Two years after a wrenching downturn forced Advanta Corp. to sell its consumer card business, the company is in the midst of a similar upheaval; this time it is struggling to leave mortgage lending, the very business it had hoped would provide the growth that cards, in more successful days, had generated.

On the bright side, there may be fewer lawsuits this time around. On May 17, Advanta told shareholders it would solicit bids for its mortgage and leasing operations, arguing the stock market was undervaluing the businesses.

Two weeks later came news that sent Advanta shares into a tailspin: The Office of the Comptroller of the Currency had issued a cease-and-desist order to the company's depository subsidiary, Advanta National Bank, and required a massive writedown of the value of its retained interest in mortgage securitizations.

Advanta, which this week settled with the OCC, on Wednesday spelled out just how much red ink went into the agreement. Its second-quarter pro forma operating profit of 65 cents per diluted share was wiped out and then some; it is now reporting a net loss of $7.64 a share. Based on the numbers it projects for the second half, the company stands no chance of turning a profit this year.

In Advanta Corp.'s conference call on Wednesday, in which it reported a $192.7 million net loss for the second quarter, chief executive officer Dennis Alter employed a bit of understatement. "A lot's happened since we met with you last quarter," he said.

He expressed optimism about the remainder of the year, saying the company expects to earn 90 cents to $1.10 per share on a pro forma basis during the second half, with full-year, per-share results, excluding the writedown, of $2.18 to $2.38 per share.

Outside Advanta, opinions differ widely on what to expect from a company that, until it lost its momentum a few years ago, was a budding powerhouse in consumer credit card lending.

Though the regulatory dispute appears settled, observers remain wary over portions of the OCC deal. Part of the pact restricts deposit and asset growth at Advanta National Bank and requires capital ratios substantially higher than current minimum regulatory requirements.

Also, under terms of the initial consent order, issued May 31, Advanta National is required to charge off delinquent mortgages after 180 days instead of six months and to use different accounting methods for its loan-loss allowance and valuation of residual assets.

The OCC appeared to be particularly concerned about this area, imposing tight limits by stating that Advanta National "shall not consider the fact that a borrower is granted an extension, deferral, payment modification, renewal, or rewrite, or the loan is re-aged." The agreement allows for exceptions but requires strict documentation, repayment commitment, and prohibits further extension of credit to the borrower to make the payments.

In addition, Advanta National must reach Tier 1 capital ratios of at least 14% of risk-weighted assets and 17% of adjusted total assets by Sept. 30, according to the May 31 consent order. A spokeswoman said Advanta National met these ratios in its December and March call reports but since May 31 has dipped below the standards.

To reach capital compliance, Advanta officials said, the bank plans to reduce its assets by securitizing a greater portion of its mortgage portfolio. One official said the bank would need about $60 million of capital.

Fitch IBCA said the restrictions could result in a move away from funding loans with deposits to securitizations, which the agency called less cost-effective and more market-sensitive.

"Without the ability to raise deposits like they had been, it potentially impacts your origination capabilities," said Thomas J. Abruzzo, senior director at Fitch.

Mr. Abruzzo said that, though using securitization to fund originations is a realistic alternative, "it's not as good" as funding on balance sheet with deposits.

The bank must also increase its loan and lease loss allowances by $22 million. After Sept. 30, Advanta National must maintain an allowance of at least 5.38% of the unpaid principal balance of all loans owned by the bank or reported on its books and records, according the latest agreement.

For residual assets, the bank must calculate using an 18% discount rate for interest-only strip securities and over-collateralization, and use a 15% discount rate for contractual mortgage servicing rights. These changes resulted in the biggest hit to Advanta's second quarter earnings. The company wrote down $13 million in its valuation of its mortgage servicing rights and $201 million in its valuations of interest-only strips it retains from securitizations.

Equity analysts on the conference call at times expressed frustration with all of the new regulatory burdens - some of which would effectively cap the company's growth. Still, as Todd Pitsinger, an analyst with Friedman, Billings, Ramsey noted, "The OCC doesn't care about the trading of Advanta's stock, it cares about protecting the deposits at all costs," he said. "And what it did, effectively, was eliminate all asset risk to those deposits."

In the long term, he said, some of the changes, including a shift away from gain-on-sale accounting treatment for the company's residual holdings, would help both the company and analysts.

"I believe it's a positive from an earnings perspective because it does give them the opportunity to eliminate the use of gain-on-sale accounting," he said, which should create a cleaner and transparent balance sheet.

Another way all the scrutiny could wind up helping is in the company's efforts to sell the mortgage business. Advanta's sale to Fleet Financial Group of its $10.5 billion credit card receivables portfolio later turned sour, with Fleet eventually suing in early 1999 over what it charged was a misappropriation of funds and misrepresentation of the portfolio's value. Advanta countersued and the case is pending with a trial date set for next year. The companies have refrained from commenting on it.

This time around, buyers would at least seem to have a very clear idea of what they are getting, given the OCC's extensive work with Advanta in corralling its accounting. Mr. Alter said Advanta officials have entered into discussions with several parties about the sale of its mortgage unit, and that due diligence is currently being performed by some bidders.

If and when the sale occurs, Advanta will be a much smaller company, with its business cards, insurance, and venture capitalist businesses all that remain.

But given how stressful the process has been so far, some analysts are cautious about predicting even the outcome of Advanta's efforts to sell the mortgage business.

"We don't know how that's going to come out," said J. Ryan O'Connell, senior vice president at Moody's Investors Service. "But it would seem that the latest developments would make that a more complicated process."


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