Advanta Corp., which last month absorbed a $214 million writedown ordered by banking regulators, now faces a possible inquiry by securities regulators into whether it adequately disclosed to bond investors the details of its regulatory agreements.

The Office of the Comptroller of the Currency has referred concerns about the disclosure to the Securities and Exchange Commission, a well-placed source said.

At issue is whether Advanta's disclosures this summer failed to alert potential investors in an $858 million issue of senior debt to the risks posed by the regulatory agreements under which it was operating.

Analysts said an SEC inquiry could further complicate the Spring House, Pa., lender's struggle to regain momentum, because $700 million of Advanta debt is due to expire in the next 18 months. If the SEC decides to intervene, and if it finds that disclosure statements were misleading or inaccurate, it could take enforcement actions, including imposing fines or issuing a stop order on Advanta's debt program.

"The ability of the company to raise deposits may clearly impact the future strategy of the firm, and as any fund-raising sources are shut down, that can have an overall impact on strategy and future financial plans," said Thomas J. Abruzzo, a senior director at Fitch IBCA.

Advanta did not respond to requests for comment.

A securities lawyer who represents investors said there seems to be little cause for a private lawsuit. Unless Advanta fails to pay the notes, "it's hard to say that anyone has really been damaged by this," he said.

At issue are SEC disclosures Advanta filed between May 31 and July 31. At the time, the holding company was grappling with cease-and-desist orders issued by OCC and the Federal Deposit Insurance Corp. against its two banking subsidiaries, Advanta National Bank in Wilmington, Del., and Advanta Bank Corp. in Draper, Utah.

On May 31, the OCC issued a cease-and-desist order against Advanta National Bank that required a massive writedown of residual assets, higher capital levels, and a change in the bank's chargeoff policy for delinquent mortgages. On the same day, the FDIC issued a similar order to Advanta Bank Corp. for "unsafe and unsound banking practices" that prevented the bank from originating new loans, issuing credit cards, or paying dividends on its capital stock, among other things.

Advanta Corp. settled the disputes in early August but took a $214 million writedown of its retained interest in mortgage securitizations and, ultimately, a $192.7 million loss in the second quarter. The writedown equaled about half of Advanta National's capital, which translated into a reduction of one-third in the parent company's capital.

Advanta, which registered the $858 million issue on April 6, is selling securities in 14 states, and in most cases, employees are selling directly to consumers. Ads appealing to investors have appeared in newspapers and on the radio. The OCC referral focuses on seeming inconsistencies between government documents concerning the agreements and the company's disclosures.

For example, the OCC consent order requires Advanta National Bank to reach Tier 1 capital ratios of at least 14% of risk-weighted assets and 17% of adjusted total assets by Sept. 30. That was seen as serious enough for Moody's Investors Service to put the credit ratings of Advanta Corp. and its Delaware bank subsidiary in review for a possible downgrading. The higher capital requirements "may increase the company's funding costs, which could affect the company's core profitability," Moody's said.

Yet in a June 5 supplement to the April 6 prospectus, Advanta stated that its banking subsidiaries' "agreements" with their respective bank regulatory agencies "require that Advanta National Bank maintain its current capital ratios." A spokeswoman explained in early August that Advanta National Bank had met the increased ratios in its December and March quarterly earnings. The capital levels had dipped below the standards only after May 31, she said, attributing the change to the agreements with regulators.

Advanta did not mention the capital requirements to investors until July 31 and Aug. 2 when it filed supplements to the prospectus. In those filings Advanta said that as of June 30, Advanta National Bank "continued to have capital requirements that meet the levels defined by the statute as 'well capitalized' and intends to meet increased capital ratios at Sept. 30, 2000." In the July 31 supplement, the company said again "agreements" require that Advanta National Bank "maintain its current capital ratios."

Advanta did not acknowledge in its filings that it did not meet capital requirements until its Aug. 14 10-Q report to the SEC. After stating that the bank met the definition of "well-capitalized" as of June 30, the 10-Q states that "Advanta National Bank does not meet the definition of 'well-capitalized' because of the existence of the agreement with the [OCC]. We intend to meet this requirement through a combination of a reduction of ANB's assets, thereby reducing the total amount of required capital, and a parent capital contribution of approximately $60 million."

Another issue is the ability of Advanta's two banks to pay dividends to the holding company. In the April 6 prospectus, the company states that regulations that apply to its subsidiaries, through which Advanta does most of its business, "impose capital requirements that these subsidiaries must maintain and impose limitations on the ability of these subsidiaries to make loans or pay dividends to us; these regulations may make it more difficult for us to repay indebtedness."

The FDIC cease-and-desist order against Advanta Bank Corp. said that while the order is in effect "the bank shall not pay any cash dividends on its capital stock without the prior written approval" of FDIC officials. Further, the OCC order said that Advanta National Bank can declare dividends only if it is in compliance with the capital requirements.

None of the supplements spelled out the dividend hurdle.

"Advanta failed to disclose restrictions in both cease-and-desist orders that locked out the holding corporation from dividend payments by both of its banks and raised capital requirements, increasing the risk of default on the notes," said Richard Newsom, a retired FDIC and California state banking regulator. "The company trivialized and understated the effects of the order, emphasizing it was merely a 'process' with its regulators, not a significant event."

A spokesman for the FDIC declined to discuss any such matter concerning an "open, operating institution" but confirmed that the FDIC has not modified or terminated the cease-and-desist order. The OCC would only confirm the dividend condition of its order.

Advanta has been selling the investment notes for decades and has not defaulted on them. It does not appear that any investor has lost money. All the supplements to the April 6 prospectus encourage investors to read the risk-factors section of the prospectus, which explains that the notes are unsecured, that repayment depends solely on revenues from operations, and that many factors could hinder repayment and result in default.

A longtime investor in the notes, who owns a large position and encourages others to buy them, said the company has never defaulted and that he is aware of the risks involved. "They are riskier notes because they are not secured by anything," he said. "But we believe Advanta has plenty of liquidity and is nowhere near a cash crunch."


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