 include approximately $410 thousand of lease termination costs paid in June 2003.

INTEREST INCOME AND EXPENSE

Interest income decreased $216 thousand to $25.2 million for the three months ended June 30, 2004 as compared to the same period of 2003 and increased $204 thousand to $48.6 million for the six months ended June 30, 2004 as compared to the same period of 2003. Interest income was impacted by decreases in average balances of investments and the average yields earned on our investments. Average investments decreased $223 million in the three months ended June 30, 2004 and decreased $150

29

million in the six months ended June 30, 2004 as compared to the same periods of 2003. Interest income was also impacted by decreases in the average yield earned on our business credit card receivables as a result of our competitively-priced offerings and products. The impact of lower yields on business credit card receivables was more than offset by increases in average business credit card receivables of $77.4 million to $584 million in the three months ended June 30, 2004 and $56.8 million to $568 million in the six months ended June 30, 2004 as compared to the same periods of 2003. Interest income was also impacted by an increase in average balances and the average yield on retained interests in securitizations in the six months ended June 30, 2004. The increase in average balances of retained interests in securitizations is due to additional securitizations completed since June 30, 2003. The increase in average yield on retained interests in securitization to 11.84% for the six months ended June 30, 2004 as compared to 10.91% for the same period of 2003 is due primarily to the composition of retained interests in the respective periods. Retained interests in securitizations in the six months ended June 30, 2003 included an investment-grade subordinated trust asset with a lower effective yield than our other retained interests in securitizations.

Interest expense includes $2.3 million for the three months ended June 30, 2004 and $4.6 million for the six months ended June 30, 2004 of interest expense on subordinated debt payable to preferred securities trust. Our adoption of FIN 46, as revised, resulted in the deconsolidation of the subsidiary trust that issued our trust preferred securities effective December 31, 2003. As a result of the deconsolidation of that trust, the consolidated income statement includes interest expense on subordinated debt payable to preferred securities trust beginning January 1, 2004, as compared to periods through December 31, 2003 that included payments on the trust preferred securities classified as minority interest in income of consolidated subsidiary.

Interest expense decreased $2.3 million to $10.8 million for the three months ended June 30, 2004 and decreased $2.0 million to $22.4 million for the six months ended June 30, 2004 as compared to the same periods of 2003. The decrease in interest expense is due primarily to decreases in our average deposits and debt and decreases in our average cost of funds, partially offset by the $2.3 million for the three months ended June 30, 2004 and $4.6 million for the six months ended June 30, 2004 of interest expense on subordinated debt payable to preferred securities trust described above. Average balances of deposits and debt outstanding decreased $469 million in the three months ended June 30, 2004 and $313 million in the six months ended June 30, 2004 as compared to the same periods of 2003. Average debt and deposits in the three and six months ended June 30, 2003 reflected the funding of higher levels of on-balance sheet assets as a result of principal collections of receivables allocated to the Series 2000-B securitization during its amortization period in 2003. The decrease in our average cost of funding debt and deposits was due to the prevailing interest rate environment and our ability to lower interest rates offered on senior debt resulting from our liquidity position.

The following tables provide an analysis of interest income and expense data, average balance sheet data, net interest spread and net interest margin for both continuing and discontinued operations. The net interest spread represents the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets. Interest income includes late fees on business credit card receivables.

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INTEREST RATE ANALYSIS AND AVERAGE BALANCES

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

(1)	Interest income includes late fees for owned business credit cards receivables of $1.4 million for the three months ended June 30, 2004 and $1.5 million for the three months ended June 30, 2003.
(2)	Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%.
(3)	Includes assets held and available for sale and nonaccrual receivables.
(4)	Includes funding of assets for both continuing and discontinued operations.

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

(1)	Interest income includes late fees for owned business credit cards receivables of $2.8 million for the six months ended June 30, 2004 and $3.0 million for the six months ended June 30, 2003.
(2)	Interest and average rate for tax-free securities are computed on a tax equivalent basis using a statutory rate of 35%.
(3)	Includes assets held and available for sale and nonaccrual receivables.
(4)	Includes funding of assets for both continuing and discontinued operations.

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PROVISION AND ALLOWANCE FOR RECEIVABLE LOSSES

For the three months ended June 30, 2004, provision for credit losses on a consolidated basis was $10.5 million as compared to $9.3 million for the same period of 2003. For the six months ended June 30, 2004, provision for credit losses on a consolidated basis was $20.0 million as compared to $18.7 million for the same period of 2003. Average owned business credit card receivables increased by $77.4 million in the three months ended June 30, 2004 and $56.8 million in the six months ended June 30, 2004 as compared to the same periods of 2003. The impact of the increases in average owned business credit card receivables on provision for credit losses in both periods was partially offset by a reduction in the estimate of losses inherent in the portfolio based on delinquency and principal charge-off trends and the current composition of the portfolio that included more high credit quality customers as compared to the same period of 2003. In addition, we have refined and enhanced our procedures and tools used in the risk management of existing customers, which has helped to reduce credit risk in the portfolio.

