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Advanta is a highly focused financial services company, well positioned in sizable and growing markets. We offer diverse and innovative financial solutions to consumers and small businesses nationwide. Our principal objectives are to use our information based strategy to continue to grow each of our businesses for the benefit of our customers while increasing profitability and improving cash flow.
Advanta Corporation originates, services, and sells small business credit card and home equity loans. It also provides equipment leasing for small businesses and offers credit life, disability, and unemployment insurance. From a family-run credit union issuing loans primarily to nurses and teachers, the company pioneered the no-fee credit card in the 1980s and moved into the 1990s as a relatively small but highly profitable niche business, depending on gold cards for the bulk of its success. After a significant rise in consumer bankruptcies and debt chargeoffs in the late 1990s forced Advanta to sell off its credit card operations, the company restructured itself to focus more intently on the subprime mortgage and small business credit card markets. By 2000 Advanta had narrowed its core business even further, announcing an imminent deal to sell its mortgage operations.
A Loan Company for the Education Community: 1950s-60s
Advanta's roots reach back to a family business that financed educational programs. In 1951 J.R. Alter, a former Philadelphia schoolteacher, founded the Philadelphia Teachers Service Organization, Inc., in the Olney section of Philadelphia. The example of J.R. Alter and his wife, also a schoolteacher, influenced their son, Dennis Alter, who also became a schoolteacher and eventually served as chairman and CEO of the much-expanded family business. In the 1960s Dennis Alter taught English at Benjamin Franklin High School for three years while moonlighting as executive vice-president and director of TSO. J.R. Alter retired in 1971. His son finished graduate school and assumed the post of president and chief executive officer of the company.
After 20 years in business, TSO maintained a modest profile, with a net worth of $300,000 in 1971. The bulk of business consisted of loans by mail, primarily to schoolteachers, nurses, and other affinity groups via endorsements by their professional and trade organizations. Its lending activities included second mortgage loans, unsecured installment loans, and home equity installment loans. The company also operated consumer finance subsidiaries in Pennsylvania, New Jersey, and Florida.
Dennis Alter worked quickly to change TSO from a sleepy credit union into a national consumer finance company. One of his first steps was to lure James T. Dimond, a former Fidelity Bank of Philadelphia senior vice-president, to TSO as president and chief operating officer. Dimond's banking expertise contributed to TSO's next strategic move: its 1982 acquisition of Colonial National Bank in Wilmington, Delaware, for $2.1 million. With its $9 million in assets, Colonial became TSO's primary resource for lending and funding management.
As part of the acquisition transaction, Colonial divested its commercial loan portfolio and thus moved outside the Bank Holding Company Act's definition of a bank, becoming what Banking Expansion Reporter called a 'Nonbank Bank' in a September 1982 article. Although Colonial no longer made commercial loans, it serviced 30,000 depositors from all 50 states, accounting for $525 million in deposits by 1986. Even as a so-called nonbank, Colonial drew new customers to TSO because of banking benefits such as FDIC-insured deposits. In addition, exploitation of communications technology enabled clients to reap the benefits of Colonial's banking without ever going near the bank. Loans and deposits were managed via WATS long-distance telephone lines, wire transfers, mail, nationwide automated teller machines, debit and credit cards, and checks. With such branchless banking, Colonial could potentially provide TSO customers with more personalized service than traditional bank service. 'The corner branch of a local bank may seem far more distant and less responsive than our customer service personnel,' said Alter in an August 4, 1986 American Banker article.
TSO also developed a special unit, Colonial National Leasing, Inc., to lease computers, telephone and medical equipment, industrial machinery, and other tools to professionals and small businesses. In 1987 TSO acquired Leasetech Inc., an Atlanta-based equipment leasing organization.
The 1980s: Diversification and Rapid Growth
With its unusual features--a 'nonbank bank' organizing 'branchless banking'--Colonial helped TSO realize unusual growth. From 1982 to 1986, TSO's net income grew at a compound annual rate of 113 percent, while assets grew at a compound annual rate of 63 percent. Gross revenue for 1985 was $67.8 million, representing an 87 percent increase over the previous year's.
Success in the early 1980s, however, was only a preface to the virtual explosion of growth that was set in motion by the 1983 introduction of credit cards. By 1985, card receivables topped installment loans--$169 million versus $167 million at year end. Whereas installment loans grew 25 percent in 1985, card balances jumped by more than 250 percent. In 1986 Money magazine, USA Today, and the Consumer Credit Card Rating Service all rated TSO's premium cards in their top categories. TSO, in turn, put 350,000 cards in circulation, assuming 89th place on the national charts. By 1991 the company derived 70 percent of its revenues from its Visa and MasterCard customers.
