Earlier this year, Advanta Financial Corp. dropped its subprime auto lending businesses, just one aspect of a larger phenomenon associated with the company: Advanta has leveled its growth.

Though subprime auto deals from Advanta won't be coming in the year 2000, you might catch a new asset-class - the small business credit card - a loan-type Advanta has been selling into commercial paper conduits since 1996, said Michael Coco, director of securitization at Advanta. If the financing is right, Advanta will break ground next year, with a first-of-its-kind term deal backed by these loans.

The debut deal would likely be structured similar to a standard, three-part, senior/subordinate credit card deal, said Coco.

"It should have slightly better credit performance than your average consumer card portfolio," he added.

So what is a small business credit card?

"It's really not much different from a small business loan, except the mechanism for delivering the loans to the customer is done through a MasterCard," said David Weinstock, vice president of investor relations at Advanta.

"We probably target a business with a smaller revenue basis [than a standard SBA-type borrower]," Coco explained. "It's the business that isn't going to have a lot of fun going to their local regional bank and asking for a loan."

The average balance per card is roughly $4,200, substantially smaller than an average SBA-type loan.

Though Advanta has been issuing small business credit cards since 1994, the portfolio did not show substantial growth until 1996. Advanta currently holds close to $1 billion in small business credit card loans, 70% of which is in ABCP.

The Big Slow Down

Advanta has been in business since 1951, though the company was originally called Teachers Service Organization. Add to that numerous equipment-backed deals and subprime auto deals, and you've got a very active issuer.

"We had been on the growth path and then, about a year ago we decided to kind of change and somewhat get off growth for growth's sake to go into growth for profit's sake," said Coco.

"In that regard we still, in the past year, have securitized a significant portion of our loans, but our origination volume has gone down since we've been selecting more profitable loans, shifting to more direct originations from indirect originations."

Though Advanta's direct origination channels have grown over the past year, total origination volume is probably down, Coco said. This is not to say Advanta is no longer purchasing loans. The company will still occasionally buy from brokers.

"But if you look at our originations over the past couple of years, the pool purchases were a significant component of our volume in 1998 and 1997," said Coco. "And [they] have really curtailed during 1999, to the point where in the fourth quarter 1999, I'm not sure we will have any pool purchases."

Additionally, when Advanta originates their own loans, they do so with a pre-payment penalty. Currently, nearly 90% of the mortgages originated in 1999 have been tagged with penalties.

One-Sixth The Cost

As part of a focus on portfolio quality and origination efficiency, Advanta has implemented an information-based strategy, said Coco and Weinstock.

"We've built what we believe is a world class database of all the different points of contact that we've had with our customers," said Weinstock. The database goes back to the mid 1980's.

Using analytical and predictive models, Advanta is able to target potential customers, and then contact the borrower via mail or telephone.

"We're able to better identify a potential Advanta customer and therefore decrease the cost for qualified lead for our origination," said Weinstock.

With the implementation of the information-based strategy, Advanta cut the cost of origination to 1/6 of what it was last year, said Weinstock.

Other trade secrets?

"Something I think is unusual about Advanta in our particular industry is that the large bulk of our origination flows through a national bank," said Coco. "So while other people in our industry - quote on quote the specialty finance industry - have had to rely on Wall Street for their funding sources, we do not have that constraint."

The Big Picture

In line with slowing the company's growth, Advanta has changed accounting processes to keep revenue levels more stable.

"One of the things we implemented in the fourth 98, was reporting the earnings substantially equal to a portfolio lender, kind of eliminated the gain-on-sale," said Coco. "We were still securitizing [this year] and still recording gain-on-sale, but not accelerating income - we were retaining the IO, keeping the residual asset flat."

As for the next year, aside from the possible small business card deal, Advanta will go on with business as usual - four or so home-equity deals, $500 million a piece, and two $250 million HELOC deals. Expect an equipment deal or two as well.

Advanta's last came to market in November, and, because of market conditions, only issued a segment of a typical quarterly deal.

"The trust we did in fourth quarter '99, was basically a subset of a deal we had done before. So it's not a new structure per se, it's just that we dropped off other pieces of the deal," Coco said. "What we didn't securitize was our fixed rate loans, because we thought the spreads would be better for the fixed-rate loans in the first quarter 2000, than in the fourth quarter 1999."

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