For the three months ended June 30, 2004, the provision for interest and fee losses, which is recorded as a direct reduction to interest and fee income, decreased by $39 thousand to $2.4 million as compared to the same period of 2003. For the six months ended June 30, 2004, the provision for interest and fee losses decreased by $474 thousand to $4.5 million as compared to the same period of 2003. The decrease was due to a reduction in the estimate of losses inherent in the portfolio based on improved delinquency and charge-off trends and the current composition of the portfolio as compared to the same periods of 2003, partially offset by growth in average owned business credit card receivables.

The allowance for receivable losses on business credit card receivables was $48.0 million as of June 30, 2004, or 8.73% of owned receivables, which was lower as a percentage of owned receivables than the allowance of $47.0 million, or 9.08% of owned receivables, as of December 31, 2003. The decrease in allowance as a percentage of receivables is due to a reduction in the estimate of losses inherent in the portfolio based on delinquency and principal charge-off trends and the current composition of the portfolio that included more high credit quality customers as compared to the same period of 2003.

Although charge-off levels are not always predictable since they are impacted by the economic environment and other factors beyond our control, and there may be month-to-month or quarterly variations in losses or delinquencies, we anticipate that the owned and managed net principal charge-off rates for the second half of 2004 will be lower than those experienced for the same period of 2003 and lower than those experienced for the first half of 2004. This expectation is based upon the level of receivables 90 days or more delinquent at June 30, 2004 and the current composition of the portfolio that reflects our strategic initiative to selectively attract and retain more high credit quality customers.

The following table provides credit quality data as of and for the year-to-date periods indicated for our owned receivable portfolio including a summary of allowances for receivable losses, delinquencies, nonaccrual receivables, accruing receivables past due 90 days or more, and net principal charge-offs. Consolidated data includes business credit cards and other receivables.

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	June 30,			December 31,			June 30,
($ in thousands)	2004			2003			2003
CONSOLIDATED – OWNED
Allowance for receivable losses	$	49,331		$	48,454		$	47,326
Receivables 30 days or more delinquent		25,605			25,413			27,228
Receivables 90 days or more delinquent		13,421			12,808			13,953
Nonaccrual receivables		10,193			7,978			7,860
Accruing receivables past due 90 days or more		11,677			11,320			11,741
As a percentage of gross receivables:
Allowance for receivable losses		8.80	%		9.06	%		10.15	%
Receivables 30 days or more delinquent		4.57			4.75			5.84
Receivables 90 days or more delinquent		2.39			2.39			2.99
Nonaccrual receivables		1.82			1.49			1.69
Accruing receivables past due 90 days or more		2.08			2.12			2.52
Net principal charge-offs for the year-to-date period ended June 30 and December 31	$	18,766		$	43,704		$	17,991
Net principal charge-offs for the three months ended June 30 and December 31		9,857			10,169			9,563
As a percentage of average gross receivables (annualized):
Net principal charge-offs for the year-to-date period ended June 30 and December 31		6.47	%		7.18	%		6.73	%
Net principal charge-offs for the three months ended June 30 and December 31		6.63			6.66			7.22
BUSINESS CREDIT CARDS – OWNED
Allowance for receivable losses	$	47,981		$	47,041		$	45,914
Receivables 30 days or more delinquent		25,493			25,301			25,839
Receivables 90 days or more delinquent		13,309			12,696			13,184
Nonaccrual receivables		10,081			7,866			7,091
Accruing receivables past due 90 days or more		11,677			11,320			11,741
As a percentage of gross receivables:
Allowance for receivable losses		8.73	%		9.08	%		10.37	%
Receivables 30 days or more delinquent		4.64			4.88			5.84
Receivables 90 days or more delinquent		2.42			2.45			2.98
Nonaccrual receivables		1.83			1.52			1.60
Accruing receivables past due 90 days or more		2.12			2.19			2.65
Net principal charge-offs for the year-to-date period ended June 30 and December 31	$	18,767		$	43,670		$	17,963
Net principal charge-offs for the three months ended June 30 and December 31		9,854			10,163			9,555
As a percentage of average gross receivables (annualized):
Net principal charge-offs for the year-to-date period ended June 30 and December 31		6.61	%		7.42	%		7.03	%
Net principal charge-offs for the three months ended June 30 and December 31		6.75			6.84			7.55

SECURITIZATION INCOME

Advanta Business Cards recognized securitization income as follows:

($ in thousands)	2004		2003
Three months ended June 30	$	32,627	$	31,752
Six months ended June 30		65,167		61,362

Securitization income for the three and six months ended June 30, 2004 increased as compared to the same periods of 2003, due to the positive impacts from increased volume of securitized receivables and a decrease in the net principal charge-off rate on securitized receivables, partially offset by a decrease in yield on securitized receivables. These fluctuations in yields and rates are similar to those experienced in owned business credit card receivables as discussed in the

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“Interest Income and Expense” and “Provision and Allowance for Receivable Losses” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Managed Receivable Data

In addition to evaluating the financial performance of the Advanta Business Cards segment under generally accepted accounting principles (“GAAP”), we evaluate Advanta Business Cards’ performance on a managed basis. Our managed business credit card receivable portfolio is comprised of both owned and securitized business credit card receivables. We sell business credit card receivables through securitizations accounted for as sales under GAAP. We continue to own and service the accounts that generate the securitized receivables. Managed data presents performance as if the securitized receivables had not been sold. We believe that performance on a managed basis provides useful supplemental information because we retain interests in the securitized receivables and, therefore, we have a financial interest in and exposure to the performance of the securitized receivables. Revenue and credit data on the managed portfolio provides additional information useful in understanding the performance of the retained interests in securitizations. The following tables provide managed data for Advanta Business Cards and a reconciliation of the managed data to the most directly comparable GAAP financial measures:

INCOME STATEMENT MEASURES AND STATISTICS

									Advanta
	Advanta								Business
	Business		GAAP			Securitization			Cards		Managed
($ in thousands)	Cards GAAP		Ratio(3)			Adjustments			Managed		Ratio(3)
Three Months Ended June 30, 2004:
Interest income	$	23,735		12.94	%	$	92,046		$	115,781		14.86	%
Interest expense		8,590		4.68			11,373			19,963		2.56
Net interest income		15,145		8.26			80,673			95,818		12.30
Noninterest revenues		73,115		39.87			(36,033	)		37,082		4.76
Provision for credit losses		10,654		5.81			44,640	(2)		55,294		7.10
Risk-adjusted revenues(1)		77,606		42.32			0			77,606		9.96
Average business credit card interest-earning assets		733,579					2,382,887			3,116,466
Average business credit card receivables		583,581					2,532,885			3,116,466
Net principal charge-offs		9,854		6.75			44,640			54,494		6.99
Three Months Ended June 30, 2003:
Interest income	$	23,007		13.86	%	$	89,819		$	112,826		16.14	%
Interest expense		11,269		6.79			9,684			20,953		3.00
Net interest income		11,738		7.07			80,135			91,873		13.14
Noninterest revenues		66,283		39.93			(33,550	)		32,733		4.68
Provision for credit losses		9,555		5.76			46,585	(2)		56,140		8.03
Risk-adjusted revenues(1)		68,466		41.24			0			68,466		9.79
Average business credit card interest-earning assets		664,001					2,132,870			2,796,871
Average business credit card receivables		506,200					2,290,671			2,796,871
Net principal charge-offs		9,555		7.55			46,585			56,140		8.03

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INCOME STATEMENT MEASURES AND STATISTICS

									Advanta
	Advanta								Business
	Business		GAAP			Securitization			Cards		Managed
($ in thousands)	Cards GAAP		Ratio(3)			Adjustments			Managed		Ratio(3)
Six Months Ended June 30, 2004:
Interest income	$	45,584		12.70	%	$	185,153		$	230,737		14.93	%
Interest expense		17,713		4.93			22,707			40,420		2.62
Net interest income		27,871		7.77			162,446			190,317		12.31
Noninterest revenues		143,377		39.96			(71,619	)		71,758		4.64
Provision for credit losses		20,067		5.60			90,827	(2)		110,894		7.17
Risk-adjusted revenues(1)		151,181		42.13			0			151,181		9.78
Average business credit card interest-earning assets		717,615					2,374,210			3,091,825
Average business credit card receivables		567,617					2,524,208			3,091,825
Net principal charge-offs		18,767		6.61			90,827			109,594		7.09
Six Months Ended June 30, 2003:
Interest income	$	43,761		13.33	%	$	176,914		$	220,675		16.09	%
Interest expense		22,003		6.70			19,205			41,208		3.00
Net interest income		21,758		6.63			157,709			179,467		13.09
Noninterest revenues		131,232		39.96			(65,649	)		65,583		4.78
Provision for credit losses		18,963		5.78			92,060	(2)		111,023		8.10
Risk-adjusted revenues(1)		134,027		40.81			0			134,027		9.77
Average business credit card interest-earning assets		656,769					2,085,603			2,742,372
Average business credit card receivables		510,800					2,231,572			2,742,372
Net principal charge-offs		17,963		7.03			92,060			110,023		8.02

(1)	Risk-adjusted revenues represent net interest income and noninterest revenues, less provision for credit losses.
(2)	Includes the amount by which the credit losses would have been higher had the securitized receivables remained as owned and the provision for credit losses on securitized receivables been equal to actual reported charge-offs.
(3)	Ratios are as a percentage of average business credit card interest-earning assets except net principal charge-off ratios, which are as a percentage of average business credit card receivables.

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BALANCE SHEET MEASURES AND STATISTICS

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

(1) Ratios are as a percentage of ending business credit card receivables.

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SERVICING REVENUES

Advanta Business Cards recognized servicing revenue as follows:

($ in thousands)	2004		2003
Three months ended June 30	$	12,499	$	9,873
Six months ended June 30		24,632		19,900

The increase in servicing revenue in both the three and six months ended June 30, 2004 as compared to the same periods of 2003 was due to increased volume of securitized business credit card receivables.