TSO's credit card strategy involved loans to the general public, as opposed to its previous practice of lending to select affinity groups. At year end, the general public accounted for 67 percent of card receivables in 1985, up from 17 percent the year before; they also accounted for 22 percent of installment loans, up from less than one percent. Driven by aggressive marketing to foster nationwide deposits and loans, the company relied on direct mail, telemarketing, newspaper ads, and radio and television spots. Institutional deposits were promoted by telephone marketing and certificate of deposit quotes on the Telerate Service. With high rates to attract deposits, longer-term loans to draw installment loan borrowers, and very competitive rates on premium credit cards, TSO expanded operations at a hefty rate.
Lending to the general public, however, represented substantial credit risk as well as quick growth. In order to best protect itself, the company invested in sophisticated marketing research, enlisting several services to provide in-depth demographic data on precise areas of the country. The company only targeted potential customers of a very specific profile: usually college-educated, ages 20 to 44, with above-average incomes. 'You cannot apply to Advanta [TSO's name after 1988]. They have to pick you as a customer who has these two characteristics: high credit quality and high usage patterns,' said First Boston's Allerton Smith in a September 15, 1992, article for Financial World. Once a potential customer was selected, however, the offer was unusually attractive. It often consisted of mostly no-fee credit cards with better-than-average interest rates and attractive credit lines, according to company spokeswoman Deborah Dove in a January 31, 1992 Investor's Business Daily article. By 1992, 80 percent of the company's credit card offerings were gold cards, reflecting the high-end emphasis of the company's marketing research efforts.
Even with the support of extensive market research, credit card lending proved a risky business in the mid-1980s, giving rise to some skepticism regarding TSO's stability. Not only was the company portfolio relatively new and untested, but mounting consumer debt had reached frightening heights. Credit card defaults doubled during 1986, to 4.2 percent of charges outstanding. 'Consumers cannot continue to carry the debt they have, and if we have an economic slowdown early next year, which I think we will, we could see a lot of problems,' said Nancy Bush, analyst with Butcher & Singer, Inc., in a December 8, 1986 Philadelphia Business Journal article. That year, Moody's graded a BA3 to $50 million in subordinated debentures offered by TSO, and Standard & Poor's ranked them B+. Likewise, TSO's common stock fell from an $18.50 high in April to $13.50 in December.
One buffer against credit card risks was TSO's involvement in other financial services, including consumer installment loans, equipment leasing, credit life and disability insurance, and residential mortgage services. Such a wide range of services was responsible, in part, for the company's 1985 name change from Teachers Service Organization, Inc. (TSO) to the more inclusive TSO Financial Corp. In 1986 the company acquired Advanta Mortgage Corp. USA (formerly Apex Financial Corp.) for $7.5 million. TSO's mortgage banking rapidly expanded nationwide and capitalized on home equity loans, which grew in popularity after mid-1980s tax reform cut the personal deductions allowed on credit card charges.
Starting in 1988, TSO began securitizing its growing home equity loan assets and credit card receivables, pooling the loan balances into securities for sale to investors. Over the years, that financial strategy became one of Advanta's (TSO's name as of 1988) fundraising specialties. In May 1989, for example, the company announced that Colonial National and Advanta Mortgage had placed with institutional investors $31.1 million of Class A certificates representing fractional ownership interests in Advanta Second Mortgage Trust. The certificates were insured by Financial Guaranty Insurance Corp. and were rated 'AAA' by Standard & Poor's and 'Aaa' by Moody's. On August 29, 1990, Colonial sold $250 million in credit card-backed notes, marking its tenth asset securitization deal. William Kaiser, senior vice-president of Advanta Mortgage, estimated in a June 12, 1991 Business Wire article that the company had securitized more than $550 million in home equity loans since 1988 and intended to pursue the practice on a regular basis. In May 1992 Advanta continued funding its credit portfolio by tapping the securitization market, completing two private placements with a combined value of about $332 million. In June of that same year, the company issued certificates in a $100 million home equity loan securitization deal. The announcement was notable on several accounts: it was Advanta's first transaction insured by MBIA, and it employed an innovative form of securitization with both fixed and variable components, increasing the company's funding flexibility and broadening its investor base, according to a June 1992 article in Global Guaranty. Advanta not only applied, but broadened securitization techniques.
