Utah's Advanta Bank seized by state regulators

"The bank, founded in 1991, is a wholly owned subsidiary of the Spring House, Pa.-based Advanta Corp., which filed Chapter 11 bankruptcy Nov. 8, 2009.
At the time the Draper bank was seized Friday, it had 25 Utah employees; another 85 worked out of the company's bank operations center in Pennsylvania."State regulators seized Utah's Advanta Bank Corp. Friday after determining the finances of the Draper-based industrial bank were too weak for it to continue doing business.
The closing marked the first failure of a Utah industrial bank.
"We've been tracking Advanta's financial condition for a number of years and finally made the case [to a Utah judge] that they were in an unsafe and unsound condition, and that unfortunately taking them over was warranted," said Ed Leary, commissioner of the Utah Department of Financial Institutions.
When it seized Advanta, the state immediately appointed the Federal Deposit Insurance Corp. as the bank's receiver. That role involves winding down the affairs of the bank by sending out checks to depositors for their insured funds up to $250,000 and liquidating its assets.
"Those checks will be mailed on Monday," said David Barr, a spokesman for the FDIC.
The FDIC noted that as of Dec. 31, Advanta had $1.6 billion in assets and $1.5 billion in deposits. Of those deposits, an estimated $20 million represented funds that are owed to Advanta's Utah customers.
Industrial banks, also known as industrial loan corporations, or ILCs, are state-chartered but remain federally insured financial institutions that historically have operated in narrow niches. In Advanta's case, it primarily provided credit cards for small-business owners nationwide.
The problems faced by Advanta were indicative of the struggles faced by small-business community generally, Leary said. "They were one of the largest credit-card lenders to small-business owners in the country." Advanta's problems began surfacing publicly last May when it announced it had quit funding its charge cards after its default rate for the first quarter of 2009 reached 20 percent.
On June 30, the FDIC ordered Advanta to come up with a plan that provided for the "orderly discontinuance of deposit-taking operations and the voluntary termination of deposit insurance after the repayment in full of all deposits."
Although that order left open the possibility that Advanta could, with FDIC approval, begin taking deposits again, it never was able to find the additional capital it needed.
And after shopping the bank for the past several months, the FDIC determined it would be unable to find another financial institution to take over Advanta's banking operations, Barr said.
The FDIC is estimating the failure of the Utah industrial bank will cost is deposit insurance fund $636 million.
Frank Pignanelli, executive director of the National Association of Industrial Bankers, said Advanta was a victim of "unprecedented financial conditions" that primarily impacted its small-business customers.
"The failure of Advanta isn't the start of a trend," he said. "Industrial banks have only marginally been impacted by the economic downtown. They are among the safest and soundest financial institutions in the country. They have some of the highest capital-to-asset ratios, the lowest troubled-asset ratios and the highest return on assets around."