OTHER REVENUES

	Three Months Ended						Six Months Ended
($ in thousands)	June 30,						June 30,
	2004			2003			2004			2003
Interchange income	$	35,513		$	29,289		$	67,088		$	55,427
Business credit cards cash back rewards		(5,933	)		(4,349	)		(11,684	)		(6,775	)
Business credit cards business rewards		(4,295	)		(3,185	)		(7,765	)		(4,891	)
Balance transfer fees		962			865			2,389			2,216
Cash usage fees		805			616			1,568			1,371
Other fee revenues		1,182			1,644			2,471			3,047
Earnings allocable to partnership interest		400			500			1,000			1,000
Investment securities gains (losses), net		0			(1,158	)		49			(1,766	)
Valuation adjustments on other receivables held for sale		0			555			0			450
Other		145			152			417			282
Total other revenues, net	$	28,779		$	24,929		$	55,533		$	50,361

Interchange income includes interchange fees on both owned and securitized business credit cards. The increases in interchange income in the three and six months ended June 30, 2004 as compared to the same periods of 2003 were due primarily to higher transaction volume. In the three months ended June 30, 2004, the increase in interchange income also includes the impact of increased interchange rates established by MasterCard®* in April 2004. The average interchange rate was 2.2% in the three month period ended June 30, 2004 as compared to 2.1% in the three month period ended June 30, 2003 and in each of the six month periods ended June 30, 2004 and 2003.

The increases in business credit cards cash back rewards in the three and six months ended June 30, 2004 as compared to the same periods of 2003 were due primarily to the increase in average business credit card accounts in the cash back rewards programs.

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

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The increases in business credit cards business rewards in the three and six months ended June 30, 2004 as compared to the same periods of 2003 were due primarily to changes in estimate of anticipated costs of future rewards redemptions. Business credit cards business rewards included a $900 thousand increase in estimated costs in the three months ended June 30, 2004, a $1.4 million increase in the six months ended June 30, 2004, a $179 thousand increase in the three months ended June 30, 2003 and a $1.1 million decrease in the six months ended June 30, 2003. See Note 7 to the consolidated financial statements for further discussion.

In the three months ended June 30, 2004, we recognized an estimated $400 thousand of earnings allocable to our partnership interest in Fleet Credit Card Services, L.P., as compared to $500 thousand in the same period of 2003. In the six months ended June 30, 2004 and 2003, we recognized an estimated $1.0 million of earnings allocable to our partnership interest in Fleet Credit Card Services, L.P. In connection with the anticipated combination of Bank of America’s and Fleet’s consumer credit card businesses and our May 28, 2004 agreement with Bank of America, our partnership interest in Fleet Credit Card Services, L.P. would represent an interest in the combined business. See Note 8 to the consolidated financial statements. Subsequent to the date of the agreement, we have accounted for our investment in the partnership interest in Fleet Credit Card Services, L.P. using the cost method.

Investment securities gains (losses), net, primarily represent increases (decreases) in valuations of venture capital investments reflecting the market conditions for the investments.

OPERATING EXPENSES

	Three Months Ended				Six Months Ended
	June 30,				June 30,
($ in thousands)	2004		2003		2004		2003
Salaries and employee benefits	$	23,276	$	18,891	$	45,707	$	36,882
Amortization of deferred origination costs, net		8,796		12,973		18,133		27,157
Marketing		6,209		4,444		9,470		7,371
External processing		5,137		5,410		10,356		10,268
Professional fees		3,675		2,879		7,923		6,075
Equipment		2,738		2,533		5,726		5,927
Occupancy		1,996		2,473		4,577		4,262
Credit		1,481		997		3,072		2,182
Insurance		1,095		976		2,179		1,727
Fraud		902		1,036		1,856		1,951
Postage		833		902		1,807		1,804
Telephone		656		772		1,581		1,846
Other		3,102		2,909		5,703		5,265
Total operating expenses	$	59,896	$	57,195	$	118,090	$	112,717

Salaries and employee benefits increased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due to higher incentive compensation expense resulting from improved earnings and collections performance and personnel hired in connection with initiatives to originate and retain relationships with high credit quality customers. In addition, salaries and employee benefits in the six months ended June 30, 2004 include $1.6 million of expense associated with executive compensation expense incurred in connection with changes in senior management and Venture Capital segment severance costs.

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Amounts paid to third parties to acquire business credit card accounts and certain other origination costs are deferred and netted against any related business credit card origination fee, and the net amount is amortized on a straight-line basis over the privilege period of one year. Amortization of deferred origination costs, net, decreased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due primarily to the number and timing of new account originations in prior periods. We originated a significant volume of new accounts in the fourth quarter of 2002, and the costs to originate those accounts increased amortization expense throughout most of 2003. We expect amortization of business credit card deferred origination costs to be lower in each of the remaining quarters of 2004, as compared to the same periods of 2003, based on the level of deferred origination costs and the timing of new accounts during prior periods.

Marketing expense increased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due primarily to costs incurred related to our development of alliances with other organizations serving segments of the small business market and amortization expense on marketing rights related to certain of these alliances, as well as increased marketing activity in response to the competitive environment.

Professional fees increased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due primarily to an increase in the use of external consultants for certain initiatives to originate and retain relationships with high credit quality customers and other corporate matters, partially offset by a reduction in legal expenses.

Occupancy expense decreased in the three months ended June 30, 2004 as compared to the same period of 2003 due to $410 thousand of lease termination costs paid in June 2003 related to office space formerly used in our venture capital operations. Occupancy expense increased in the six months ended June 30, 2004 as compared to the same period of 2003 due to additional office space that we began leasing in March 2003, partially offset by the impact of the lease termination costs discussed above. In addition, occupancy expense in the six months ended June 30, 2004 includes approximately $571 thousand of expense relating to lease commitments associated with the closure of an operational location of our Venture Capital segment in the first quarter of 2004.