In the late 1980s the company continued to grow. In August 1987 it delved back into familiar territory, acquiring Educational Credit Corporation (ECC) from Pacific Financial Asset Management Corp. ECC loan programs included competitive rates and long-term repayment plans to accommodate escalating costs of education aggravated by reductions in federal tuition assistance. That same year, the company acquired the remaining stock of LeaseComm Financial Corp., of which it previously held 21 percent equity interest. By 1988, since its primary focus was no longer on educators, TSO stockholders voted to change the company name to Advanta Corporation.
In addition to a change of name, 1988 brought a change of fortune, as Advanta posted its first loss--$9 million--since it was founded in 1951. After an initial loss of $6.1 million in the fourth quarter of 1987, Dennis Alter commented in a February 10, 1988 PR Newswire report that 'the decline in earnings ... is due, in large part, to an earlier decision to restructure the company's balance sheet to achieve a more balanced asset portfolio. We believe this restructuring will significantly strengthen Advanta.'
Along with financial restructuring, Chairman and CEO Dennis Alter recruited a new management team to help refocus the company. In June 1987 James T. Dimond resigned as chief operating officer, to be replaced by Richard A. Greenawalt, former president of Transamerica Financial Corporation in Los Angeles. Before that he had been with Citicorp for 15 years, as chairman and chief executive of Citicorp Person-to-Person Inc., and president and chief executive of Citicorp Retail Services Inc., New York. In March 1988 Dennis R. Eickhoff joined the company as president of its Advanta Mortgage Corp. USA subsidiary. Eickhoff had served since 1983 as president and chief executive officer of Gibraltar MoneyCenter, Inc., the San Diego-based $1 billion second mortgage subsidiary of Gibraltar Financial Corporation. With the expertise of its new management, Advanta exited the installment loan business and focused on credit cards and secured lending products.
Advanta also began more aggressively promoting its stock, undertaking a new investor relations campaign in the early 1990s. Convincing investors to buy into high stock prices proved challenging, as 50 percent of the company's 9.13 million outstanding shares were controlled by insiders. Dennis Alter himself held 41 percent of the company's outstanding stock, or 3.8 million shares. Consequently, the float--the number and value of shares tradable--was small. Advanta enlisted the help of Prudential-Bache Securities and First Boston Corp., two of Wall Street's big players, to provide analyst coverage and consulting services. In September 1990 Hambrecht & Quist analyst Dirk Godsey valued Advanta stock at $18 to $23 a share, with strong potential for the future, according to a September 17, 1990 article in Philadelphia Business Journal. His assessment was confirmed in July 1991, when Prudential Securities Research, Inc. analyst Larry Eckenfelder named Advanta Corp. his 'single best idea' in the financial services industry and repeated his buy recommendation on the stock.
Eckenfelder almost proved mistaken when the stock price of Advanta and other credit card companies fell on worries over a November 1991 Senate vote to cap interest rates on consumer credit cards. After a 52-week high of $38.50 on November 13, Advanta dropped 25 percent over the next two days. Even after the Senate's quick shelving of the rate ceiling, Advanta shares remained well below their November peak. Nevertheless, Advanta's outstanding growth record--the company registered 40 percent compound growth in cards outstanding between 1987 and 1990--made its shares a good investment, according to Gordon Matthews in a December 17, 1991 feature for the American Banker.
With its experienced management team and focus on a profitable niche business, Advanta moved into the 1990s with excellent prospects. By January 30, 1992, its stock had more than recovered from the 1991 scare, closing at $39.375. The company also had realized a broad portfolio, with a 1991 revenue breakdown of 70 percent from credit cards, 20 percent from home equity loans, five percent from equipment leasing, and five percent from its credit insurance business. To expand its leasing program, Advanta introduced the Access to Capital Equipment (ACE) card in January 1993. The service was designed to augment leasing services with such features as deferred payment, adjustable payment schedules, and a simplified application process.
With roughly one percent of the U.S. credit card market in 1991, Advanta had plenty of room for continued growth. In April 1992 its board approved a share-for-share dividend of Class B common for each old common (now Class A common) share outstanding, doubling the number of common shares outstanding to 22.2 million and increasing the float for new investors. 'This plan is designed to increase the company's flexibility in financing future growth and to promote management continuity,' said Dennis Alter in an April 13, 1992 National Mortgage News article. Indeed, Advanta Corp. appeared to be entering the latter half of the 1990s in healthy condition, as it announced a company record $17.2 million in net income for the second quarter of 1993.