Credit expense increased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due in part to a shift in the types of our recoveries. There was an increase in the dollar volume of charged-off accounts collected through outsourced individual account recovery efforts. Credit expense also increased in the three and six months due to the utilization of additional services from credit information service providers.

Insurance expense increased in the three and six months ended June 30, 2004 as compared to the same periods of 2003 due to an increase in directors’ and officers’ professional liability insurance costs as a result of market rates for this type of insurance.

LITIGATION CONTINGENCIES

We estimate our litigation reserves based on the status of litigation and our assessment of the ultimate resolution of each action after consultation with our attorneys. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of our litigation, claims and other legal proceedings are influenced by factors outside of our control, it is reasonably possible that our estimated liability under these proceedings may change or that actual results will differ from our estimates. Changes in estimates or other charges related to

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litigation are included in operating expenses of the respective business segment if related to continuing operations, or gain (loss) on discontinuance of mortgage and leasing businesses if related to discontinued operations. See Note 8 to the consolidated financial statements for further discussion of litigation contingencies.

INCOME TAXES

Our effective tax rate increased to 39.5% in 2004 due to higher state income taxes. Income tax expense on income from continuing operations was as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
($ in thousands)	2004			2003			2004			2003
Income tax expense	$	7,071		$	3,932		$	13,234		$	7,628
Effective tax rate		39.5	%		38.5	%		39.5	%		38.5	%

See Note 8 for a discussion of tax matters currently before the Internal Revenue Service Regional Office of Appeals and the agreement with Bank of America signed in the second quarter of 2004.

DISCONTINUED OPERATIONS

For the three months ended June 30, 2004, we recorded an after-tax gain on the discontinuance of our mortgage and leasing businesses of $160 thousand. The components of this net gain include a $2.8 million pretax loss on the discontinuance of the mortgage business, a $3.0 million pretax gain on the discontinuance of the leasing business, and tax expense of $105 thousand. The loss on the discontinuance of the mortgage business was the result of an increase in our estimated future costs of mortgage business-related contingent liabilities, due primarily to recent litigation with Chase and disputes related to one of our former mortgage programs. The gain on the discontinuance of the leasing business was principally associated with favorable performance in revenues and an insurance settlement, partially offset by increased operating expenses due to a lengthening of the anticipated timeframe over which we expect to incur certain operating expenses related to the lease portfolio.

For the three months ended June 30, 2003, we recorded an after-tax loss on the discontinuance of our mortgage and leasing businesses of $2.0 million. The components of this net loss include a pretax loss on the discontinuance of the mortgage business of $2.6 million, a pretax loss on the discontinuance of the leasing business of $600 thousand, and a tax benefit of $1.2 million. The loss on the discontinuance of the mortgage business represents an increase in our estimated future costs of mortgage business-related contingent liabilities, due primarily to a lengthening of the anticipated timeframe of the resolution for those contingent liabilities, which included an extension of the discovery process and a delay in the scheduled trial date in the original litigation with Chase. The loss on the discontinuance of the leasing business represents an adjustment in our estimate of operating results of the leasing segment over the remaining life of the lease portfolio. The decrease in estimated operating results of the leasing segment was primarily associated with an unfavorable sales tax assessment, partially offset by favorable credit performance on the leasing portfolio.

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OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet securitizations provide a significant portion of our funding and they are one of our primary sources of liquidity. At June 30, 2004, off-balance sheet securitized receivables represented 64% of our funding. These transactions enable us to limit our credit risk in the securitized receivables to the amount of our retained interests in securitizations. We had $150.0 million of retained interests in securitizations at June 30, 2004 and at December 31, 2003.

The following table summarizes business credit card securitization data including income and cash flows:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
($ in thousands)	2004		2003		2004		2003
Average securitized receivables	$	2,532,885	$	2,290,671	$	2,524,208	$	2,231,572
Securitization income		32,627		31,752		65,167		61,362
Discount accretion		4,276		4,373		8,878		7,965
Interchange income		28,801		23,521		54,745		43,925
Servicing revenues		12,499		9,873		24,632		19,900
Proceeds from new securitizations		0		226,851		90,000		299,376
Proceeds from collections reinvested in revolving-period securitizations		1,633,689		710,553		3,257,245		1,768,945
Cash flows received on retained interests		68,208		84,702		134,890		133,002

See Note 6 to the consolidated financial statements for the key assumptions used in estimating the fair value of retained interests in securitizations as of June 30, 2004 and December 31, 2003 and for the three and six months ended June 30, 2004 and 2003.

We have a $280 million committed commercial paper conduit facility that provides off-balance sheet funding, $90 million of which was used at June 30, 2004. In June 2004, this facility was renewed through June 14, 2005.

Each of our business credit card securitization series has a date that the revolving period is scheduled to end. The revolving periods for each of the series in our securitization trust, except Series 1997-A, may be extended for up to seven months past the scheduled end of the revolving period, if the payment rates on the receivables in the trust meet certain thresholds. Based on current payment rates, we do not anticipate that any of our business credit card securitization series will end their revolving period in 2004.