The Specialized Credit Card Industry in the Late 1990s
The bulk of Advanta's profits in the mid-1990s came from its credit card operations. By 1995 cards accounted for 80 percent of earnings. The company was attracting new customers at a record pace, issuing more than 1.5 million new cards in 1994, 700,000 of those in the fourth quarter alone--compared with 310,000 in the fourth quarter of 1993. Net income in 1994 rose to $106.1 million, a 36 percent increase from the previous year (marking Advanta's sixth consecutive year of record earnings), while total managed assets climbed to $8.6 billion.
Encouraged by this rapid growth, Advanta began focusing on marketing new card products in previously unexplored markets. In June 1995 the company struck a deal with Royal Bank of Scotland, one of the leading credit card issuers in the United Kingdom, to create RBS Advanta, a joint venture geared toward marketing a new low-interest credit card in the United Kingdom. The card was launched the following February with an APR of 15.9 percent, which was significantly lower than rates offered by other major card companies in England. It marked the beginning of an American invasion of the British credit card industry, with People's Bank of Connecticut following suit in April 1996, when it launched a card offering 14.4 percent financing.
By the end of 1995 Advanta and three other specialized card companies--Capital One, First USA, and MBNA--had seized a 20 percent market share of a credit card industry that had swelled to $305 billion. Between 1995 and early 1997 Advanta's cardmember base doubled; 1995 earnings rose to $136 million, and in 1996 the company began developing a wider range of products, including a Platinum Edge MasterCard. In November 1996 it reached an agreement with American Express to market the Rewards Accelerator Card, which would allow customers who made charges on Advanta MasterCard and Visa cards to accrue Membership Rewards points in their American Express accounts. Visa and MasterCard were quick to cry foul, however, and in the midst of the ensuing litigation the project was eventually scrapped.
During this period of expansion, however, the red flags were already beginning to fly. In addition to unprecedented profits, 1995 also saw a significant rise in credit card delinquency. In the third quarter of 1994, companies were reporting that 2.9 percent of cardholders were more than 30 days late with payments; by the third quarter of 1995 that number rose to 4.2 percent. In June 1996 the Bank of New York established a $350 million provision as insurance against potential credit card losses, causing Advanta's stock to drop 13.8 percent in one week. At around the same time, Advanta relaxed its charge-off accounting policy, raising the time allowed for reporting from 30 to 90 days--a move that raised more than a few eyebrows in the financial world.
The bottom fell out on March 17, 1997, when Advanta reported a quarterly loss of $20 million. Rumors that the company would be sold were rampant in the industry. After a period of aggressive restructuring--which primarily involved turning increased attention to its subprime mortgage business--Advanta managed to get back on an even keel, however, and was once again reporting strong earnings by the third quarter. In October 1997, the company reached an agreement with Fleet Financial Corporation to sell its credit card operations for $500 million.
The year 1998 was dedicated to rebuilding, with a new emphasis on nonconforming mortgages and credit cards for small businesses. By the end of 1999 Advanta was the fourth leading subprime lender in the United States, and the company saw increased earnings into the first quarter of 2000. In spite of these gains, however, the company's stock valuation continued to fall. Advanta's new focus failed to restore investor confidence, and by May 2000 the company's stock had dropped to $17.50 a share--compared with a peak value of $57.50 a share in May 1996. Regulatory changes in the home mortgage industry, which imposed stricter limitations on lending, resulted in a second quarter loss of $192.7 million and drove the company's stock down to $8.56 a share. By the end of the year the company announced it had reached an agreement to sell its home mortgage operations--although it declined to identify the buyer at the time of the announcement--and that it would begin to devote most of its marketing resources to building a reputation as a leading provider of credit cards for small businesses. At this time Advanta also was facing a potentially disastrous legal battle with Fleet Financial Corporation, over alleged misappropriations of funds and misrepresentation of portfolio value relating to the sale of its credit card business, with a trial date set for 2001.
Principal Subsidiaries: Advanta National Bank; Advanta Bank Corp.; Advanta Partners LP; Advanta Mortgage Corp.; Advanta Leasing Services; Advanta Insurance Companies; Advanta Business Cards.
Principal Competitors: Aames Financial Corporation; Citigroup Inc.; Household International, Inc.
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