In June 2003, the FASB issued an exposure draft, “Qualifying Special-Purpose Entities and Isolation of Transferred Assets – An Amendment of FASB Statement No. 140.” The changes and clarifications in the proposed statement would prevent derecognition by transferors that may continue to retain effective control of transferred assets by providing financial support other than a subordinated retained interest or making decisions about beneficial interests. The changes would also help to ensure that variable interest entities will not qualify for the qualifying special-purpose entity exception to FASB Interpretation No. 46, as revised, if any party involved is in a position to enhance or protect the value of its own subordinated interest by providing financial support for or making decisions about reissuing beneficial interests. For public entities, this proposed

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statement would apply prospectively to transfers of assets occurring after the beginning of the first interim period after the issuance of the final statement. In June 2004, the FASB announced plans to issue a revised exposure draft in the fourth quarter of 2004 and a final standard in the second quarter of 2005. Management will evaluate any potential impact of this revised proposed statement when it is available.

MARKET RISK SENSITIVITY

Market risk is the potential for loss or diminished financial performance arising from adverse changes in market forces including interest rates and market prices. Market risk sensitivity is the degree to which a financial instrument, or a company that owns financial instruments, is exposed to market forces. Fluctuations in interest rates, changes in economic conditions, shifts in customer behavior, and other factors can affect our financial performance. Changes in economic conditions and shifts in customer behavior are difficult to predict, and our financial performance generally cannot be insulated from these forces.

We measure our interest rate risk using a rising rate scenario and a declining rate scenario. Net interest income is estimated using a third party software model that uses standard income modeling techniques. We also measure the effect of interest rate risk on our managed net interest income, which includes net interest income on owned assets and net interest income on securitized receivables. The measurement of managed net interest income in addition to net interest income on owned assets is meaningful because our securitization income fluctuates with yields on securitized receivables and interest rates earned by noteholders. Both increasing and decreasing rate scenarios assume an instantaneous shift in rates and measure the corresponding change in expected net interest income as compared to a base case scenario. As of June 30, 2004 and December 31, 2003, we estimated that our net interest income would change as follows over a twelve-month period:

	June 30,			December 31,
	2004			2003
Estimated percentage increase (decrease) in net interest income on owned receivables:
Assuming 200 basis point increase in interest rates		11	%		11	%
Assuming 200 basis point decrease in interest rates		(5	)%		3	%
Estimated percentage increase (decrease) in net interest income on securitized receivables:
Assuming 200 basis point increase in interest rates		(5	)%		(5	)%
Assuming 200 basis point decrease in interest rates		10	%		9	%
Estimated percentage increase (decrease) in net interest income on managed receivables:
Assuming 200 basis point increase in interest rates		(2	)%		(2	)%
Assuming 200 basis point decrease in interest rates		7	%		8	%

Our business credit card receivables include interest rate floors that cause our net interest income on managed receivables to rise in the declining rate scenario. Our net interest income on managed receivables decreases in a rising rate scenario due to the variable rate funding of off-balance sheet securitized receivables and the portion of the business credit card portfolio that is effectively at a fixed rate because of the nature of the pricing of the accounts or because the cardholder pays their balance in full each month resulting in an effective fixed yield of 0%.

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Changes in the composition of our balance sheet and the interest rate environment have also impacted the results of the net interest income sensitivity analyses.

The above estimates of net interest income sensitivity alone do not provide a comprehensive view of our exposure to interest rate risk. The quantitative risk information is limited by the parameters and assumptions utilized in generating the results. These analyses are useful only when viewed within the context of the parameters and assumptions used. The above rate scenarios do not reflect management’s expectation regarding the future direction of interest rates, and they depict only two possibilities out of a large set of possible scenarios.

LIQUIDITY, CAPITAL RESOURCES AND ANALYSIS OF FINANCIAL CONDITION

Our goal is to maintain an adequate level of liquidity, for both long-term and short-term needs, through active management of both assets and liabilities. Since Advanta Corp.’s debt rating is not investment grade, our access to unsecured, institutional debt is limited. However, we do have access to diverse funding sources as described below, and had a high level of liquidity at June 30, 2004. At June 30, 2004, we had $289 million of federal funds sold, $230 million of receivables held for sale, and $180 million of investments, which could be sold to generate additional liquidity.

Components of funding were as follows:

	June 30, 2004					December 31, 2003
($ in thousands)	Amount		%			Amount		%
Off-balance sheet securitized receivables(1)	$	2,454,849		64	%	$	2,371,819		62	%
Deposits		647,104		17			672,204		18
Debt and other borrowings		291,226		7			314,817		8
Subordinated debt payable to preferred securities trust		103,093		3			103,093		3
Equity		366,612		9			341,207		9
Total	$	3,862,884		100	%	$	3,803,140		100	%

(1) Includes off-balance sheet business credit card receivables. Excludes our ownership interests in the noteholder principal balance of securitizations (subordinated trust assets) that are held on-balance sheet and classified as retained interests in securitizations.

As shown above in the components of funding table, off-balance sheet securitizations provide a significant portion of our funding and they are one of our primary sources of liquidity. See the “Off-Balance Sheet Arrangements” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of off-balance sheet securitizations and their impact on our liquidity, capital resources and financial condition. In order to further diversify our sources of funding, we anticipate increasing the percentage of receivables that are held on-balance sheet in the second half of 2004, and expect off-balance sheet securitized receivables to represent approximately 60% of our funding at December 31, 2004, as compared to 64% at June 30, 2004. Given our current expectations, we may not have any significant public business card securitizations in the remainder of 2004.

We continue to offer unsecured debt securities of Advanta Corp., in the form of RediReserve Certificates and Investment Notes, to retail investors through our

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retail note program. We change the interest rates we offer frequently, depending on market conditions and our funding needs. In the three and six months ended June 30, 2004, we reduced originations of retail notes due to our liquidity position and, as a result, the balance of RediReserve Certificates and Investment Notes outstanding decreased by $33.6 million in the six months ended June 30, 2004 to $281 million at June 30, 2004. Based on anticipated liquidity needs, we plan to continue reducing originations of retail notes during the remainder of 2004.

In June 2004, we exercised an option to extend the term of an existing operating lease for five years through 2010 for office space used for certain business card operations and general business purposes. The minimum lease payments under the extension will be $2.5 million in each of the years 2006 through 2009 and $2.0 million in 2010.

On February 2, 2004, the court issued its final judgment and order in the Delaware Chancery Court litigation with Fleet. In early February 2004, the escrow agent released $63.8 million from the escrow account to Fleet in satisfaction of all amounts due to Fleet in connection with this litigation and the $10.5 million of funds remaining in the escrow account were released and transferred from the restricted escrow account to an unrestricted cash account. At December 31, 2003, the escrow account was included in restricted interest-bearing deposits on the consolidated balance sheet. In accordance with the court’s order, the payment to Fleet was net of amounts due to Advanta from Fleet. As a result of the court’s order and payment to Fleet in February 2004, there was a decrease in other assets and other liabilities as of the payment date. There was no impact to the results of our operations since, based on the final judgment and order, our reserves at December 31, 2003 were adequate. In March 2004, we filed a notice of appeal to commence the appeals process related to this final judgment and order. On May 28, 2004, we reached an agreement with Bank of America to resolve all outstanding litigation, including partnership tax disputes, between Advanta and FleetBoston Financial Corporation, which was recently acquired by Bank of America. Under the agreement, Bank of America will pay Advanta $63.8 million in cash which represents a return of the payments made to Fleet in February 2004 described above. That payment will be made following IRS approval of the settlement of the tax disputes. We expect our book value would increase by approximately $2.45 per share as a result of the agreement and other considerations associated with the agreement. We anticipate that the $63.8 million of cash will be used for general corporate purposes and to enable us to have lower debt levels than would otherwise be the case. See Note 8 to the consolidated financial statements for further discussion.

Advanta Corp. and its subsidiaries are involved in other litigation, including litigation relating to the Mortgage Transaction, class action lawsuits, claims and legal proceedings arising in the ordinary course of business or discontinued operations, including litigation arising from our operation of the mortgage business prior to our exit from that business in the first quarter of 2001. See Note 8 to the consolidated financial statements for further discussion. Management believes that the aggregate loss, if any, resulting from existing litigation, claims and other legal proceedings will not have a material adverse effect on our liquidity or capital resources based on our current expectations regarding the ultimate resolutions of these actions. However, due to the inherent uncertainty in litigation and since the ultimate resolutions of these proceedings are influenced by factors outside of our control, it is reasonably possible that the estimated cash flow related to these proceedings may change or that actual results will differ from our estimates.

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In February 2004, the Board of Directors of Advanta Corp. approved a 50% increase in the regular quarterly cash dividends per share beginning in the second quarter of 2004. We funded the increase in dividends with operating cash flows.

Our bank subsidiaries are subject to regulatory capital requirements and other regulatory provisions that restrict their ability to lend and/or pay dividends to Advanta Corp. and its affiliates. Advanta Bank Corp. issues and funds our business credit cards and is the servicer of our discontinued leasing business. Advanta Bank Corp. paid dividends to Advanta Corp. of $20 million in March 2004 and $5 million in June 2004. At June 30, 2004, Advanta Bank Corp.’s combined total capital ratio (combined Tier I and Tier II capital to risk-weighted assets) was 28.15% as compared to 26.28% at December 31, 2003. At both dates, Advanta Bank Corp. had capital in excess of levels a bank is required to maintain to be classified as well-capitalized under the regulatory framework for prompt corrective action. Prior to our exit from the mortgage business in the first quarter of 2001, Advanta National Bank issued and funded a large portion of our mortgage business. Advanta National Bank’s operations are currently not material to our consolidated operating results. Our insurance subsidiaries are also subject to certain capital and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. Management believes that these restrictions, for both bank and insurance subsidiaries, will not have an adverse effect on Advanta Corp.’s ability to meet its cash obligations due to the current levels of liquidity and diversity of funding sources.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These forward-looking statements may be identified by the use of forward-looking phrases such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “projected,” “intends to” or other similar words or phrases. The most significant among these risks and uncertainties are:

(1)	our managed net interest income including changes resulting from fluctuations in the volume of receivables and the range and timing of pricing offers to cardholders;
(2)	competitive pressures;
(3)	political conditions, social conditions, monetary and fiscal policies and general economic conditions that affect the level of new account originations, customer spending, delinquencies and charge-offs;
(4)	factors affecting fluctuations in the number of accounts or receivable balances including the retention of cardholders after promotional pricing periods have expired;
(5)	interest rate fluctuations;
(6)	the level of expenses;
(7)	the timing of the securitizations of our receivables;
(8)	factors affecting the value of investments that we hold;
(9)	the effects of government regulation, including restrictions and limitations imposed by banking laws, regulators, examinations, and Advanta National Bank’s agreements with its regulators;
(10)	effect of, and changes in, tax laws, rates, regulations and policies;
(11)	relationships with customers, significant vendors and business partners;
(12)	difficulties or delays in the development, production, testing and marketing of products or services;
(13)	the amount and cost of financing available to us;
(14)	the ratings on our debt and the debt of our subsidiaries;
(15)	revisions to estimates associated with the discontinuance of our mortgage and leasing businesses;

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(16)	obtaining Internal Revenue Service approval of the settlement of the tax disputes, as required under the agreement with Bank of America;
(17)	the impact of litigation;
(18)	the proper design and operation of our disclosure controls and procedures; and
(19)	the ability to attract and retain key personnel.

Additional risks that may affect our future performance are set forth elsewhere in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2003 and in our other filings with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is set forth in “Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report on Form 10-Q. See “Market Risk Sensitivity.”

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was performed by management with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2004, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The legal proceedings and claims described under the heading captioned “Commitments and Contingencies” in Note 8 of the Notes to Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report are hereby incorporated by reference.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)	Advanta Corp. held its Annual Meeting of Stockholders on June 9, 2004 (the “Annual Meeting”).
(b)	Dennis Alter, Dana Becker Dunn, Arthur P. Bellis and Robert S. Blank were the nominees for director who were included in the proxy statement sent to stockholders of record in connection with the Annual Meeting and each received sufficient votes at the Annual Meeting, in person or by proxy, to be reelected to the Board. However, Mr. Bellis did not stand for reelection because prior to the Annual Meeting he retired from the Board of Directors. In addition to Ms. Becker Dunn and Messrs. Alter and Blank, the following directors’ terms of office continued after the Annual Meeting: Max Botel, Ronald Lubner, Robert H. Rock, Olaf Olafsson, William A. Rosoff and Michael Stolper.
(c)	The following proposal was submitted to a vote of stockholders.

The election of four directors to hold office until the 2007 Annual Meeting of Stockholders.

NOMINEES	VOTES FOR			VOTES WITHHELD
Dennis Alter		8,332,783			336,725
Dana Becker Dunn		8,018,834			650,674
Arthur P. Bellis		8,354,917	*		314,591	*
Robert S. Blank		8,055,439			614,069

* Mr. Bellis did not stand for reelection at the Annual Meeting because prior to the Annual Meeting he retired from the Board of Directors. See Item 4(b) above.

(d) Not required.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits – The following exhibits are being filed with this report on Form 10-Q.

Exhibit
Number	Description of Document
10.1	Agreement relating to Fleet Credit Card Services, L.P., dated as of May 28, 2004, by and between Advanta Corp., Advanta National Bank, Advanta Service Corp., Fleet Credit Card Holdings, Inc., Fleet Credit Card Services, L.P. and Bank of America Corp.
10.2	Letter Agreement between Advanta Corp. and Brian Tierney dated June 8, 2004.
10.3	Relocation Agreement by and between Advanta Corp. and John F. Moore, dated as of May 20, 2004.
10.4	Letter Agreement between Advanta Corp. and Arthur Bellis dated June 8, 2004.
12	Consolidated Computation of Ratio of Earnings to Fixed Charges
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

(b)(1)	A Current Report on Form 8-K, dated April 22, 2004, was filed by Advanta setting forth the financial highlights of Advanta’s results of operations for the quarter ended March 31, 2004.
(b)(2)	A Current Report on Form 8-K, dated April 22, 2004, was filed by Advanta for the purpose of filing disclosures made during the April 22, 2004 conference call discussing the company’s results for the quarter ended March 31, 2004.
(b)(3)	A Current Report on Form 8-K, dated June 21, 2004, was filed by Advanta announcing that it had reached an agreement with Bank of America Corp. to resolve all outstanding litigation, including partnership tax disputes, between Advanta and FleetBoston Financial Corporation, which was recently acquired by Bank of America. The agreement is subject to the Internal Revenue Service’s final approval of the settlement of the tax disputes.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Advanta Corp. (Registrant)
By	/s/ Philip M. Browne
Senior Vice President and
Chief Financial Officer
August 6, 2004
By	/s/ David B. Weinstock
Vice President and
Chief Accounting Officer
August 6, 2004

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EXHIBIT INDEX

		Manner of
Exhibit	Description	Filing
10.1	Agreement relating to Fleet Credit Card Services, L.P., dated as of May 28, 2004, by and between Advanta Corp., Advanta National Bank, Advanta Service Corp., Fleet Credit Card Holdings, Inc., Fleet Credit Card Services, L.P. and Bank of America Corp.	*
10.2	Letter Agreement between Advanta Corp. and Brian Tierney dated June 8, 2004.	*
10.3	Relocation Agreement by and between Advanta Corp. and John F. Moore, dated as of May 20, 2004	*
10.4	Letter Agreement between Advanta Corp. and Arthur Bellis dated June 8, 2004.	*
12	Consolidated Computation of Ratio of Earnings to Fixed Charges	*
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	*
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	*
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	*
32.2	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	*

* Filed electronically herewith.

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